State Of the Art on Business Models

Colophon
Date : Version : Change : Project reference: Freeband reference : Company reference : URL : Access permissions : Status : Editor : Company : Author(s) :

September 04, 2003 Final Rewrite based on review Pals B4U/D3.2 B4U/D3.2 TI/RS/2003/112 Public Final

Harry Bouwman (TUDelft)

Synopsis:
This document offers a state of the art in the domain of business models in complex value systems, discussing customer value, organisational and network aspects, technical issues and economical approaches. Objectives are not only to offer an overview of existing theories, concepts and measurement approaches, but also a basis for further analysis for case studies that are executed within the B4U project and to deliver a basis for design guidelines.

Copyright © 2002 Telematica Instituut, TU Delft, TNO, KPN research Personal use of this material is permitted. However, permission to reprint/republish this material for advertising or promotional purposes or for creating new collective works for resale or redistribution to servers or lists, or to reuse any copyrighted component of this work in other works must be obtained from or via Telematica Instituut (http://www.telin.nl).

Preface
This document offers a state of the art in the domain of business models in complex value systems, discussing customer value, organisational and network aspects, technical issues and economical approaches. Objectives is not only to offer an overview of existing theories, concepts and measurement approaches, but also a basis for further analysis for case-studies that are executed within the B4U (Business for Users) project and to deliver a basis for the design method and game. As such this document offers more background information that play a role in other work packages of B4U. The B4U project is part of the Freeband Impulse programme. The Freeband Impulse programme aims at the generation of public knowledge in advanced telecommunication (technology and applications). It specifically aims at establishing, maintaining and reinforcing the Dutch knowledge position at the international forefront of scientific and technological developments. The Dutch Ministry of Economic Affairs is cofunding this programme as part of the policy plan "Concurreren met ICT Competenties". The general intention is to prepare the grounds for the big leap forward towards 4G, in which seamless integration of fixed, wireless and mobile networks will be the standard and in which an attractive environment for user centred applications will be the norm.

State of The Art Business models, value webs, design and metrics V

Management Summary
General information
1. Acronym: B4U State of the art Business models in complex value systems 2. Title: Business for Users (B4U) 3. Programme leader: Project manager: Manager research TI-CO: Manager research TU Delft: Manager research TNO STB: 4. Date of first submission: 03-06-2003 5. Date of current project proposal: Ferial Moelaert (TI-CO), Edward Faber (TI-CO), Edward Faber , Harry Bouwman (TU Delft). Pieter Ballon

Manager research TNO Telecom: Nico Pals

Synopsis
This document offers a state of the art in the domain of business models in complex value systems in general and more specifically of mobile business models, discussing customer value, organisational and network aspects, technical issues and economical approaches. Objective is not only to offer an overview of existing theories, concepts and measurement approaches, but also a basis for further analysis for case studies that are executed within the B4U project and to deliver a basis for design guidelines for mobile services. Most new mobile services for 3G and beyond are developed by a network of organisations that have to work together to realise access to infrastructure, middleware (such as location based technologies), multimedia content, customer data and customers. This network of organisations and or business units within organisations adds to the value of the service as perceived by the customer. Although much is written about business models, little is known about business models used by networked organisations. Furthermore, proper performance indicators for business models are still under development. Within ongoing research projects, such as Business Models for Innovative Telematics Applications (BITA) and Business for Users (B4U) we are developing methods and tools to design and evaluate business models for mobile services. In this state of the art document we will discuss literature with regard to business models, networked services and performance and propose a measurement instrument. Furthermore we offer both descriptive models and causal models that will help to analyse the data of case collected both in the BITA end B4U projects.

