Open Source Strategy Research Blog

Updating business strategy for a world embracing open source

Wednesday, September 12, 2012

Open entrepreneurship: The process of building a born-open business – Pitch for FSOSS October 26, 2012

Using FLOSS tools and methods is a no-brainer for cash-strapped startup companies that are trying to create something of value for their customers while growing their business. Some of these businesses will follow traditional business models and use FLOSS only as internal cost-saving measures. Other businesses are “born-open” and choose to build their business models around the norms and values of the FLOSS movemen. But what does the process of starting and growing a born-open business actually look like? How do founders create a business model that promotes FLOSS values while generating revenue?

Using data gathered from research on entrepreneurs involved in FLOSS, this presentation offers a perspective on the process of starting and growing a born-open business. It provides accounts of how founders from radically different backgrounds engage in a community building process that leads to surprisingly similar business models. Some of the key factors in understanding what is different in born-open business models are discussed.

Historically, the business world has viewed FLOSS as counterproductive for competitive advantage as many of the shared values in FLOSS communities are thought to result in business models that are not sustainable. Yet many entrepreneurs have shown that born-open businesses can work. This presentation examines some of the conditions required for success when using a born-open business model. It highlights why some of the traditional apprehentions might be unfounded and revisits some of the assumptions about value creation and how successful businesses grow.

posted by Mekki at 12:50 pm  

Wednesday, May 16, 2012

Looking for Dataset on Corporate Contributions to FLOS

Hello friends,

As many of you know, I’m currently working on my PhD in Strategy at the Schulich School of Business, York University. The focus of my research is Free/Libre/Open Source strategy (peer production strategy, if you’re familiar with Benkler’s work). I am now done my course work and am in the process of planning the specifics of my dissertation work that will be completed over the next year and a half.

I’m looking for a data set to analyze for my research. The specifics of what I am looking for are broadly defined because I will take whatever I can get or is available and find a way to make it useful. Broadly speaking, I’m looking for a data set containing one or more (or any combination of) the following things (need not be restricted to software):

– Year by year (or quarterly/monthly) financial contributions made by one or more companies to FLOS (broadly defined)
– Year by year (or quarterly/monthly) non-financial contributions (broadly defined, including things such as paid employee time to work on projects) by one or more companies to FLOS (broadly defined)
– Any other company-specific or FLOS project/community-specific (would also consider higher level of analysis) data measured over time on activities/contributions of companies or other definable groups (number of lines of code contributed, number of bug fixes, features added, other things, broadly defined)
– Any other data set that relates to FLOS in some way that you think I should consider analyzing (reasoning and suggestions would be most welcome)

The purpose I have in mind is to attempt to empirically address the question “what do companies get out of participating in FLOS” by pairing this data set with other data sets that I have access to and performing the appropriate statistical analysis. There are obviously huge limitations to this approach, but bear in mind that it is one of many different triangulation methods I am using to research the topic of FLOS strategy, including a suitable mix of both quantitative and qualitative methods at levels of analyses from the individual right up to institutional factors.

If anyone is familiar with sources for such data sets, your help would be greatly appreciated! Please feel free to forward my message to anyone who you think might be able to help (anyone have contacts inside companies? I could anonymize anything that were published to protect any required confidentiality…)

Feel free to contact me offline via one of my many different online presences (see below) if you would like to discuss. Your input to my research and suggestions are most welcome!

Thanks!

Mekki


Mekki MacAulay Abdelwahab
B.Eng., B.A., M.A.Sc., P.Eng.

Email: mekki@mekki.ca / mekki@yorku.ca / mekki@osstrategy.org
MSN: atriou@hotmail.com
Gtalk:mektek@gmail.com
Skype: mekkim
ICQ: 26465030
Facebook: https://www.facebook.com/mekki
Google+: https://plus.google.com/109175295655095213074
Web: http://mekki.ca / http://osstrategy.org
Cell/SMS: 647-771-1208

posted by Mekki at 9:17 pm  

Monday, March 21, 2011

With apologies to Joss Whedon

Open Source Song, sung to the tune of the Firefly theme song

Take my tech, take my trend
Take me where I cannot lend
I don’t care, I’m still free
You can’t take open source from me
Take me out to the hack
Tell them I ain’t comin’ back
Burn Linux and foil the fee
You can’t take open source from me
There’s no place I can be
Since I replaced Windows ME
But you can’t take open source from me…

posted by Mekki at 9:49 pm  

Tuesday, February 8, 2011

Make, Buy, or Open Source: Maximizing Appropriable Value by Reducing the Transaction Costs of Leveraging Knowledge Assets

