Segway_Business Model by Francisco Furtado

MIT-IST

Segway Aim for the sky, with the feet on the ground Francisco Furtado 27 de Janeiro de 2009

Contents Introduction .................................................................................................................................................. 2 Segway Business Model ................................................................................................................................ 2 Product and Value Proposition ................................................................................................................. 3 Costumer Interface ................................................................................................................................... 4 Target Customer ................................................................................................................................... 4 Distribution Channel ............................................................................................................................. 5 Relationship .......................................................................................................................................... 5 Infrastructure Management ..................................................................................................................... 6 Value Configuration .............................................................................................................................. 6 Capabilities ............................................................................................................................................ 6 Partnerships Network ........................................................................................................................... 7 Financial Aspects ....................................................................................................................................... 7 Revenue Model ..................................................................................................................................... 7 Cost Structure ....................................................................................................................................... 7 Aiming to high? Or to no were? .................................................................................................................... 8 Back to mother earth, but with an eye on the Sky ....................................................................................... 8 Renting and Sharing .................................................................................................................................... 10 Conclusion ................................................................................................................................................... 11 Bibliography ................................................................................................................................................ 11

Introduction The purpose of this report is to apply the Business Model concept and framework as a tool of analysis on a real case study, the Segway. We will start by describing the main features of the Segway LLC original Business model, to do this we will use the framework proposed by Ostenwalder, besides describing we will also deliver comments on all the relevant features. After this description we will make a synthesis of our comments, and focus on the main issues that lead to the failure to reach the initial stated objectives of the entrepreneurs behind the Segway business. In the fallowing section some remedies and suggestions will be made on how the Business Model can be improved. Then we will look into cases of business that provide use of products without ownership (like rentals and tourist services). In the end we will take some over all conclusions on the use of Business Model as a tool for managers, and some guidelines we can extract from the Segway case in particular.

Segway Business Model In the description of the Segway Business Model we will use the Ostenwalder framework suggested in is 2004 thesis1, according to him we can broadly define a Business Model as:

Figure 1 - The business model building blocks and Pillars

A business model is a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm. Therefore we must consider which concepts and relationships allow a simplified description and representation of what value is provided to customers, how this

is done and with which financial consequences. (OSTERWALDER, 2004) In more detail, a Business Model is constituted by four Pillars that are split into nine building blocks (or simply business model Elements) that are the real core of this approach. Bellow we present a table that summarizes this. 1

See Bibliography

Product and Value Proposition The heart of every Business is the services/products it intends to put in the Market, everything else revolves about this products/services and the market we are aiming… How to sell? To who? How to manufacture the product and distribute it? What partnerships to establish? Both to produce and to reach the market… All of these questions are related to the product/service and the markets were we want to enter. The Segway LLC was centered on selling a single product, the Segway device, actually this company was a spinoff of DEKA2, the company headed by the inventor-visionary Dean Kamen, that in 1999 came out with this new device. The Segway HT, the “human transporter”, is a two-wheel, selfbalancing, electric-powered transporter. It incorporates very advanced technology, the greater breakthrough been is “dynamic stabilization”, also determinant is the overall configuration of the gadget3. It occupies the same space as a pedestrian, for the first model in the market the maximum speed was about 20 Km/h and it´s range was of 25 Km per charge. It was sold for $4,950 (US Dollars). So the value proposition the company had to offer was a new type of revolutionary vehicle that provided a mobility option (a transportation mode) for short range distances superior to any other on the market (including walking!). It was faster, allowed greater distances and had Figure 2 - Segway more carrying capacity then a person walking. It occupied less space than a bicycle, cart or a bike. And, again for short distances, was superior to the car because it avoided congestion and was environment friend since it was very efficient and didn´t rely on fossil fuels. At least this was the reasoning of the Segway developers. This is extremely important because it was based on this belief, that they were selling a new transportation mode (in the form of a vehicle that was sold and individually owned) that was superior than any other for short range distances (and that this was easily perceived by the public once they knew the gadget), that the rest of the business model was built. There are several short comings in this vision4, we will point some of the most relevant: - A great, if not the majority, of trips people make are simple or composed (making a detour for shopping or leaving and picking up the children) commute voyages from work to house, this generally go beyond a the short range distance for which the Segway was designed; - The price, per se, is not enough to explaining the debacle, but for the price of a Segway is possible to buy a car, and if for short distances we can argue a Segway is better, it cannot

DEKA research & Development Corporation aim was to foster innovation and bring new ideas to fruition. The company was structured in a way to promote maximum creativity from his employees. 3 For more information on the technical characteristics go to www.segway.com 4

At least the advantages are not so self evident for the general public as the designers predicted.

compete in the medium and long range with the car. So the car is a much more flexible option for the same available budget; - In very short distances it´s difficult how a Segway can beat the human legs, and for the shortmedium the Bicycle is a worthy opponent, a lot cheaper, can go faster (if it´s a plain terrain), and it´s a very well known product to which people are already used. As previously stated in the next section we will further develop these questions.