Telematica Instituut

Table of Contents
1 2 Introduction Business models in context 2.1 2.2 2.3 2.4 2.5 3 Customer value Organisational issues Technical arrangements Financial arrangements Metrics and performance 9 11 14 15 16 16 17 20 21 22 24 24 25 26 26 28 28 29 32 32 34 35 37

Business models and complex value networks 3.1 3.2 3.3 3.4 3.5 Customer value and complex value systems Complex value systems and organisational arrangements Complex value systems and technical arrangements Complex value systems and financial arrangements Complex value systems, performance and metrics

4

Mobile business models 4.1 4.2 4.3 4.4 4.5 Mobile business model and customer value Mobile business model and organisational arrangements Mobile business model and technical arrangements Mobile business model and financial arrangements Explaining the success of mobile business models

4.5.1 Causal model 4.5.2 Mobile business model, metrics and performance 4.6 5 Conclusion

References

State of The Art Business models, value webs, design and metrics vii

1

Introduction

The objective of this state of the art is to offer an overview of literature with regard to business models in general, and more specifically with regard to business models for mobile services. The overview of mobile business models starts from the perspective of service providers rather than from the perspective of mobile network operators. First, we will discuss the literature that discusses business models in general, subsequently we will shift our focus towards business models that are developed in a complex actor setting, where multiple actors have to work together to deliver customer value to the end-user and we will finish this overview with the mobile perspective. Furthermore the concepts as discussed in this state of the art are relevant for the development of framework for analysis of the case-studies that are part of WP 3 of the B4U project, and for the design of guidelines for mobile services. A large portion of the extensive body of literature on business models is devoted to understanding what a business model is, what its main characteristics are or what typologies are available. In most cases the unit of analysis is the single firm or organization. A business model can be defined as the description of the roles and relationships among a firm’s consumers, customers, allies and suppliers that identifies the major flows of products, information and money, and the major benefits to participants (Weill & Vitale, 2001, p. 34). Although definitions may vary and pay greater or lesser attention to the elements constituting a business model, in practice we have not seen research whereby the business models of a large number of firms are evaluated in terms of their performance. Studies with regard to business models and business models performance are mainly based on case-material and tend to be anecdotic in nature. We fully realize that most large-scale analyses of competing business models are hindered by the lack of financial data. Most companies are very reluctant to share this kind of information, and when it is available the data can seldom be compared. In this state of the art document we will discuss the problems involved in developing an instrument to measure the performance of business models across a range of firms. To make it even more complicated we are not interested in business models of single organisations but of networked enterprises or complex value systems where a number of firms have to work together to provide a service to the end-customer. We will focus specifically on the mobile service domain. Research questions are:

• What is a business model? Which elements do constitute a business model? What metrics help to
understand the feasibility and viability of a business model? With regard to the complex value systems we will discuss the following questions

• How are business models and complex value networks related? How do business models of complex
value systems differ from business models of singular organisations? With regard to the mobile dimension we will discuss the following questions

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• Are business models for 3rd generation mobile services different from more general business models?
Although thus far the questions have mostly been descriptive in nature, we also want to analyse the performance of business models.

• Can we, based on the reviewed literature develop a model that explains the performance of business
models for 3 G and beyond and what relevant indicators can be used to measure the concepts in this model? In this state of the art document we will therefore discuss a number of definitions of business models, the concepts used to analyse them, such as the description of the customer value, and of the organizational, technical and financial aspects. As a first step we will introduce a model of the elements that make up a business model (for a more extensive discussion of this descriptive model see Faber et al., 2003). Starting from this descriptive model we will develop a conceptual model that may help us understand which concepts contribute to the performance of a business model and what the causalities are between the concepts. Subsequently we will apply the model to the mobile domain.
rd