This short paper begins by reviewing the papers on property rights and the phenomenon of open source from the economics and organization science perspectives. I then investigate the potential to extend the resource-based view and property rights economics perspective and the nature of make or buy decisions by highlighting the competitive advantage created by widely sharing property rights over knowledge-based resources in circumstances where both markets and hierarchies are suboptimal for the exploitation of these resources. I conclude with an example that suggests that the path to maximum value appropriation for a focal firm may sometimes be to allow as many outside actors as possible to exercise property rights over some of its resources.
Foss and Foss (2005) compare property rights economics to the resource-based view of the firm. They first extend the RBV definition of resource attributes to account for the property rights which may be held for each attribute of a resource at a firm’s disposal. They define these property rights as the “right to use, consume, obtain income from, and alienate” attributes of resources (Foss & Foss, 2005). Their major contribution to the strategy literature is the introduction of the notion that resource transactions involve the exchange of property rights over resources, not the exchange of resources per se, and that such transactions have transaction costs, the reducing of which can create capturable value for the firm that owns the property rights. The transaction costs that can be reduced are the costs of exchanging, defining and protecting the property rights. They further contribute by demonstrating how property rights can increase the demand curve for complementary goods that a firm offers, resulting in a net value capture that is independent of returns directly relating to the property rights (See figure 1, Foss & Foss, 2005). The scenario they present alludes to strategic implications surrounding circumstances where sharing property rights over resources without direct compensation for those rights might lead to increased value creation and capture by the firm. Foss & Foss (2005) conclude their paper with a call for future research examining exactly such a possibility.
Lerner and Tirole’s (2002) paper on the economics of open source examines the phenomenon in the software industry where skilled developers work to develop collective projects without obvious incentives or rewards. The major contribution of their paper is the examination of conditions where firms might wish to release their innovations as open source in order to increase their returns on the asset. They suggest that firms should open source resources when 1) the release of the property rights will lead to increased value acquisition in a complementary asset, and 2) this increase in value acquisition in complementary assets is larger than would have been possible directly through the selling of the property rights to the resource (Lerner & Tirole, 2002). They further argue that firms might benefit from a signalling advantage when they open source resources, similar to the advantage seen in joint ventures, because the adoption of an open source strategy is read by partners as a promise to not expropriate their complementary goods and services in the future (Lerner & Tirole, 2002). The net trust benefits increase cooperation in the ecosystem, and promote involvement between heterogeneous players, who support each other. Finally, they argue that the risk of imitation by competitors may be overstated due to the heterogeneity of firm capabilities (Lerner & Tirole, 2002). This assertion hints at situations where firms might be able to leverage the advantages of an open source strategy while minimizing the risks of loosening property rights restrictions.
In their paper, von Hippel and von Krogh (2003) contribute to the organization science and strategy literatures by suggesting that the open source phenomenon is an example of a novel “private-collective” innovation model. They propose that this mixed innovation model takes parts of both the traditional private and collective innovation models to maximize the advantages while minimizing the weaknesses inherent in the separate model. They make two major contributions. The first contribution is the description of the loss in value creation potential that arises when the “private-collective” innovation model is used by society to incentivize innovation. As they put it: “the monopoly control that society grants to innovators represents a loss to society relative to the free and unfettered use by all of the knowledge that the innovators have created”. In other words, the total value that the knowledge asset could have created is artificially constrained by the property rights protecting its use by others. The strategy implications of this circumstance is that the value that is lost may be of consequence to the firm that is protecting its rights by constraining use of their resources, as it could be value that the firm could have otherwise obtained itself. The second contribution is the challenging of the agency-theory-like assumptions that are implicit in the traditional innovation models, namely that innovators must be incentivized to innovate and that “free-riders” will extort benefits from collective innovations without contributing anything in return. Instead, von Hippel and von Krogh (2003) argue that by relaxing this assumption, the collective action innovation model “ceases to be a prisoner’s dilemma because members cease to regard participation as costly” (von Hippel & von Krogh, 2003). Participation becomes a benefit in itself, through learning effects, network effects, reputation effects, and positioning effects, leading to the formation and growth of an ecosystem centered on the shared resource. This change in paradigm suggests that there are certain benefits to reducing the constraint on the property rights to a resource that are only available to the focal form. These benefits act as a form of selective incentives that primarily increase the focal firm’s ability to appropriate the value created by the resource, even while that value is created by others.
All three of the papers previously discussed yield insights that have a strong commonality to each other: they all describe circumstances where conventional wisdom about property rights—i.e. that firms should hold tight to them, and that not protecting them leads to a loss of value through competitive imitation—may not hold true. Excluding non-owners from using and obtaining value from resources is costly, and provides no guarantees that the rights-owning firm can appropriate any of the value that the resources have the potential to create (Foss & Foss, 2005).
Barney (1991) argued regarding the strategic application of resources that sustainable competitive advantage is the result of “a value creating strategy not simultaneously being implemented by any current or potential competitors, [where] these other firms are unable to duplicate the benefits of this strategy”. Barney surely intended that the reason other firms were “unable to duplicate the benefits of this strategy” was due to their inability to access the benefits of the VRIN resources controlled by the firm; yet, the definition doesn’t preclude other explanations for why competitors can’t duplicate a strategy. It is entirely consistent with the resource-based view that competing firms might have access to resources but be unable to leverage them to obtain a competitive advantage. For example, a focal firm that has property rights to a resource may also have knowledge about how to best apply the resource to create value for a target customer base. Independent of that knowledge, the resource itself is less valuable. It is the knowledge that multiplies the value-creating properties of the resource. Said another way, resources have inherently different values to different firms due to heterogeneous firm capabilities. As such, freely granting property rights to a resource to a competitor may lead to low value dissipation for a focal firm if it has low rivalry in the ability to leverage that resource (von Hippel & von Krogh, 2003).
What then are the circumstances under which it may be advantageous to freely grant property rights over firm resources to other firms? Benkler (2002) suggests that it may be advantageous to do so when the joint production of firms in the ecosystem will more efficiently assign idiosyncratic human capital to information inputs than could be done either through purely market-based or hierarchical (intra-firm) means. This situation is often the case in the development of information assets, as the costs of information production and exchanges are rapidly declining in terms of physical capital, communications, and information input costs, leaving human capital costs as the remaining opportunity for cost optimization (Benkler, 2002). As Benkler (2002) put it: “markets and hierarchies are both relatively lossy media when applied to questions of human capital, primarily in terms of creativity, ability, motivation and focus. This information is uniquely in the knowledge of individuals and is immensely difficult to measure and specify in contracts for market clearance or for managerial allocation of resources”. A joint-production model, instead, allows firms to self-identify for tasks based on the talents of their employees, maximizing their productivity. The situations favouring different strategies of production organization are described in table 1.

