10.

IT Business Startup
10.1
10.2
10.3

IT Business Models
IT Products
Bringing the first product to the market

Introduction:
Much of the focus of the entrepreneurship literature is on starting a new business,
so in this section we look at software start-ups, companies where the primary value
creation is achieved through writing software.
Giarratana mentions three types of entrepreneurs:

the innovator creates new products (our software is ground breaking and has
not been seen before)
the arbitrageur exploits market inefficiencies (there's only one company that
provides ecommerce solutions for local businesses and they're too expensive
for the region's small firms - we can provide a personalized, low-cost
alternative)
the coordinator introduces an alternative use of resources (we will provide
weather presentation software based on open source components where
much of the development effort is free which will compete with the dominant
proprietary software providers such as Metra).

In each case the entrepreneur will have to understand something of the business
positioning of the new company. Cusumano suggests that there are some basic
questions that need to be answered:
do you want to be mainly a products company or a services (consultancy)
company?
do you want to sell to individuals or enterprises, or to mass or niche markets?
how horizontal (broad) or vertical (specialized) is your product or service?
can you generate a recurring revenue stream to endure in good times and bad?
will you target mainstream customers, or do you have a plan to avoid "the chasm"
(the gap between early adopters - the rather few customers with specialised
interests who buy technically innovative products, and the early majority (the many
customers who want to buy a product that is technically sophisticated, but also
established and popular)?

 do you hope to be a leader (a company that is an innovator), follower (one that

bases its products on established technologies), or complementor (a company that
provides additional software and services to an established platform)?
what kind of character (culture, image, brand, working environment) do you want
your company to have?

10.1

IT Business Models

If you're starting a software business, what type of business will it be? What will it
offer in terms of products and services and how will it generate value? The most
common distinction is between companies primarily offering products, and those
primarily offering services. Product companies (Microsoft, Adobe, Apple) build
packaged proprietary software and sell it to customers on the open market. Service
(consultancy) companies (PricewaterhouseCoopers, Accenture, Cap Gemini Ernst
and Young) contract with customers to develop software tailored to their needs.
Many mature companies develop effective hybrid strategies, but start-ups,
according to Cusumano need to choose and continue to choose in their early growth
phase.
According to Rajala, a software business model consists of four elements (a
somewhat narrow characterisation compared to other writers on the subject):

a product strategy (what kind of software and applications do we write)

a revenue logic (how do we earn money out of them)
a distribution model (how do we get them to our customers)
a service and implementation model (how do we keep them working when
our customers are using them)

They develop four generic software business models based on a matrix. The vertical
axis specifies how intensely the IT company collaborates with its customers and
users; the horizontal how much they focus on standardised products rather than
software custom-built for a particular situation.

This yields four types of business model:

software tailoring building tailor-made software for specific customers;

example Logica developing the clearing system (CHAPS) for the British
banking system
applied formats customized solutions based on common platform; example
SAP offering solutions based on the its Enterprise Resource Planning (ERP)
software
resource provisioning developing software components or middleware
designed to integrate with other software; example Red Hat developing their
own version of Linux and offering software and services around it
standard offerings own products sold widely and used without
customization; example Apple selling integrated hardware and software
products direct to private users.

They specify the four generic models in the table below:

Though they are useful to stimulate thinking about different forms of software
venture, its not clear these generic business models go to the heart of what leads
to competitive advantage in the software industry. For instance, Google, Microsoft
and Apple all fall in the 'standard offerings' group - but their business models are
radically different. A start-up positioning itself in the standardized offerings group
would need a radically different business model, probably with a highly specialized
market niche, in order to survive. Nor is it clear that one business model can
describe all the activities in these companies; they dont with the four examples I
used above.
What is clear is that engineering skills and the ability to develop software is
necessary, but not sufficient for survival as a start-up. Chesbrough argues that new
technologies open up many possibilities for exploitation, and that it is not the
technology itself, but the business model that exploits it which is the key ingredient
in success. Well look at open software business models later.
New software companies need to develop viable business models relatively quickly;
probably by thinking explicitly and acting proactively. They dont necessarily need to
have a strategy or a document called a business model, but they need to make an
explicit connection between the software applications and services they develop,
and revenue generation and value in the business.