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2

Business models in context

In the 1970’s the concept of business model was used to describe and map business processes and information and communication patterns within a company for the purpose of building an IT-system (Stähler, 2001). More recently, business models have been related to market structures and the place of individual companies within those structures. Sometimes the concept is used to describe co-ordination mechanism in economic processes i.e. markets or hierarchies, or to discuss intermediation or disintermediation trends. In other studies the implementation of a specific market model, for example the English auction, is discussed in terms of business models. Very often only one economical or technical aspect of a business model is emphasized, for example the B2C-model for the retail sector. The concept of business model is also used as a synonym for business modelling: the modelling of organizational processes with the use of Unified Modelling Language (UML), an object-oriented modelling language. It is clear that the concept business model is widely used but hardly ever clearly defined. In the introduction we referred to Weill & Vitale's definition of a business model, which is most probably not the best definition for the purpose of our research, because in our view the authors fail to pay sufficient explicit attention to technology. Alternative definitions, for instance the one proposed by Timmer (1998) stress the architectural and technology elements. A business model is an architecture for the product, service, information flows, including a description of various business actors and their roles, a description of potential benefits for the various actors, and a description of the sources of revenue. We therefore prefer this definition above the definition given by Weill & Vitale. Kiezen we nu de definitie van Timmers? What business models are available? In various taxonomies a large number of business models are mentioned (Timmers, 1998, 1999; Rayport, 1999; Madehevan, 2000; Rappa, 2000; Turban, Lee, King & Chung, 2000; Afuah & Tucci, 2001; Deitel, Deitel & Steinbuhler, 2001; Deitel, Deitel & Nieto, 2001; Raessens, 2001; Rayport & Jaworksi, 2001). The basis for these classifications varies. Some classifications are based on developments in the area of technology, others on marketing concepts or product types. In some classifications elements like value creation or strategy play a role. However most classifications tend to be based on new opportunities offered by the Internet (Afuah & Tucci, 2001). Some classifications pop up in a number of places, sometimes in slightly modified or more detailed versions. The business models as discussed in these taxonomies basically are versions of what Weill & Vitale (2001) call Atomic business models, to wit Content Provider, Direct to Customer, Full Service Provider, Intermediary, Shared Infrastructure, Value Net Integrator, Virtual Community and Whole-of-Enterprise/Government models. In our view most taxonomies can be traced back to these eight basic models. What are the basic elements of a business model? Alt & Zimmerman (2001) suggest that there are a few common elements that turn up in definitions of business models:

• Mission: determining the overall vision, strategic objectives and value proposition, but also the basic
features of a product or service.

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• Structure: this has to do with the actors and the role they play within a specific business environment (a
value chain or web), the specific market segments, customers and products.

• Process: the concrete translation of the mission and the structure of the business model into more
operational terms.

• Revenues: the investments needed in the medium and long term, cost structures and the revenues that
are generated. As in the definition of Weill & Vitale the role of technology and architectural elements is negelected.

Afuah & Tucci (2001) see business models as a system of components (value, revenue sources, price, related activities, implementation, capabilities and sustainability), relationships and interrelated technology. Mahadevan (2000) emphasizes value creation, revenues and logistics. As far as the buyer is concerned value creation means a reduction in searching and transaction costs. The seller can reduce costs associated with tracing customers, promotion and transaction costs, and benefit from a shorter turnover rate. The introduction of all sorts of intermediary parties on the Internet is assumed to increase the value stream for both the supply and the demand side. According to Mahadevan this will lead to a virtuous cycle, which will finally materialize in Virtual Communities. These communities offer benefits to all parties concerned: companies, customers, market makers and portals. Osterwalder (2002, also Osterwalder & Pigneur, 2002) is far more systematic in his approach to the concept of business models. Based on the questions what a company has to offer, who it targets, how this can be realized and how much can be earned, he discusses four basic elements, i.e.:

• product innovation and the implicit value proposition, • customer management, including the description of the target customer, channels, customer relations, • infrastructure management, the capabilities and resources, value configuration, web or network,
partnerships