In order for the open source strategy to be successfully executed, two additional conditions need to be met. The first condition is that the resource to which property rights are granted should be non-rival, i.e., using it does not diminish its utility to the subsequent user. It should also be non-excludable such that all potential actors can have simultaneous access to it. These properties are inherent to most knowledge-based resources. The second condition is that the focal firm that owns the property rights over the resource must focus its strategy on leveraging a complementary resource to the shared one in order to establish and maintain its competitive advantage in the ecosystem. This complementary resource might be knowledge or capability that enables it to utilize the shared resource in ways other firms cannot. Or, it may be brand, reputation, production, value-chain, or network effects that allow the focal firm to shape the industry in such a way that it is positioned to acquire the lion’s share of the value that is jointly created (Lecoq & Demil, 2006). This capture potential, itself, can act as an ex post barrier to competition (Peteraf, 1993), leading to increase rents for the focal firm.
The important strategy implication of this extension of existing theories can be summarized by the idea that an “effective open strategy balances value capture and value creation, instead of losing sight of value capture during the pursuit of innovation” (Chesbrough & Appleyard, 2007). In other words, property rights are an important part of strategic decisions about resources, but too much focus on rigidly protecting them can lead both to extensive transaction costs and loss of total capturable value. When asked about its investment into Linux, the freely available open source operating system, IBM’s VP of corporate strategy, Joel Cawley explained that “it takes $500M to create and sustain a commercially viable operating system” (Cawley, 2006 in: Chesbrough, 2006) on an annual basis. IBM invests about $100M per year and other commercial developers contribute $800-$900M per year. Even accounting for the portion of development that is exclusively for the specific needs of those companies, the net result is an extra $400M per year of cost-savings value that comes to IBM that was created through the joint development process. By allowing others unfettered access to its property rights over the resources related to the open source development, IBM has magnified the total value that is created to levels that it could not create on its own. IBM can then acquire much of this value by pairing the operating system with its server products and services and selling them as a bundle (Chesbrough & Appleyard, 2007).
The described IBM scenario is far from unique. Open strategies are presently being executed in various forms by large firms around the world, including Google, Facebook, Nokia, and even Microsoft. As Chesbrough and Appleyard (2007) point out, “if we are to make strategic sense of innovation communities, ecosystems, networks, and their implications for competitive advantage, we need a new approach to strategy – open strategy”. The literature needs to continue adapting the extant strategy theories to account for these circumstances. It is my hope that the present short paper has stimulated that effort.

References

Barney, J. B. 1991. Firm resources and sustained competitive advantage. Journal of Management. 17: 99-120.

Benkler, Y. 2002. Coase’s Penguin, or, Linux and the Nature of the Firm. Yale Law Journal. 112 (3): 369-446.

Chesbrough, H. W. 2006. Open Business Models: How to Thrive in the New Innovation Landscape. Harvard Business School Press: Boston, MA, USA.

Chesbrough, H. W., & Appleyard, M. M. 2007. Open Innovation and Strategy. California Management Review. 50 (1): 57-76.

Foss, K., & Foss, N. J. 2005. Resources and transaction costs: how property rights economics furthers the resource-based view. Strategic Management Journal. 26: 541-553.

Lecocq, X., & Demil, B. 2006. Strategizing industry structure: the case of open systems in a low-tech industry. Strategic Management Journal. 27: 891-898.

Lerner, J., & Tirole, J. 2002. Some Simple Economics of Open Source. The Journal of Industrial Economics. 50 (2): 197-234.

Peteraf, M. A., 1993. The cornerstones of competitive advantage: a resource-based view. Strategic Management Journal. 14 (3): 179-191.

von Hippel, E., & von Krogh, G. 2003. Open Source Software and the “Private-Collective” Innovation Model: Issues for Organization Science. Organization Science. 14 (2): 209-223.

posted by Mekki at 5:42 pm  

Wednesday, August 25, 2010

Let’s Talk About This – A Gamer View Examining Game Purchasing Business Models

In a recent article, Cory Ledesma, the creative director for wrestling games at THQ, is quoted as saying that the used video game market “cheats developers”.  He goes on to say,

“[L]oyal fans who are interested in buying the game first-hand are more important.   I don’t think we really care whether used game buyers are upset because new game buyers get everything. So if used game buyers are upset they don’t get the online feature set I don’t really have much sympathy for them. We hope people understand that when the game’s bought used we get cheated.”

The Internet exploded in furor, as this comment comes in the context of numerous companies moving into the used video game market, including Best Buy and Walmart, and new games often costing $60 or more.

Mike Krahulik, of Penny Arcade, known to many as Gabe, who was recently included in Time Magazine‘s list of Top 100 most influential people, tweeted and posted comments on his blog on the topic, which has proved to be quite controversial.  He issued a call to gamers and developers to give their take on the issue.  Below is my response to Gabe on the subject:

Hi Gabe,

I’m a gamer (over 20 years).  I’m also a PhD researcher in business strategy, and am really interested in gaming (and open source) business models (which share many commonalities).  Here’s my take:

The problem (for me) with your comment,

“not saying you can’t buy used stuff. just when you buy a used game you
are not supporting developers. If that matters to you is your choice.”

is that it implies that the gamer, alone, is responsible for the revenue source that developers have.  It says to gamers that there is one way to support developers because of “industry forces”, and if you don’t like it, you’re not supporting them.  It binds the customer to the business model that game developers have chosen, and makes customers responsible for the shortfalls of this business model, of which the used game market is one.

It is similar to the RIAA insisting that there is only one way to support “artists”, and that if you want to do things differently, you are putting artists in the poor house.  There are lots of analyses that have shown that the decline in music sales is not the “fault” of music lovers, but rather a problem with the evolution of the music industry’s business model.

It’s the same here.  If used game sales are a problem for developers in the gaming industry, like the Internet is a problem for RIAA-era media companies, then it’s time to change the business model so that developers can get more revenue.  This change isn’t the responsibility of gamers.  It’s the responsibility of the developers. Developers have to come up with creative an innovative ways to offer direct value to gamers in a way that cuts out the obsolete parts of the business value chain.

