Open Business Models and Closed-Loop Value Chains: Redefining the Firm-Consumer Relationship
Sebastian Kortmann and Frank Piller
Conventionally, manufacturing firms produce goods and sell them to customers. While this business model still exists in certain industries, many firms have started to look for new pathways out of shrinking markets, declining profits, and increasing commoditization of their products. Two recent socio-economic developments now threaten established business models. The first development is prompted by growing societal concerns about our environment and the demand for sustainability, leading firms to consider the entire life cycle of their products as part of a closed-loop value chain. In the case of consumer electronics, customers frequently want to replace their current devices with the latest model, but are also interested in recycling older products to partially recover their payments. The second development is related to the increasing willingness of stakeholders to participate in firm activities via social media and online collaboration platforms. Responding to major trends like crowdsourcing, many firms now see the integration of external partners into the new product or service development process as a critical component of an open business model.
These two developments fundamentally redefine the firm-consumer relationship by vertically integrating the entire product life cycle and by re-allocating traditionally separated tasks into new forms of horizontal collaboration.
New Business Models
Nine emergent business models suggest a trend toward greater openness in the modern firm-customer relationship. These business models can be delineated by two major axes. Along the horizontal axis are the three stages of value creation during the product life cycle: production, consumption, and circulation. Along the vertical axis are three types of collaboration corresponding to the business model’s level of openness: firms, alliances, and platforms.
Closed-Loop Value Chain Firms increasingly extend their activities to the entire product life cycle and seek to enhance their profitability. The first set of business models progressively move closer to a closed-loop value chain.
The Transaction-Oriented Manufacturer resembles a conventional business. Manufacturers of apparel, footwear, and typical “supermarket” products fall into this category.
The Servitizing Manufacturer extends activities into the consumption stage, primarily employing models based on value-add services. Providers of home appliances, like Sears and Whirlpool, are part of this category, providing maintenance plans and upgrades to their customers.
The Rebound Manufacturer is focused at the end of consumption. After they’re done with a product, consumers will often sell their products to other individuals through personal connections, or through platforms like eBay. When selling old products, these consumers face a situation of low demand and high uncertainty. Rebound manufacturers seek to address by acquiring, recovering, and reselling used products on the previous owner’s behalf.
Open Business Models An alternative path of business model development builds on the integration of consumers and other external partners into value creation and capture, including all activities such as product development, manufacturing, and distribution.
The Co-Creating Manufacturer establishes alliances with consumers and other external partners, taking an open approach to participation. One example is Quirky, a company that provides a platform for creators to share new product ideas that can be selected for financing and manufacturing. Profits are shared between the company and the original creators.
The Maker-Platform Operator simply provides a platform to coordinate the efforts of individual creators and a broader market, manufacturing nothing on its own. A prime example is Etsy, an online marketplace for craft goods.
The Co-Creating Service Provider further forms alliances with other firms or groups to jointly provide customers with a certain service. On example is Giffgaff, a mobile telephone network in the UK running on the O2 network. Giffgaff claims to be “run by [its] members,” with sales and support almost solely performed by its users - members who answer questions in the community space or generate sales are rewarded with “Payback” points that can be redeemed as cash, airtime credit, or donated to charity.
The Sharing Platform Operator coordinates a peer-to-peer market where consumers share services with other consumers. On platforms like Airbnb, peer-to-peer matching facilitates direct transactions.
The Recycling Alliance is a circular economy business model that specializes in the reacquisition of used products after the consumption stage, often driven by ecological, social, and economic goals. Closed Loop Fund is a coalition of consumer goods companies and retailers that are creating economic value by increasing recycling rates.
The Circulation-Platform Owner provides a marketplace where consumers can sell their used products directly to other consumers. Craigslist is the best-known example of this business model.
The nine different business models described demonstrate how innovative firms are moving toward closed-loop value chains while simultaneously seeking to openly incorporate external partners into their businesses. Under these models, the firm-consumer relationship is fundamentally shifted. No longer is the relationship unidirectional, static, and limited - as it was for conventional transaction-oriented manufacturers. Modern corporations have the opportunity to creatively build platforms and consumer communities that emphasize sustainability and open their businesses to the power of collective insight.
Sebastian Kortmann is an Assistant Professor of Strategy and Innovation at the Amsterdam Business School at the University of Amsterdam, the Netherlands.
Frank T. Piller is Chair Professor of Management at the Technology & Innovation Management Group at RWTH Aachen University, Germany and Co-Director of the MIT Smart Customization Group at the Massachusetts Institute of Technology, USA.
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