Friday, 5 September 2014

Open source business model 4/5 – when can it be used?

This fourth post suggests when it can be used.  What it can be used for is in the first, the second explains the model, the third why it works and the last explains how to use it.

When can it be used?

Four examples are suggested:

1.     In competitive environments, it is especially impactful for things new; new entrants attempting to enter established turf, existing firms trying to enter new sectors or a new product.  It has been used to disrupt the established and to establish a market presence more quickly.   Think Firefox browser against Microsoft.  The reason is that the open source model is a robust disruptor, catalysed by the potency of ‘free’ as a product and in the production process.  Business models around free, hardly new, has been elevated powerfully in the internet economy.  Potential entrepreneurs with little to lose should watch this space.  Or firms wanting to enter completely new sectors with no baggage.  Or as Sony shows (previous post), it brings competitive advantage too.  And can Google dominate the mobile phone market so quickly without open sourcing Android?  Caveats notwithstanding, consider it if you have an idea you think can disrupt the market and your firm has little baggage in that sector.

2.     Similarly it has been used for market expansion.  Tesla is attempting this by releasing all its designs into the public domain to expand the electric car market more quickly.  It has been used by companies to expand overseas.  A listed local software house I know used it to expand globally at very low costs by releasing its core software free. Although most downloads are by free loaders, 1% to 2% turned into global sales, enough to net this company a few million dollars a year with very little (market development) cost.  In time, it could open international offices in countries where sales justify it.  Compare this to the traditionally method: open a representative office with a single sales staff.  If he succeeds to bring in enough sales, it is expanded into a full office.  Cost is higher.  Interestingly this reverses the old economy’s use of copyright to protect the market, not owning copyrights actually help enter markets.

3.     When you want to tap skills.  Since it is based on the crowd, you can do that to supplement internal ones or more likely new skills that you may not have.  Another reason is for fresh perspectives. Goldcorp, a Canadian mining outfit tapped outside analytical capabilities when internal ones ran out of steam.  It increased gold yields significantly.  When a firm lack skills in a non-core area, the open source model is especially applicable.  BMW used it to help design its GPS system.  This is also one way an established firm can use the open source model.  They can’t use it on their core products if they have to give away the design but they can on peripheral functions.  In software (open source) however, they do.  They run two versions; one for the public and the other as a ‘product’ for sales.  This approach may be useable on some digital services firms.

4.     For market intelligence.  Two scenarios are suggested here.  Because a successful initiative creates a community, you have an engaged industry group.  Tap this peer crowd to gauge interest in your products (how? – 2nd post).  One furniture manufacturer used this method to plan production and inventory levels on their range of furniture reducing the previously high inventory holding cost. It can be used for market research, track industry trends, etc.  The strength with the open source method compared to traditional surveys is that while the latter can only be carried out over a short duration, the former can be sustained over a long period.  And if done correctly, it provides a real-time trend feed!  Anyone in retail reading this?

And of course it’s primary use is for design and development.

The open source model is by no means easy to execute successfully but when it is, it is a powerful method.  In such cases it is usually not a matter of whether the model will work, it is a matter of whether you are willing to release something potentially lucrative into the public that include competitors.