As a gamer, I don’t feel it’s my responsibility to pay $60+ for a new game to “support developers” because, as in the music industry, the lion’s share of that money is going to intermediaries (Best Buy, distributors, production companies, EA, etc.). And I have no control over this value chain, or the business model that set it up.  For every $60 I spend on a new game, the “developers” maybe get a couple of dollars.  This model comes from an era when creating, producing and distributing games (like music in the 20s-30s) was prohibitively expensive. This is no longer the case.

I *will* spend $20 on a new indie game on Steam, knowing that a much larger share of that money goes to the developers. This example shows how new vs used misses the point, and that it’s more about the value-generation channels.  It explains the success of Popcap Games, and others who are changing their business model away from what the mega-studios are doing, to accommodate the change in attitude and definition of value. I could refine this much further, but for brevity’s sake let’s keep it at that.

In summary, I think this is more about business models, value chains, and adapting to evolving definitions of value than it is about “new vs used”.  Gamers by and large want to support developers, but restricting them to a single way of doing that makes no sense, and doesn’t help anyone but the corporate giants. We can come up with smarter business models than that for the game industry.  If we can do it for open source products that are often available at no cost (legally!)–this is my area of expertise–we can figure it out for game companies too.  And I’d like to help. I think research needs to be done in this area to figure out how to overcome the growing pains of the gaming ecosystem.

posted by Mekki at 1:37 pm  

Friday, June 4, 2010

Letter to Parliamentarians on Bill C-32 (2010)

Jun 04 2010

The Honourable Tony Clement
Minister Of Industry, Science & Technology
House of Commons
Ottawa, Ontario
K1A 0A6

The Honourable James Moore
Minister of Canadian Heritage and Official Languages
House of Commons
Ottawa, Ontario
K1A 0A6

The Right Honourable Stephen Harper
House of Commons
Ottawa, Ontario
K1A 0A6

Dear Ministers,

Having reviewed the recently tabled Bill C-32, I would like to
express my concern about the Digital Lock provisions and
insufficient Fair Dealings provisions.

Specifically, the bill sought to strike a balance between
the rights of copyright holders, and Canadian Citizens.
Numerous provisions were included to balance these rights.
The digital lock anti-circumvention provision COMPLETELY
REVERSES all of these forward looking provisions by putting
ALL of the power in the hands of copyright holders, and NO
power in the hands of Canadian Citizens.  It unduly restricts
libraries, educational institutions, cultural organizations,
students, teachers, remixing artists, and dozens of other 
groups.  It will completely crush innovation and new 
artistic development in Canada.  

Further, the fair dealings provisions are insufficient.
And expanded, non-exhausted \"example\"-type list should be
included, with wording that allows for broad interpretations
as new media, technology and creativity come up with new ways
of exercising fair dealing rights in the future.

I ask that you seriously consider amending these sections of
an otherwise quite strong bill.  While the bill is generally
strong, I cannot support it with the above provisions, as they
completely reverse the spirit and intent of the bill.

Sincerely,

 Mekki MacAulay
 26-920 Dynes Road
 Ottawa
 Ontario
 K2C 0G8
 parliament@mekki.ca

CC: The Honourable Michael Ignatieff
CC: Marc Garneau - Official Opposition Critic For Industry,
Science & Technology
CC: Pablo Rodriguez - Official Critic For Canadian Heritage and
Official Languages
CC: Charlie Angus - NDP Digital Affairs Critic
CC:  Dewar.P@parl.gc.ca
posted by Mekki at 10:24 am  

Tuesday, June 1, 2010

Growing Revenue with Open Source, Mekki MacAulay

Below is the published version of my article for the June 2010 issue of OSBR.  It can be found on the OSBR site here.

This version has a slightly different focus, with examples of specific company implementations of these strategies as the core of the article.

Editorial:

The editorial theme for this issue of the OSBR is Growing Business. Authors from academia and industry share their research and experiences on how to grow a successful business in a world that is increasingly embracing open source. They provide growth strategies that leverage the advantages of open source, and blueprints for company activities that lead to growth in revenue. The issue provides lessons on how to leverage an open source product as the keystone of a company; how to engage an open source community to support a company’s growth; selecting a growth strategy that is best depending on the company’s core business; and, the challenges that startups face as they start to grow.

Growth is important for any business, especially technology companies that operate in an environment of constant innovation, advancement, and evolving consumer needs. It is essential to maintain long term profitability, develop a brand, and attract new investment. But the path to successful growth is not obvious, and is filled with hurdles. Growth requires capital, making consistent revenue a necessity. But figuring out the smartest way to invest capital to promote growth can be a daunting task. Growth can also require some experimentation with different stategies, weathering the occasional failure along the way, in order to find one that is the right fit for the company. But where do you start?

Book stores have hundreds of books on business growth, with many promising a surefire strategy for success. But the reality is that there is no single growth formula that works for all businesses. Entrepreneurs must understand what drives their business–something that might be very different from other, similar businesses–and leverage this knowledge in order to grow. Growth requires focus, and energy must be directed on one particular aspect at a time, such as revenue growth, market growth, product line growth, or even shareholder growth. Trying to extend in all directions at once is a sure path to failure. Disciplined, incremental, consistent growth is the formula for success, no matter how that success is defined by the business.

Article:

The rules of the game are continually changing. It’s no wonder that participants are now particularly receptive to the siren song: ‘Discard the old, leave your historic core business behind and set out for the promised land’. Sometimes this advice leads to the right course, yet usually it does not solve the fundamental problem and can even aggravate the underlying cause of inadequate profitable growth. The key to unlocking hidden sources of growth and profits is not to abandon the core business, but to focus on it with renewed vigor and a new level of creativity.”

