LinkedIn is an example of a company with an effective alignment of its business and operating model. LinkedIn is the world’s largest professional network with 332 million users, operating a multi-sided business model platform. To help assess LinkedIn’s business and operating model, I’ll use the “business model canvas” in conjunction with the firm’s operational assets as a framework.
LinkedIn’s customers are individual professionals and representatives from companies and agencies. In other words, LinkedIn’s mission and vision represent the value that the company endeavors to create for its users. Specifically, the consumer groups consist of recruiters, advertisers & marketers, developers, and professionals who use the Internet.
LinkedIn’s mission is to “connect the world’s professionals to make them more productive and successful” and has a vision to “create economic opportunity for every professional in the world.” Specifically, LinkedIn allows its professional users to manage a professional online identity. For companies and agencies, LinkedIn provides a platform to reach and identify talent.
According to LinkedIn’s 2014 annual revenue, the company’s operating margin is 3%. This number compares to Facebook at 30%. I’m evaluating the cost structure, specifically the expenses of the firm’s operation, to assess the firm’s operating effectiveness. Although the operating margin seems to indicate that LinkedIn is ineffective in its operations, upon closer inspection, one realizes that these expenses result from discretionary and variable costs. A mere 35% of operating costs are as a result of General & Administrative expenses and Traffic Acquisition Costs. The bulk of its operating costs result from sales & marketing and product development, costs for which the firm can scale back without damaging the underlying firm assets.
While the firm’s operating effectiveness can help to gauge the model operational effectiveness of the business, the revenue earnings can provide insight into a firm’s business model effectiveness as revenue represents a firm’s ability to capture value. LinkedIn has three primary revenue streams: Talent Solutions, Marketing Solutions, and Premium Subscriptions. Talent solution products made up 57% of LinkedIn’s Q4 revenue, marketing solutions 23% and premium subscriptions 20%. The firm captures value primarily from its corporate key customers rather than the professionals for whom the company seeks to create value as stated in the mission and value statements. The fact that only a fifth of revenue is generated from individual professionals is an impairment to an otherwise healthy business model. LinkedIn also seems to recognize this as an issue as the company’s CEO, Jeff Weiner, stated that LinkedIn will increase prices for its premium users in its most recent earning call.
The key activities of LinkedIn are indicated in by its cost structure and are sales & marketing and the development of its platform, which is the company’s most readily apparent asset. LinkedIn’s business model is unique in that network effects are both “same-sided” and “opposite-sided.” LinkedIn’s activities help to facilitate the network effect on the “same-side” through professional network connection requests and endorsement of skills. This activity of the users aided by the company’s activities creates a network effect that attracts “opposite-sided” users, such as businesses and marketers.
The key partners for LinkedIn are Equinix, which is LinkedIn’s Internet service provider and the content provider of its website. Equinix, Inc. is the world’s largest IBX data center & colocation provider and hosts carrier-neutral data centers. LinkedIn’s key partners is an indication of how well the firm manages the assets of other firms for the company’s own advancement. While the firm’s operating and cost structure can lead to insight into the effectiveness of a firm’s operations, an analysis of key partners helps to assess its effectiveness in managing assets of others. LinkedIn has been extremely successful in that the vast majority of the content on LinkedIn is sourced from outside the company. Information is almost wholly user-provided. This has positive effects on cost structure — an operational measure — and the company captures the value through corporate fees, a business model measure. Thus, LinkedIn captures the value on assets the company facilitates, rather than provides itself! As a result, I’m inclined to say that the firm has excellent business model and operating model alignment.