• financial aspects, the revenue models, cost structure, and profit.
In our approach we will focus on customer value, and the organisational, technical and financial arrangements needed to provide a service that offers customer value (see Figure 2.1). In our opinion the starting point is the customer value of a product or service that an individual company has to offer. Strategies, which in the organisation domain are leading, are increasingly being translated into business models. Nowadays, many business ventures have a limited interest in formulating strategies; instead they formulate business models (Hedman & Kalling, 2002; 2003). Strategies, and consequently business models, to a large extent determine the processes that lie at the basis of the business case: the concrete implementation of the business model in operational terms. To achieve this a company has to make resources and capabilities available within the organisation and organise relevant (information) processes

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that will ensure the delivery of the product or services. This is enabled by technologies, in the case of mobile services most importantly by information and communication technology. Information and communication technology, i.e. Internet is playing an increasingly important role not only in the organisational processes but also in delivering valuable products and services to the end customer as well. It is clear that in addition to these elements financial aspects play a significant role too. In our view business models are defined by these four elements: customer value, and organisational, technological and financial arrangements. We will discuss these four elements in greater detail in the next sections.

Delivers (T4)

Defines (T1)

Customer Value Of services
Based on (T1)

Enables (T0)

Organisational arrangements
Redefines (T2)

Technical architecture
Generate costs (T1)

Division of costs & revenues (T3)

Financial arrangements

Figure 2.1

Business model components

On a process level we see that technological innovations or combinations of existing technologies make it possible to develop services that are assumed to deliver customer value. However to realize this new services specific organisations have to collaborate within other department within an organisation of across the borders of an organisation, for instance for a service that requires location specific information collaboration with GIS-providers is necessary. So in the development of a services matching of service requirements with technologies and therefore the establishment of collaboration with a number of organisations is an important phase in the development of a business model. This process becomes most explicit in the phase of the development of the services where negotiations on investments, revenue models and revenue sharing take place. Most of the time this will lead to a redefinition of the business

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model and an adjustment of the initial service concept. As a result the customer value as initially foreseen will be different from the actual customer value offered.

2.1

Customer value

There is a long tradition of literature on customer value, and basically it discusses what Ansoff’s (1987) matrix, based on the dimensions of market and product newness, illustrates. Newness is quite a troublesome concept, whether it concerns products that are new to the world (Booz et al , 1982), or major (Lovelock, 1984) or disruptive (Christensen, 1997) innovations. ffering has to have added value for its customers. In general, we will make the distinction between new-to-the-world products or services and new versions of existing products or services (see also the concepts of versioning as used by Shapiro & Varian, 1999). Value is seen as part of an equation in which customers in target markets compare the perceived benefits and total costs (or sacrifice) of (obtaining) a product or service (Chen & Dubinsky, 2003). The value proposition of a firm must be considered better, and deliver the desired satisfaction more effectively and efficiently than competitors. Customer experience is the key (Bouwman, Staal & Steinfield, 2001). With the increasing importance of electronic networks, i.e. the Internet or mobile Internet, the channels that play a role in offering a product or service also become more important. Rayport & Sviokla (1994) therefore draw a distinction between content: what companies are offering, context: how companies are offering it, and infrastructure: what enables the transaction to take place.

-

-

-

All three factors can play a role in defining the newness of the product or service. Both the product or service and the context can be new. For instance location-based mobile services represent a new product, whereas it may also be the mobile channel that constitutes the new element. Increasing connectivity is crucial. Furthermore, the intangible nature of the product or service as well as the increased role that customers play (McNaughton, Osborne & Imire, 2002) is becoming more and more important and reflects the service character of transactions through electronic networks. Customers contribute to and consume value. In most cases, due to all kinds of organizational, technical and operational problems, customer value, as defined in strategic plans, is not the value that will be ultimately delivered to the customer, and even if it is, it is not the value that will be perceived by the customer. In many cases the customer value as perceived