Chris Zook & James Allen

To survive, a company must grow revenue from the core of their business. This article describes how open source can be used to help support revenue growth. We suggest seven strategies and provide examples of successful implementations for each.

Ways Companies Can Use Open Source to Grow Revenue

Growing revenue is a challenge for most companies. The selected growth strategy should complement the core business. Open source, carefully applied, can help improve revenue growth potential by leveraging increased adoption, community participation, strategic partnerships, and optimizing product positioning. This section reviews seven ways a company can use open source to grow revenue and provides examples of successful implementations.

1. Sell services to government agencies that collaborate with the company to contribute code to an open source project. A company can jointly develop open source software with a government agency. The company benefits from the innovation and development work of the government agency and earns revenue by selling support and consulting services and developing specific features for the agency and other customers with similar needs. One advantage to this type of collaboration is that the government agency is not likely to become a direct competitor to the company. European governments are leaders in the adoption of open source. There have been rumours for some time that the US government will be following suit, opening the door for new opportunities.

2. Sell more of a product that depends on open source. A common strategy is to use open source as a means of increasing the value of a primary, closed product. This approach is often leveraged by hardware manufacturers that have an embedded software component. Since the hardware, not the software, is their core business, opening up the development of the embedded software can promote the use of the hardware and provide a competitive advantage over other hardware vendors.

For example, the core business of Nokia is to develop and sell cell phones. Nokia recently acquired the Symbian cellular phone operating system and promptly released it as open source. By allowing the open source community to improve the operating system, Nokia increases the value of its cell phone. A larger number of developers will advance the cellular phone operating system and Nokia will be able to bring more features and services to its customers, leading to more sales revenue.

3. Sell proprietary products built on top of an open source platform and capture the brand value that results from leading the development of the platform. A company can lead the development of an open source platform and sell the proprietary products it builds on top of the platform. As the open source platform grows it creates brand value for the company that leads its development. The brand becomes a valuable asset for the company. Sometimes the value of the brand exceeds the revenue that the company receives from the sale of its products built on top of the open source platform.

This approach to growth allows the company to focus on the differentiations for which customers are willing to pay and monetize the value of the brand that results from leading the development of the platform.

The Sun Microsystem’s (now Oracle) Java platform is an example of such an approach to growth. The Java brand enjoys high recognition and is associated with a broad range of products and services, from desktop applications, to web services, to cell phone games. Sun’s open source platform development strategy led to the effective creation of a “new product” for the company in the form of a brand, and they captured value through the lucrative licensing of the brand.

4. Sell more products by adapting language, interface, and features to different geographies and linguistic environments. This approach to growth entails reaching new geographies with existing products/services whose language, interface, and features have been adapted to be suitable to different geographies and linguistic environments. To implement this approach the company first modularizes all the regionally-specific components into a generic framework called a locale. Locales can be developed by participants in underserved markets who would benefit from access to products/services that weren’t initially written for them. Mozilla’s Firefox web browser is one of the most successful examples of such a growth approach. It has locales available for over 70 different languages and regional needs. It is likely that this localization strategy played a role in its rapid adoption, grabbing a sizable share of new markets where localized versions of Microsoft’s Internet Explorer were not available. Figure 1, from Mozilla’s Q1 2010 Analyst Report on the State of the Internet, shows the international usage statistics for Mozilla Firefox, highlighting the success of its localization efforts.

Figure 1: Firefox Worldwide Market Share

5. Sell new products and services in one place of the supply chain while concurrently introducing open source software in another place of the supply chain. A supply chain is a set of companies that work to progressively refine a product/service from basic principles, such as raw materials or consulting, until it is ready for consumption by an end user. Each company in the chain adds some value to the product or service and, in turn, extracts some value from the supply chain. This value extraction is not uniform as different companies at different places in the supply chain extract different amounts of value. In a vendor dominated supply chain, there is one company that extracts the lion’s share of the value. Yet, this position is precarious. If it extracts too much value, there may not be enough resources to support the rest of the supply chain which could collapse. Such a collapse can happen even when there is high demand, especially if a product/service is disrupted. The key to company survival and growth is to gradually move towards the most profitable place in the supply chain, the place where the most value can be extracted.

One approach to shifting the value extraction point in the supply chain is to introduce an open source product/service that is positioned to compete with products offered at that level of the supply chain. This introduction is effectively signaling to the market that, since an open source product is replacing a paid product, the value-added is elsewhere in the supplier chain. This may lead to a devaluation of the other products at that position. The core business must, at the same time, focus on research and innovation to introduce new products/services that refocus and capture customer attention. This diversification strategy leverages the loss leader open source strategy, while positioning the loss leader elsewhere in the supply, outside of the core business, insulating it from devaluation effects.

This strategy is being experimented with in the Netbook supply chain. Several Netbook manufacturers have moved to release open source embedded operating systems for their devices that offer basic functionality such as web browsing and media playback. This strategy is testing the ability to weaken Microsoft’s dominant position in the supply chain while funneling the value to device manufacturers who previously could only extract a small percentage of the total value generated by the supply chain.

Greg Wallace describes a similar effect in the customer relationship management (CRM) system supply chain based on the strategic choices of open source company SugarCRM. By moving the focus away from hardware and software and towards value added services in the CRM supply chain, SugarCRM positioned itself as the leader in customization services, its core business, extracting the lion’s share of revenue from the supply chain. Figure 2 describes the evolution in the CRM supply chain in terms of value.

