Economic models

A business provides a product or service to customers and tries to survive and grow in the process.

While a business model is about how a business intends to generate revenue and profits, what I'm talking about here is what Dale Kutnick says about 'economic models'.

A company can make money by three means:
- Focusing on the customer
- Focusing on research or innovation
- Focusing on cutting costs

I have had opportunities to work under the first two economic models. And I hope not to be in the third one. Who wants to be in a commodity business cutting costs for competing and growing? Well, ok, GE, Dell, and others, not me.

Now, would I like to create new products sitting in my desk, browsing the internet, evaluating other technologies and coming up with something? Of course. If there's a guarantee of success in the market, who would want to talk to customers? Now before I alienate all customers from this blog, let's just say it takes a lot of effort to get to talk to the right people and then understand their business and issues. Also, it's quite easy to make a fool of yourself if you're under prepared.

But there are no guarantee's in life or the markets.

It's all about the risk. What is the acceptable risk of creating a new product using a particular method?

Research Model

Imagine a lab with scientists in white coats, trying to come up with the next big thing. This is the research model. Typically focused on a technology area or technique, this model comes up with break through ideas and solutions.

What are the characteristics of an industry/organization/person in this model?

• Technical Superiority and focus:
  
In the space between the solution domain and the needs domain, the focus is more toward the solution domain.

• Committed Investment in Research
  
New organizations need a lot more investment to get into the space. That itself might be a significant deterrent to entry.

• Reduced time to market
  
Time to market is a critical component of the Research economic model. This can be a significant advantage with respect to competition.

The risks would be:

• Competition catches up
  
With every move that you make, the competition can catch up. Yes, Intellectual Property protection is key to this model, but unless litigation is a big part of the budget, it is a cumbersome process. I'll dedicate another post to my views on competition.

• Group Think, talent pool stagnation, etc.
  
Some people are with a company for too long. While they may produce very effective incremental innovation, the talent pool needs to be rejuvenated with new or rotating talent for revolutionary innovation. Group Think, is a problem with a bully boss. Alright, there may be other 'team' issues that are legitimate in Group Think, but innovation suffers in Group Think.

• Execution failures
  
Ok, this is a risk in any economic model. But with the research model, any failure in execution can set the clock back by months or years. But conversely, coming up with a new innovation can set the competitors clock back by several months/years.

In future posts about the economic models, we'll talk about the Customer Model.