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by the end-user has little to do with the customer value that is envisaged in initial business models and greatly depends on the user’s personal or consumption context (Chen & Dubinsky, 2003). In general, research into (perceived) customer value is associated with customer satisfaction and evaluation. Until now there is no generally accepted theoretical conceptualisation for customer value in eservices (Van Riel, Liljander & Jurriens, 2001). The SERVQUAL model is used in many research projects but seldom in relation to services delivered over the (Mobile) Internet (Parasuraman, Zeithaml & Berry, 1988). It is, however, doubtful that the five dimensions of SERVQUAL: tangibility, responsiveness, reliability, assurance and empathy, actually capture customer value and perceptions of e-service quality. The SERVQUAL approach is backward looking: discussing customer value from the point of view of existing customers and customer satisfaction. An alternative, forward–looking, approach, in literature mentioned as policy capturing, vignette studies or conjoint measurement, discusses the perceptions and perspectives of end users and decision makers on an unknown product or service. This approach is handicapped by the absence of physical prototypes and the difficulty of reproducing market conditions. This causes problems when conducting research into predominantly intangible products or services. Alternative research methods, i.e. policy capturing (Wijngaert 1996; Bouwman & Wijngaert, 2002, 2003) might present a more realistic alternative, not only because customer value can be manipulated, but also because the context and infrastructure can be taken into account.

2.2

Organisational issues

In general, organisational issues revolve around the resources and capabilities that have to be made available to the organisation. In their analysis of business models Hedman & Kalling (2002) conclude that the bottom line is that economic value is determined by a firm’s ability to trade and absorb ICT-resources, to align (and embed) them with other resources, to diffuse them in activities and manage the activities in a way that creates a proposition at uniquely low costs or with unique qualities in relation to the industry in which the company is operating. Collaboration, in-sourcing and network formation are possible strategies to obtain the necessary resources if an organisation doesn't control the resources. Both the resource based (Barney, 1991) and resource dependency (Pfeffer & Salancik, 1978) theory are relevant in this respect. Hedman & Kalling (2002, 2003) rightfully point out that the relevant literature on business models is dominated by descriptions of 'specific' empirically identified business models and that little attention is paid to the theoretical sub-constructs of these models. Starting from strategy theory, more specifically theories on Industrial Organisation (Porter 1985; Porter & Millar, 1985), the strategy process perspective (Mintzberg, 1983; Scott Morton, 1990; Henderson & Venkatraman, 1993) and the resource-based theory (Barney, 1991) they conclude that strategy has to deal with industry, industry position, customer segment,

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geographical markets, product range, structure, culture, position in value chain, resource bases, knowledge bases and technologies.

2.3

Technical arrangements

Although technological innovations enable new services offering, not every new technology will lead to new services. Business requirements as defined in corporate strategies and business models determine the process and information infrastructure. Both specify the internal technical architecture, but also the technologies necessary to offer a specific new service. This way, new service offerings and business processes can be embedded in web-services, which contain both IT-functionality and data. As we have discussed before there is an interaction between technological innovations that make a new service offering possible at one hand and the technological embedding of the service at the other hand. In this section we will not look into technology as a driver and enabler of technology but look at the internal technological embedding of a services. In general organisations have a choice in the degree to which they want to embed processes in ITfunctionalities. The most detailed level at which business processes can be embedded is the CRUD-matrix level (Create, Read, Update and Delete). At a higher level objects are defined. Objects are related to the business and information processes. A complex organisation can use object-models with thousands of objects with a limited scope. At still higher-level components are used. Components are applications that can be used by multiple users. One level above that web-services are being discussed (Koushik & Joodi, 2000). Functions and objects are combined together with business processes in a service application that can be used by "business messages". Web-services have the highest level of granularity. Web-services are business functions exposed to the web through a well-defined interface and use standard web protocols, such as UDDI, SOAP and WSDL (Lankhorst, Van der Stappen & Jansen, 2001). Most webservices are based on a 3-tier infrastructure defining external client interfaces, middleware and application services and back end data services. We will not discuss technology in detail, it is clear that technology at one hand enables new services offering, and at the other new service offerings require new technologies. At a governance level web-services can be provided by third parties and do not depend on the ITresources of an individual firm. Furthermore, we have to realise that, to provide services over the Internet and mobile networks, organisation legacy IT-systems or web-services are not sufficient.