Figure 2: Evolution of CRM Supply Chain

6. Open source a legacy product that is no longer generating sales. Software evolves quickly. New versions are released all the time, and new products replace old ones. Companies that have been around for a while will have a library of older titles that they developed and sold in the past which have since become obsolete, or are otherwise out of date. These older products are perfect candidates for open sourcing. The best way to open source them is to leverage a strong distribution channel, such as an online service, and to sell the complete product, documentation, and code as a single package for a significantly reduced price. The low price will lure customers who are interested in the product for personal research, interest, and nostalgia. By combining everything in a single place, from an authoritative source, even if the now-open-sourced product becomes available elsewhere at no cost, customers are likely to pay the small amount of money to purchase through the authoritative source.

The best current example of this strategy is Id Software which has a policy of releasing its games as open source under the GPL open source license five years after their initial release. This strategy has led to continuous sales of their legacy, open-sourced titles through their website, Microsoft’s Xbox Live content distribution service and Valve’s Steam distribution service, with some games still selling well over a decade after their initial release. It has also led to a large community following for Id Software games, with numerous ports, expansions, and other value-added components being developed for free by the community, adding value to the games themselves. This strategy also draws attention to the latest games that Id Software releases, increasing their sales.

7. Open source a transactional product. With the evolution of the Internet into a near-real-time, transactional network, products with distributed components that rely on network services have become common place. The businesses that develop these products maintain a network infrastructure or complex database structure and generate revenue from the product transactions that use these services. By releasing a transactional product as open source, a company can increase revenue generated by the user transactions by increasing adoption of the product. This front end provides access to the network services, and may even provide access to basic services at no cost to develop a user base. The value of the service is based on the strength of the network or data mining possibilities with the database, and, as such, the company is protected from imitation by competitors who might adopt the open-sourced front end.

There are several examples of this strategy in industry. Linden Labs, the makers of the popular virtual world Second Life, have released their Viewer and Snowglobe development environment as open source. This strategy has attracted attention from developers and new users alike. Linden Labs generates most of its revenue from services such as item sales and land transactions within the virtual world, so releasing programs used to access its services leads to an increase in their revenue potential. The revenue increase following the open source move has been substantial, with an increase of user-to-user transactions of over 65% year over year.

There have been rumours that voice over IP giant Skype will soon be releasing its client as open source. Such a move would also fit with this model, as Skype generates its revenue not from sales of its software, but rather from network services. By open sourcing its software, it would be opening the door to novel uses of its network services, increasing its revenue.

Conclusions

Growing revenue is challenging and an open source strategy can help companies attain their growth goals in novel ways. This article reviewed some of the strategies that have been successfully implemented by industry participants. They can serve as a starting point for companies to plan out a strategy that will successfully fuel their revenue growth while supporting their core business.

posted by Mekki at 2:17 pm  

Tuesday, June 1, 2010

Open Source Growth: How Open Source Can Support Traditional Growth Strategies, Mekki MacAulay

This is the draft version of an article I wrote for the June, 2010 issue of OSBR (www.osbr.ca)

“The rules of the game are continually changing. It’s no wonder that participants are now particularly receptive to the siren song: ‘Discard the old, leave your historic core business behind and set out for the promised land’. Sometimes this advice leads to the right course, yet usually it does not solve the fundamental problem and can even aggravate the underlying cause of inadequate profitable growth. The key to unlocking hidden sources of growth and profits is not to abandon the core business, but to focus on it with renewed vigor and a new level of creativity.” Chris Zook & James Allen

Carefully selected open source strategies can help support business growth. By focusing on its core competencies, its competitive advantage, and current market successes, a company can use open source strategies to improve its ability to expand its product base, reach new markets, and diversify through vertical integration. This article discusses three traditional business growth strategies and highlights how an open source angle can help improve their effectiveness, without compromising the core business.

Growth from the Core

Companies must grow to survive, and stay relevant to their customers, investors and employees. Most companies that don’t grow cease to innovate, become stagnant and eventually either cease to be relevant, or go out of business. But growth is a painful process, one that is difficult to navigate. There is a long list of once successful companies that tried to grow and failed, destroying the value they had developed in their core business. It can be tempting, especially for young companies, to jump on the latest trends, or blaze trails into new markets, but this strategy, as Zook and Allen remind us, can lead to a quick demise. Open source, with its promise of quick development cycles, accelerated customer adoption, and low cost can be a component of a viable growth strategy, but businesses must resist the siren call to discard their core business.

Every successful business is based around core products and/or services, customers and competencies. This core is the foundation of the business, and its structural pillar of value generation for all of its stakeholders, investors, customers, and employees. A strong core affords a company cash flow to support its growth efforts, which can be time consuming and expensive. It gives the company a staging ground from which to plan its growth. And, most importantly, it defines the company, its profile, goals and values, all of which are important in long term strategic growth. At the most basic level, the core of a business is what it “knows” and “does really well”. It is what creates value, maintains competitive advantage, and motivates the company to grow.

Growth doesn’t come on its own; it must be earned. Companies earn the right to grow by developing their core business to a point where it is self-sustaining, has relevant products/services with an established customer base and notable market share. Companies that haven’t yet reached this point cannot yet afford to spend their precious resources on growth, and should instead first focus on solidifying the core. Once the core is stable, and the company has the leeway to focus its attention on its next stage of evolution, it is ready to grow. There are several strategies that allow companies to grow without extending too far from their core.

Growth Strategies

There are three major growth strategies that were first described by Igor Ansoff in his 1957 Harvard Business Review article (Strategies for Diversification, Harvard Business Review, 35(5), Sep-Oct 1957, pp.113-124). He explained the dimensions of expansion from a core business with successful products/services and an existing client base. Figure 1 (Adapted from Ansoff, 1957) describes the dimensions of growth from a core business.