Costumer Interface The Costumer interface pillar is focused on the interaction of the Business with the customers. Who are they? To what Market segment is the product/service aimed? How will the product be sold, threw what channels? What is the relationship to be established with the customer? All this questions were poorly addressed by the original Segway Business Model, and most of the effort was put on the infrastructure Pillar, the reason for this wasn’t explicit neglect but a direct consequence of the gap that existed between the value proposition the Segway designers had in mind and the value of use perceived by the general public.

Target Customer Since this gadget was going to make a revolution in mobility, it´s target was all the people that traveled short distances, namely people that lived in cities (more then half of the world population). Actually the aim was in the medium term to replace the car, over those short distances, by the Segway as preferential transportation mode5. So the product was to be sold en masse, to all the persons that require a simple, efficient mode of personal transportation. The main adversary of the Segway was the car, at least the vision that inspired this business was a device that would replace cars, but there was no recognizable competitor in the view of the Segway developers. Still, there is a panoply of competitors that weren´t taken into account: Motorbikes, electric cars, small cars built for the city, mopeds, bicycles, Scooters and electric scooters… Besides the complex “dynamic stabilization” component (that allows you to be standing, and above the others), all this alternatives provide the same value use for much lower cost… We can say that the target market was so broad that in the end there was no particular target market, the market for the Segway was almost the same as for Coca-Cola… Besides that, no particular competitors were identified, and the elected main adversary was car use, when for the short distance market they were aiming other serious competitors already existed.

Kamen proclamed that the Segway “will be to the car what the car was to the horse and buggy”.

Distribution Channel Being a product targeting mass use how should Segway be available to all its potential customers? Being a new type of product, with an perceived enormous potential of profit the decision was made to create a company that would manufacture it and sell it, the already mentioned Segway LLC. But threw what channels should it reach the public? There was no clear answer, there were suggestions that “authorized service representatives” would be available, but the only sure way to get the “Human Transporter” was threw the internet, namely Amazon.com, so the online retailer became the exclusive consumer sales channel. Well… one can only be amazed by such a decision, how would people be able to test it, make test drives, ask the human retailer clerk what is his opinion? Buying a book or a CD/DVD is a very different experience from buying a car, a motorbike or a bicycle. It seams that once again a gap emerges between the mass market that was targeted (and the nature of the product) and the channels threw each the product would reach such a market. We should add here that the company that gave birth to the Segway LLC had no previous experience in this field, selling directly the product, it was a Research Company, that developed high tech ingenious solutions that were sold to big companies (namely Baxter and Johnson and Johnson, that then would bring the products to the market). Given this background some of the mentioned crude mistakes became more understandable, and also: the partnership strategy that was developed; the concern that was put on the Infrastructure issues; the kind of publicity campaign that was put in motion. Even tough some top CEO´s from transportation related companies were recruited to the Segway LLC6…

Relationship What relationship did Segway intended to have with his customers? There wasn´t much concern in answering this questions. In did Segway would start to sell his product threw Amazon, so there is no direct relationship between Segway and the customers. Segway wanted to have a modern, sophisticated environmentally friendly image, this image could became the foundation of a strong relationship between Segway and the pretended customers, but no real moves were made in this direction. The company did develop some partnerships with large institutions, like some government agencies (U.S. Postal Services, San Francisco International Airport…), but this was seen as a first step to reach the broader market7, and there wasn´t a specific strategy aimed at this segment. Nowadays, after the “Revolutionary Debacle” the Segway is positioning itself strongly towards the Law enforcement agencies market, but we will speak more about this when we get to the proposed remedies section.

The President of Segway LLC was the former president of Subaru America.

Actually these partenerships were seen as a way to test the device, to give it credibility and a serious image, and to help overcome regulatory obstacles.

Infrastructure Management How does the company generates value? How does it keep his customer Interface? What resources are used, what kind of operations are put in place to achieve this? What partnerships are established, outsourcing production? Or distribution? Or the selling operations? What are the firm capabilities? This seams the strong point of this Business Model, or the Pillar, that deserved more consideration, but if the two first Pillars are not set right, the Business is doomed. We can have the best, most efficient Infrastructure Management in the world, but for what? If nobody will buy our product/services?

Value Configuration Now the question isn´t what is the value we are offering to the customer, but how are we going to deliver it. As mentioned, the way Segway intended to deliver the value (improved mobility) to the customers was by selling them a new kind of vehicle, the “Human Transporter”. The company would create value by: - Research to develop and improve this new high tech, mobility revolutionary, vehicle; - Producing the Vehicle (with non core components being outsourced to other cutting edge companies); - Selling the Vehicle threw “authorized representatives”, altought the only retailer was on-line (Amazon.com).