2.4

Financial arrangements

With regard to financial arrangements there are basically three main issues: investment decisions, revenue models and pricing. We will not discuss pricing in general terms, because pricing issues are directly related to a specific service offering. We will only deal with investment decisions and revenue models in general terms. When it comes to investment decisions there are a large number of surveys available (Demkes,

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1999; Renkema, 1996; Oirsouw, 1993). The authors of these surveys describe a large number of methods predominantly based on financial criteria. They discuss general financial methods as well as multi-criteria, ratio and portfolio approaches (Renkema, 1996). Financial methods are aimed at average costeffectiveness, net cash worth, and internal return. Multi-criteria methods are those found in Information Economic, Kobler Unit Framework and the Siesta-method, which is partly based on the Strategic Alignment model. The ratio-methods are those found in Return-on-management and IT-assessment. Portfolio-methods are found in Bedell, investment portfolio and investment mapping (see Renkema, 1996, and Demkes, 1999). Some methods go beyond the merely financial considerations, for example the balanced score cards (Kaplan & Norton, 1992; 1996) and the option theory, a more detailed elaboration on the net cash worth concept (Renkema, 1996; Demkes, 1999). Demkes (1999, p. 91) does point out that decision-makers hardly ever use these kinds of investments methods. Decision making on new investments is most of the time ad hoc and intuitive. Nevertheless if decisions are made it is important to evaluate these decisions on a continuous basis and therefore it is important to develop performance measures. Generally speaking the cost side of investments are reasonably well charted. As far as the revenue side is concerned, which from our point of view not only includes realizing cost reductions but also long term advantages that stem from intangibles, literature is less uniform. Revenue models indicate what methods of payment are used, what is being paid for, and thus in what way income is generated. The thinking about models for income generation is less articulated than that with regard to business models. Furthermore, the distinction between the two is often vague. Mahadevan (2000), when talking about revenue models for the Internet, distinguishes, for example, subscriptions, shopping mall operations, advertisements, computer services, general services, time usage and sponsoring (or free services). Weill & Vitale (2001) distinguish between (1) payments for transactions, (2) payments for information and advice, (3) payments for services and commissions and (4) advertisementgenerated income and payments for referrals. Holland, Bouwman, & Smidts(2001) discuss the following revenue models for Internet services: advertisement based, transaction based, models based on the float, subscription-based, licensed based and models based on utility, i.e. pay for-models.

2.5

Metrics and performance

Performance indicators for organizations have long ago ceased being determined solely on the basis of solid economic assets. In 1981, the book value of a company was equal to its market value. In the year 2000 the market value was 4.2 times the book value. In other words, the value of a company is determined not only by its tangible assets, but by its intangible assets, such as goodwill, as well (Boulton, Elliott, Libert & Samek, 2001), which include, for example, marketing costs for branding, patents, etc. There have been various attempts to quantify these assets by means of performance scales and indices, such as the Value Creation Index, Value on Investment , Performance Measurement Matrix, Smart Pyramid, Macro Process
TM

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Model, the Balanced Score Card, the Performance Dashboard, and the Customer Value Index (this list was partly based on Marr & Neely, 2001). In the Value on Investment
TM

(VOI) approach a relationship is established between strategy, business

models and modelling on the one hand, and implementation and innovation on the other hand (Davies, 2001). The approach is based on the balanced score card (Kaplan & Norton, 1992, 1996). In addition to the financial performance, which is usually referred to in terms of Return on Investment (ROI), other ways to measure success are elaborated on the basis of internal work processes, performance of systems and infrastructure, productivity of employees and customer satisfaction. Based on the Balanced Score Card approach, Dubosson-Torbay, Osterwalder & Pigneur (2001) propose, product measures that assess