Figure 1: Growth Strategies from Core Business

Image:AnsoffMatrixUpdated.JPG

The first strategy is new product/service development: selling new products/services to the same customer base. This strategy leverages the current customer base, target market demographics, and accessible geographies of the core business and focuses on finding new products/services that meet the current and future needs of customers. This is one of the most common growth strategies and has numerous advantages: the primary one being the ability to query the existing customer base for pain points that have not yet been addressed by an existing product or service. Working with existing customers can yield innovative ideas and help chart out the growth path of the company. It spurs innovation in the company, which can lead to discoveries and advances that solidify and build the company’s stakeholder value and long term industry relevance.

The second strategy is market expansion: selling the same products/services to a new customer base. This strategy leverages the product/service expertise that the company has honed through its core business and focuses on bringing the products/services to new customers in new markets that have previously gone unserved by the company. This strategy’s primary advantage is that it allows the company to focus all of its energy on acquiring new sales instead of research and development. It takes successful products/services and reaches out to new customers who were not previously part of the target market. One of the best ways to execute market expansion is to expand the company into new geographies, such as new cities, provinces, or countries. This expansion may lead to minor tweaks and regionalization of the products/services, but does not stray far from the core business.

The third strategy is diversification: expanding into new businesses, most often through vertical integration in the supplier chain. Most companies that are in a position to grow are part of a supplier chain that funnels a raw product/service and progressively refines it until it reaches the client. A vertical integration strategy is effectively a combination of the previous two strategies that still leverages the core business. It proposes expanding into a new customer market where the new customer is the current core business. This approach is advantageous as the needs of the customer are well understood. It proposes new products/services at the same time, where the new products/services are those that are consumed by the core business. This approach has the advantage in that the pain points that the products/services address and use of these products/services are well understood. By acquiring a company upstream in the supplier chain, a successful intermediary can expand its influence and control over the supplier chain while acquiring more of the net value created in the chain.

Open source can play a creative role in each of these strategies to improve their effectiveness and likelihood of success.

Open Source and Growth via New Product/Service Development

New product/service development implicitly implies innovation. Traditionally, innovation occurs through internal research and development, requires time and effort, and very few ideas make it all the way to the customer. Increasingly, companies are moving towards an open source innovation strategy to address some of these issues. In his 2003 book Open Innovation (http://www.openinnovation.net), Henry Chesbrough compares the traditional model of closed, intra-company innovation and open innovation principles. Table 1 compares these principles.

Table 1: Comparing Closed vs Open Innovation Principles

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The advantages of an open source innovation strategy are clear: there are numerous existing product/service ideas, allowing a company to identify new opportunities and capture a portion of the value generated without having to generate the ideas from scratch. This strategy allows the company to focus its resources on the correct execution of the idea that leads to a product/service.

Open innovation principles lead to strategies that complement, and depend on, the core business. The focus shifts away from coming up with innovative products/services to positioning the company to acquire value from existing product/service ideas. Depending on the core business, the best way to acquire value from an existing idea may be through the ability to deliver that idea better than anyone else to an existing market. Such an approach leads to a distribution focus. Another core business might have strengths in development and may take a base idea and improve it threefold, selling a new and improved version to an underserved market. Such an approach leads to a development focus.

In some cases, it is possible to take the open source strategy even farther, right through to collaborative and distributed development. This is possible where the core business has a positioning that can partner with customers, or other industry participants who are not in direct competition, to work collaboratively on product/service development for mutual gain. A common example is partnerships between a company and a government agency. By opening up new product/service development to participation by a government agency, a company can benefit from the free innovation and development work of the agency, while earning revenue through support services, specific feature development, and in-depth product expertise–all the while safe in its knowledge that a government agency is not likely to suddenly go into the product/service business in direct competition.

This approach can also lead to mutually profitable associations in a broader, more distributed context. In such models, the products/services that are collectively designed and developed in the open source community are at one participation layer for the company seeking to grow. The growth takes place at a different layer, typically with revenue-generating services overlaid on the new product/service development. The new product/service development becomes an extension of the core business that improves its revenue generation potential. One example is the Symbian (http://www.symbian.org) cellular phone operating system which Nokia recently acquired and promptly released as open source. The core business of Nokia is selling cell phones. By engaging in new product development and improvement of Symbian, and allowing the community to improve it via distributed development, Nokia increases the value of its cell phone production, bringing more features and services to its customers. Such an approach can lead to company growth just as surely as if they had developed a whole new cell phone from scratch.

Another successful open source strategy for new product/service development hinges on the idea of distributed platform development. This strategy focuses on building and offering new products/services that meet a specific need, such as that of the customers of the core business, by creating a platform that is shared by other developers who target other customer markets. It protects the company’s core business by modularizing and opening a portion of the product/service that is not the core competency of the business and not part of its competitive advantage. This approach allows the company to focus on its value-add (its competitive advantage) while effectively outsourcing the foundation upon which it is built. It also allows the company to develop and leverage a brand surrounding the platform. This brand becomes an asset whose value could exceed traditional products/services. An example of such platform brand value is Sun Microsystem’s (now Oracle) Java platform. The Java brand enjoys high recognition and is associated with a broad range of products and services, from desktop applications, to web services, to cell phone games. Sun’s open source platform development strategy led to the effective creation of a “new product” for the company in the form of a brand, and they captured value through the lucrative licensing of the brand.

Open Source and Growth via Market Expansion

When seeking to expand into new customer markets, one of the biggest challenges is customer adoption. An open source strategy can help improve the adoption of a product (and, in turn, an overarching service) in a new market through viral redistribution. By encouraging end users to redistribute the product, a world of mouth effect quickly leads to exponential increases in awareness, the first step in market penetration. Companies must be careful to pay close attention to the market response immediately after a product release as the needs of this new market may be substantially different from the needs of the market that was previously addressed by the core business. This strategy works particularly well if the core business operates at different layers, where one product, or part of a product, can be open sourced to bring new clients to the company. This way, revenue is still generated by the other parts of the core business, be it support services, network infrastructure, or complementary products. The open source product will bring the new market to the company, and the core business has to deliver something of value to that new market in order to capitalize on the new market. An example of such value is releasing a basic, open version of a product to a new, overserved market, and offering a fully-featured closed version of the product to customers who require additional functionality. This strategy can lead to increased brand recognition and can devalue competing products, both of which can lead to market expansion.