10.2 IT Products

For many start-ups, the most important element is the software product. The really
good product idea is often the inspiration and primary motivation for starting the
company. The product needs to be differentiated from others in the market - you
can't usually make a business by copying an existing product unless you intend to
provide it much cheaper or for free (and derive income from another source). In
many cases the product will be innovative, maybe a spin-off from university
collaboration or industry experience. Often the survival of the firm is dependent, at
least initially, on the success of the product. Heirman and Clarysse argues that
delivery of the first product is important for

early revenues, improved cash flow and greater financial independence

building a customer base
engineering experience, and
visibility in the market.

This also means that innovation speed - time to market - is important, especially
where the company is heavily indebted to banks and venture capitalists. The longer
a start-up works without income, the more difficult it is to achieve financial stability.
Case Study : Checkpoint
Checkpoint created an innovative process to build firewalls, security products that
could go directly off the shelf to a customer and that enforce the boundaries
between different networks and protect firms against unauthorised users.
Checkpoints programmers introduced a new language, Inspect, specifically for
directing the rapid inspection of communication packets and a compiler to translate
policy rules written in Inspect into assembly language. The program opens data
packets, checks the content and quickly inspects each data packet. The innovation
is that the program sends along the data in parcels after they are checked, rather
than waiting to reassemble them before the entire transmission. This methodology
increased dramatically the speed of data transmission, with the same level of
security.

10.3 Bringing the first product to the

market
How do you arrive at the first product? Companies typically start with an idea or
concept, a software prototype or, more rarely, a finished product awaiting
commercialisation. You'd imagine that starting with a lot of working code and a
large amount of venture capital would be an advantage, but this turns out not
necessarily to be the case. Software firms starting with a prototype often meet

costly demands for redesign when they eventually meet with customers and users.
Engineers preoccupied with software design often neglect market involvement and
real experiences with customers. Those that are more successful involve customers
from the beginning and this improves speed to market. Neither is it automatic that
having a large bag of money helps - this encourages gold-plating and lack of focus.
Lean may be just as good. A good experienced partnership behind the software
collaboration also improves speed to market. However Heirmann also points out
that many software inventors have difficulty with shifting their mental models and
adapting their brainchild to changing needs and conditions. Sometimes it may be
important to believe in the original product concept and work at creating the market
for it, but at other times flexibility is required to meet practical demands of users
and customers, or react to competitor's products. Newly created small firms hardly
ever have the resources and experience to operate traditional standardised
development methods and are dependent on their ability to move flexibly forward
through improvisation and bricolage. Both the venture and its mode of working
need to be agile. The first customer can be a really important link in developing a
marketable product, providing much needed domain knowledge, input into
requirements, cash injections (sometimes) and the necessary motivation to finish a
working application. De Haan and Cohen point out that the traditional Systems
Development Lifecycle (SDLC) is impossible to follow in entrepreneurial
development. They suggest a 12 step process for off-the-shelf business software
incorporating the first customer, which they call Lead-Driven Development. In this
model the real development of the software is undertaken in cooperation with the
first customer, whilst the development firm also identifies the kernel of the system
which will be sold to a wider market. It is best-suited for the applied formats and
resource provisioning styles of software company.
Step
initiation informal:

high level concept

development:
demonstration prototype:

minor testing in non-profit

environments, academic
demo and

Description
structuring the will and intent to begin the project,
giving the go-ahead, providing limited resources
for exploring the idea
basic idea and scope, business value, developed in
spare time sometimes with academic partners
help, some code, no documentation or testing
important milestone partly functional prototype
with
good interface clearly addressing the problem that
should
be solved, many missing features, many bugs and
engineering problem,
exploiting opportunities for showing and
communicating
application in non-commercial situations to achieve

use:

feedback on features, bugs and use

market introduction, benefit

oriented
demonstrations and mini
pilots:

demonstrations at potential customers customer

specific: the development team tries to pick up as
much information about the potential customer as
possible and codes extra targeted features for their
sales meetings. No documentation or test

offer product + implementer:

when a customer wishes to buy (first sale) they

offer both the product and an implementer who will
supervise the installation and train users bug
fixing: the product is improved to a commercially
useable nonfrustrating version targeted at the
first customers baseline requirements - many
unresolved bugs remain
the development team identify a core set of
features which will form the basis for further
commercial releases (and attracting new
customers) and develop a support plan for the
software
address complexity issues with first customers
work, synchronize software with customers
business goals, interface with other organizational
systems, find additional customer problems to
solve

constrain features, further

commercial
releases, and support plan:

develop complexity
management
tools, establish interface with
customer's software, find
additional
benefit oriented projects,
embed
within
organizational deliverables:
second sale licenses:

maintenance, begin user

training,
tutoring, software support:
third sale, support

second sale to the same organisation and move to

licensing arrangement indicates that the customer
has moved beyond the learning stage and is ready
to adopt the software
here the customer begins to deal with the software
without intensive support from the developers, who
put more conventional training, maintenance and
support processes in place
customer has moved beyond independently using
the software and has realised the benefits of the
product and committed to long term use

This kind of process will obviously not work for some other forms of software
entrepreneurship where there is a software tailoring (pure consultancy) or standard
offerings (generalized products for a broad market) business model.

Quiz
1. Giarratana mentions how many types of entrepreneurs?
a. 1
b. 2
c. 3
d. 4
2. Cusumano suggest how many basic questions need to be answered?
a. 3
b. 4
c. 6
d. 7
3. According to Rajala a software business model consists of how many
elements?
a. 1
b. 2
c. 4
d. 5
4. The most common distinction between companies are betweena. Products and services
b. Goods and services
c. Goods and products
d. None of the above
5. There are how many types of business model?
a. 1
b. 2
c. 3
d. 4
6. A product strategy is a part of
a. Computer business model
b. Software business model
c. Hardware business model
d. None of the above
7. Building tailor made software for specific customers isa. Software tailoring
b. Hardware tailoring
c. Standard offering
d. Applied formats
8. Logica developing the clearing system is an example ofa. Hardware tailoring
b. Software tailoring
c. Computer tailoring
d. Standard offering

9. Engineering experience is important for the delivery of the ______

product
a. First
b. Final
c. Second
d. None of the above
10.
A revenue logic is an element of
a. Software business model
b. Hardware model
c. Compute model
d. None of the above
11.
Apple selling integrated hardware and software products direct to
private users is an example ofa. Software tailoring
b. Applied format
c. Standard offering
d. Resource provisioning
12.
a.
b.
c.
d.
13.
a.
b.
c.
d.
14.
a.
b.
c.
d.
15.
a.
b.
c.
d.
16.
a.
b.
c.
d.
17.
a.

How do we get the software to customers this is answered by

A revenue logic
A product strategy
A distribution model
All of the above
A distribution model is an example ofSoftware business model
Hardware model
Computer model
All of the above
How many elements of software business model are there?
3
4
5
6
The delivery of first product is important forEarly revenues
Improved cash flow
Building a customer base
All of the above
Packaged proprietary software is built byService companies
Product companies
Both a & b
None of the above
How do we earn money out of them is questioned byA product strategy

b.
c.
d.
18.
a.
b.
c.
d.

A revenue logic
A distribution model
None of the above
Customized solutions based on common platforms is known asSoftware tailoring
Applied format
Resource provisioning
Standard offering

19.
Own products sold widely and used without customization is
known as
a. Software tailoring
b. Applied format
c. Resource provisioning
d. Standard offering
20.
Companies typically starts with
a. An idea and concept
b. A software prototype
c. Finished product awaiting commercialization
d. All of the above
Answers: 1.c, 2.d, 3.c, 4.a, 5.d, 6.b, 7.a, 8.b, 9.a, 10.a, 11.c, 12.c, 13.a, 14.b,
15.d, 16.a, 17.b, 18.b, 19.d, 20.d