• the originality of the value proposition, • customer measures that evaluate the relationship of the organisation with its customer (retention,
acquisition, satisfaction, profitability) and the appreciation of the value proposition,

• infrastructure measures, identifying internal and outsourced activities, and • financial measures, such as revenue growth, cost management, asset utilization and market
capitalisation. The balanced score card approach has a number of limitations. According to Rayport & Jaworski (p. 263) the balanced score card cannot be used to evaluate business models. They argue that in the BSC methodology there is no clear definition of strategy (or business models), no clear location of organizational capabilities or resources and no clear identification of strategic partners. Rayport & Jaworski have developed an alternative method. This method, the so-called performance dashboard, is equipped with a set of concrete indicators. They are:

• measures for market opportunities, including market size and competitive environment, • business model measures, the unique value proposition, capabilities and resources, exclusive
partnerships, investment in technology

• measures for branding and implementation, brand awareness, but also indicators for system uptime,
number of IT staff and the percentage of inaccurate orders.

• measures for customer acquisition, customer share, purchases, service requests. • financial measures, such as revenues, profits, earnings per share and debt to equity ratio.
Auer (2003) relates the Balanced Score Card method, in combination with other approaches to eServices. In his approach he makes a distinction between three main phases, the customer process integration, the eService scorecard and investment simulation and controlling. In the first phase the objectives are analysis of the customer processes, estimation of the value and costs for the user and the development of keyindicators. In the second phase the objectives are estimation of the value and costs for the eService

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provider and again the development of key-indicators. In the third phase target values for cost and performance indicators are estimated, various utilisation and cost scenarios considered, and target values controlled and adjusted. In the services score card several intangibles elements are taken into account, while differentiating from the original BSC approach a fifth dimension is added, discussing trust issues, including security and safety, brand and image, product and process information, assuring trust building signals, improving trustworthiness and mechanisms for control. The basic question is how the factor trust be can translated into a competitive advantage. Thus far we have mainly been concerned with individual organisations. However, in reality most services are developed in value networks.

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3

Business models and complex value networks

Traditionally business models are related to single organisations in a value chain. Value chain analyses gained popularity through the writings of Porter (1985) and have since evolved to include a wide variety of models. Although the original purpose of a value chain was to identify the fundamental value-creating processes involved in producing a product or service within a firm, the concept has since been broadened and is often used to describe an entire industry. An industry-level value chain serves as a model of the industry whereby processes are considered independent of the firms that may or may not engage in them. This separation enables analyses of the positions of various firms in the overall industry as well as instances of vertical integration or cooperative agreements (alliances, joint ventures, etc.). Despite these strengths, critics (e.g Tapscott, Ticoll & Lowy, 2000) note that the chain metaphor masks the importance of horizontal aspects of a firm’s processes, particularly their relationships with other firms. Furthermore, dynamic forces in the course of production are ignored and the model implies that product and service development is necessarily a sequential process. Such criticisms have led to the development of alternative conceptualisations such as stakeholder value chains, business webs and value nets (see respectively Tapscott, Ticoll & Lowy, 2000; Kothandaraman & Wilson, 2001). There is a shift towards providing information, products and services by networks consisting of collaborating sub-units of organizations and/or cooperating organizations (e.g. Stähler, 2001). The borders of organizations are becoming more transparent and organizations, enabled by ICT, cooperate in changing constellations. Information, services, and products can be offered by sub-units of organizations, by single organizations or by collaborations between companies, so-called value networks. The broadening of the value chain concept to that of a value net or web coincides with the general trend towards greater attention to network concepts in the strategic management literature (Gulati, Nohria & Zaheer, 2000). By definition, plural organizations with various roles and functions create an organizational network by pursuing a collective set of objectives (Demkes, 1999). Inter-organizational networks, relations between firms that extend beyond the dyad or triad, come in many forms, such as business groups (Granovetter, 1994), cooperative and governance networks (Wigand, Picot & Reichswald, 1997), constellations (Jones, Hesterley et al. 1998), network enterprises (Castells, 1996), trade associations (Oliver, 1990), and strategic networks (Gulati, et al. 2000). These various forms can be differentiated based on the patterns of interaction in exchanges among the members, as well as the flows of resources between them (Jones, Hesterley et al. 1997). A more dynamic approach specifically directed towards the evolution of networks, seen as complex systems, is discussed by Monge & Contractor (2003). They see complex (adaptive) systems as systems where actors (agents) in a network follow rules that explicitly and sometimes consciously seek to improve their fitness in terms of performance, adaptability, or survival.