One way to reach new geographies with existing products/services is to localize them by adapting the language, interface, and features to be suitable for a different geographic and linguistic environment. This process can be time and resource consuming and, to be successful, it is important that the company understands the specific linguistic, cultural and functional needs of unfamiliar markets. One way to address these challenges is to open up the product/services for distributed, collaborative localizing, typically by modularizing all the regionally-specific components into a generic framework called a locale. Locales can be developed by participants in underserved markets who would benefit from access to products/services that weren’t initially written for them. Mozilla’s Firefox web browser is one of the most successful examples of such a strategy, with locales available for over 70 different languages and regional needs. It is likely that this localization strategy played a role in its rapid adoption, grabbing a sizable share of new markets where localized versions of Microsoft’s Internet Explorer were not available. Figure 2, from Mozilla’s Q1 2010 Analyst Report on the State of the Internet (http://blog.mozilla.com/metrics/2010/03/31/mozillas-q1-2010-analyst-report-state-of-the-internet), shows the international usage statistics for Mozilla Firefox, highlighting the success of its localization efforts.

Figure 2: Firefox Worldwide Market Share

Image:FirefoxWorldUsage2010.PNG

Open Source and Growth via Vertical Integration

A supply chain is a set of companies that work to progressively refine a product/service from basic principles, such as raw materials or consulting, until it is ready for consumption by an end user. Each company in the chain adds some value to the product or service and, in turn, extracts some value from the supply chain. This value extraction is not uniform as different companies at different places in the supply chain extra different amounts of value. In typical supply chains, there is one company that extracts the lion’s share of the value. Yet, this position is precarious. If it extracts too much value, there may not be enough resources to support the rest of the supply chain which could collapse. Such a collapse can happen even when there is high demand, especially if a product/service is disrupted. The key to company survival and growth is to gradually move towards the most profitable place in the supply chain, the place where the most value can be extracted. An open source strategy can help with this supply chain positioning by acting as a funnel of resources to the desired value extraction point in the supply chain. This strategy must be carefully executed in order to not destroy the core business.

One approach to shifting the value extraction point in the supply chain is to introduce an open source product/service that is positioned to compete with products offered at that level of the supply chain. This introduction is effectively signaling to the market that, since an open source product is replacing a paid product, the value-added is elsewhere in the supplier chain. This may lead to a devaluation of the other products at that position. The core business must, at the same time, focus on research and innovation to introduce new products/services that refocus and capture customer attention. This diversification strategy leverages the loss leader (http://en.wikipedia.org/wiki/Loss_leader) open source strategy, while positioning the loss leader elsewhere in the supply, outside of the core business, insulating it from devaluation effects. This strategy is being experimented with in the Netbook supply chain. Several Netbook manufacturers have moved to release open source embedded operating systems for their devices that offer basic functionality such as web browsing and media playback. This strategy is testing the ability to weaken Microsoft’s dominant position in the supply chain while funnelling the value to device manufacturers who previously could only extract a small percentage of the total value generated by the supply chain.

Greg Wallace describes (http://linux.sys-con.com/node/173425) a similar effect in the customer relationship management (CRM) system supply chain based on the strategic choices of open source company SugarCRM (http://www.sugarcrm.com). By moving the focus away from hardware and software and towards value added services in the CRM supply chain, SugarCRM positioned itself as the leader in customization services, its core business, extracting the lion’s share of revenue from the supply chain. Figure 3 describes the evolution in the CRM supply chain in terms of value.

Figure 3: Evolution of CRM Supply Chain

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In Closing

Growth is challenging. While open source strategies can give a competitive edge, not all circumstances and companies can leverage these strategies. They are highly dependent on the nature of the core business, the products/services offered by the company, its environment, customers, and supply chain. Every company is different and should devise a strategy that is the right fit for its situation and goals. An open source strategy should be looked at as another tool in the toolbox of strategic growth planning, and not as a one-size-fits-all roadmap.

posted by Mekki at 12:09 pm  

Monday, February 15, 2010

OS Adoption Faces Similar Challenge to Vaccine Addoption

It occurred to me that when we examine OS Culture, and the culture of resistance to change, the challenges are similar to those faced by the medical communities in convincing people to get vaccinated against illnesses.

It is at this junction where logic and empirical evidence no longer sway adoption that the interesting research needs to be done.  Current efforts on OS adoption focus on logical reasoning, and empirical evidence of successful adoptions, ROI, more stable, safer, better applications; but where they fail is in the “warm fuzzy” feelings of the adopters.

Evidence shows that vaccines are the single most effective means to reduce propagation of diseases and likelihood of infection, yet people resist them, devising wild conspiracy theories to support their fears.  In my experience, discussing OS adoption is much the same.

Recently, the Bill and Melinda Gates foundation made the single largest donation in the history of philanthropy, targeted specifically at the development of new vaccines.  The foundation makes a stand to only support empirically-based research and missions.  This approach is very challenging in the face of large lobby groups for diseases that, while horrible, kill far fewer people than some that receive less press coverage.

OS Culture needs to learn lessons here.  And there are numerous cross-discipline research opportunities.

posted by Mekki at 1:38 pm  

Thursday, February 11, 2010

Looking for Details about OSStrategy.org?

Looking for Details about the consulting company OSStrategy.org?

Check back soon to http://osstrategy.org for the new company website!

posted by Mekki at 4:15 pm  
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