Capabilities What were the capabilities this business developed to assure that it could deliver its value proposition? We can make a list: - First, was the Know-how do foster new technologies and produce this new device, this was the strongest point of the Business model, and of the company; - Very important was also the capacity to influence regulation, since there were no clear rules on how to accommodate this new vehicle, in the road? In the Sideways? The company wanted it to be used in sideways and bike trails, and had a very aggressive lobbying strategy that gave some good results; - Other key issue was to make this product known to the general public, and presented as a vehicle that would change the way how we move. High profile known people spoke in favor of the Segway, there was a lot of news coverage and free publicity, including the presence of this vehicles in TV series and movies. As mentioned several partnerships were established with big institutions to test the vehicle but also as a way for the public to see the advantages of the device. In the first two points the Business was very successful, in a way also in the third, since the product got a lot of publicity and became known to the general public, the problem is that people didn´t valued the proposition Segway was making the same way the segway developers thought they would… 6

Partnerships Network We already mentioned the partnerships made with large institutions, like government institutions and Universities, and with Amazon. Besides these ones, on the commercial side, Segway also made partnership with Jager Di Paola Kemp Design, for marketing and brand development8. The rest of the partnerships were all on the producing and technological side (Afuah, 2003). The Segway LLC kept the control on the core technology, the “dynamic stabilization” and the overall concept, the rest being produced and developed by those partner firms.

Financial Aspects How was then the cost structure, the revenue model and the overall sustainability?

Revenue Model The revenue of the business was very simple; it consisted in the revenues made by selling the vehicles it produced. Besides this there were no other sources of revenues. It was expected that such a revolutionary product would sell like “hot cookies”, and there was no need to divert attentions from this simple objective.

Cost Structure The Business cost structure could be summarized in the following points: - Costs related to Research and development, very significant for this case; - Publicity and marketing, great sums were also spent in this; - Lobby for regulation changes, so that the Segway could use the sideways; - Investment in a big factory, with the manufacturing capacity for 40 000 units per month, plus the costs of producing each vehicle; - Staff, this was not very significant since the company didn´t employed a great number of people. The Business required a very large initial investment, it´s estimated in $100 million dollars the development costs of the vehicle. The ability to achieve sustainability and profits was dependent on the assumption that the product would be sold in large quantities, for a very large market.

To see a list consult (Afuah, 2003)

Aiming to high? Or to no were? The objectives established by the Segway developers were never met (to use a euphemism). Why? In the previous section we already mentioned some key issues; we will highlight the most determinant and add some more broad reasons. The price was simply much higher than the value proposition this Business made to the market. The value that a particular individual obtained by owning a Segway, could be obtained at a much lower cost by just walking, having a bike, a motorbike, or even a second hand car… The notion that this vehicle could be THE solution for the mobility problem was simply wrong, a main issue not addresses was the lack of flexibility, how could it compete with the car when it carries only one person, a lot less luggage, and can´t go beyond short distances? And for shorter distances it has a price much higher than its direct competitors? Despite of that, a good marketing might have created a hype/trend among certain market segments, but this was not achieved for two reasons in our view: - The target market was so broadly defined that it didn´t allowed a more focused approach on certain segments; - The delusion that the product advantages were self evident, if people saw it they would buy, so amazing was the value proposition. Besides this, the distribution channels were simply inadequate given the nature of the product and to reach the aimed customers. Another issue, that was addressed in the marketing strategy, but in an insufficient way, was the perception that the Segway was little more than a very expensive toy. And experience shows that seeing police forces using the vehicle, per se, doesn´t increase the product credibility… It also produces a cultural shock walking in the street near someone standing on top of a device above everybody else… only if it had mass use this effect might be mitigated. Overall we can say that the Business Model focused too much on the product, and too less on the customer/market. Technology doesn´t sell by itself, it as to generate value lower then it´s price, and have a cost lower then it´s price. Many times this is achieved not simply by having a new product to sell, but by creating new services associated with that product.

Back to mother earth, but with an eye on the Sky But is this product completely useless? Even if it was it could make money, there are even more expensive toys… But we believe this is not the case and there are important market segments that can be targeted, and Business Model configurations that could ensure best prospects for the Segway /Segway LLC/DEKA. First thing is to define what segments are those: - Security Forces: if moving in a device that keeps the traveler standing still and above everyone else is a bad thing for the general public the opposite happens with Security Forces… It allows Police officers, Surveillance personal, Private security personal, etc… to move in a easy way, 8

have a better perspective of the surrounding and also have a psychological impact on the general public.

Figure 3 - Segway and Police Forces, taken from www.segway.com

Communities that occupy space in extension and are relatively isolated from the exterior. The best examples of this are USA suburban neighborhoods, University Campus, big sport complexes… These are safe environments were the Segway can room without many problems, were its efficiency, and general characteristics present more evident advantages. In those environments it could be seen more as a useful tool than a toy. Actually those environments are perfect for coupling pleasure and fun, were it could be seen as a fun experience, and still a useful tool; Large Facilities. Large factories, storehouses, exhibitions, shopping malls are also targets, not only for Security forces, but also maintenance teams, foremans, deliveries, and all personal that as to be on the move in such environments; With some sensors, AI incorporated, and maybe some physical changes these vehicles could, for instances, work in industrial and adverse environments, and be used as robots for some manufacturing processes; Also on the “Robotic” side, the Military might be interested in these technology (actually the Segway company is already moving in both the Military and Industrial markets); Maintain and foster the relationship with Universities, not only by selling the vehicles for use in the Campus, but using this technology for research purposes; Particularly in the last three segments Segway LLC should consider to go back to its original vocation as a R&D company, were the company Know-How is more obvious, and not as a provider of services/products to the general public;

So the company could maintain its original vocation as a “foster of innovation”, and at the same time target the other mentioned segments. To this end it´s indispensible: - Develop proper Channels of distribution for each of the segments; Security Forces, Suburbia/Campus, Large facilities;

Develop special relationships with those clients, and sell the product as a “way of life” and “set of values” and not only a funny gadget9; Partnerships should be made with firms that already are implemented on those markets, to better sell the product, increase its use, familiarity and accessibility. Namely in Suburban neighborhoods and for the large facilities.

Another target worth looking into is for elderly people9, and handicapped persons, still these should be well assessed since there already other products in the market, and there safety/security issues are very sensible in this segments. If so, a special model should be issued, not only for technical reasons but also for marketing purposes (if the device is seen as a handicapped or old people vehicle the effect can be devastating in the other markets) But is this vehicle only useful in Airports, Suburbia and Exhibitions? And is selling a product the only way to make money?

Renting and Sharing Besides security forces, one segment were the Segway has been doing alright is in some Tourist Services, it allows to cover much longer trails, and being less physically demanding than walking… Given the high costs (as opposed to the value offered…) of buying a vehicle, renting/leasing seams a very good option. It could be rent in shopping malls, exhibitions, large parks (such as Parque das Nações in Lisbon), and Historic city centers (namely were no cars are allowed). For these services it can become a very strong competitor, rivaling the bicycle and walking. To hit hard this market Segway Figure 4 - A possible solution? should try to establish partnerships with companies that already provide these kinds of services (travel agencies? Rental companies?), and also with Municipal Governments in cities that have blocked Car access to the center. It should also foster new businesses that want to deliver these kind of touristic/recreational services threw leasing contracts and similar. Besides being used for recreational purposes, the Segway could be, not THE solution, but a part of the solution, for mobility problems. It could be used as Bicycles are already used in some countries, in

“When I first saw it I thought of it as kind of a baby boomer wheelchair (BB's are getting older and will need such mobility aides soon, but they will insist on something "cooler" than grandma's wheelchair)”, this comment was taken from an internet forum, it looks offensive but it actually makes sense and this profile seems to fit very well in suburbia.

complement with mass transit systems, to cover “the first” and “last mile”, or in more broad park-andride systems (it can be better than the Bicycle for uphill trips or for certain segments).10 These rentals and Park-and-Ride services would not only be a market of their one but also serve as “ice breakers” in the way people look to the vehicle and its use.

Conclusion The reasons why a specific Business thrives, while others are big failures, don´t fit neatly on pre-made schemes, sometimes luck, and the sheer charisma of the entrepreneur can make a difference. Still the Business Model concept is a very useful tool, since it forces structured thinking and demand answers for the more crucial questions when setting up or accessing a Business. From the Segway case some very relevant lessons can be made, technology doesn’t sell for itself; the product/service is important but don´t get carried away by it, focus on the Market/client and not on your belly button; selling a product is not the only way to make money, more and more the real money comes from providing services and not products/items. It is easy to batter down a project/vision when we look back at what happened, still especially in the transport area (although this seems to be a more general trend), to think there is ONE solution/vehicle that will solve all the problems is extremely Naife. Mobility, of persons and goods, as to be addressed through a proper combination of different alternatives (services, modes or vehicles) and not threw single miraculous solutions.

Bibliography Afuah, A. (2003). Segway: Segue to... In A. Afuah, Business Models (pp. 318-329). New York: McGrawHill. Ireland, S. (2008). A Submission on sustainable Transport. Dublin: Segway Ireland. OSTERWALDER, A. (2004). THE BUSINESS MODEL ONTOLOGY A PROPOSITION IN A DESIGN SCIENCE APPROACH. Lausanne: UNIVERSITE DE LAUSANNE.

See (Ireland, 2008)