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3.1

Customer value and complex value systems

For complex value systems, the generation and delivery of value to the users becomes a mutual interest. Based on their internal resources and capabilities, they adjust their functional contribution in the development of customer value. Their operation in this framework is based on the exchange of information, products, services and financial assets. Hence, organizations become dependent on each other strategically, functionally and financially. Continuous and repetitive interactions lead to the emergence of relationships between firms, which might become institutionalised through legal agreements and contracts. The interrelationships between the actors can exist at various levels, e.g. communications, information flows and revenue flows (Maitland, Van de Kar, When de Montalvo, & Bouwman, 2003). Complex value systems, value networks or value webs (we will use these concepts as synonyms) have to strive for supporting customer processes to the maximum possible extent when thinking of improving customer value (based on Grönroos, 1994). On the other hand each service is associated with costs. Companies can choose whether they support the entire customer process or only one or a few steps in the entire process. This choice depends on a company’s core competencies (based on their resources and capabilities) (Petrovic and Kittl, 2002). Since we assume many services are provides by value networks, this choice forms the basis for the configuration of a value web. Each company in the web will choose which value (and ultimately which part of the end-user value) it will offer or in other words which part(s) of the customer process it will support. So, the values and cost are formed by various organizations performing roles that contribute to the value being offered to the customer through the e-service. The following five characteristics distinguish a value net and give it the edge over a traditional business:

• Customer-aligned. Customer choices trigger sourcing, building, and delivery activities in the net.
Distinct customer segments receive customized solutions with customized service “wraps.” The customer commands the value net; he or she is not a passive recipient of supply chain output.

• Collaborative and systemic. Companies engage suppliers, customers, and even competitors in a
unique network of value-creating relationships. Each activity is assigned to the partner best able to perform it. Significant portions of operational activities are delegated to specialist providers, and the entire network functions flawlessly thanks to collaborative, system-wide communication and information management.

• Agile and scalable. Responsiveness to changes in demand, new product launches, rapid growth, or redesign of the supplier network are all assured through a flexible production, distribution, and information flow design. Constraints imposed by bricks and mortar are reduced or eliminated. Working capital shrinks. Process time and steps are reduced, sometimes eliminating entire echelons of the traditional supply chain. Everything in the value net, physical or virtual, is scalable.

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21

• Fast flow. Order-to-delivery cycles are fast and compressed. Rapid delivery goes hand in hand with
reliable and convenient delivery. That means on-time, complete orders delivered to the customer’s plant, office, or home. Time is measured in hours or days, not weeks or months. At the same time, it means drastically lower inventories for the company.

• Digital. E-commerce is a key enabler. But beyond the Internet, it is the information flow design and its
intelligent use that lie at the heart of the value net. New digital information pathways link and coordinate the activities of the company, its customers, and its providers. Rule-based, event-driven tools take over many operational decisions. Distilled real-time analysis enables rapid executive decision-making. The value web model appropriates various concepts of economic and information systems theory. Markets, hierarchies, networks and information technology are woven into an intricate web of relations to make this possible (Selz, 1999). According to Selz the main characteristics of the model are cherry picking from existing value systems, a value web broker that acts as central coordinator, an endeavour to gain proximity to the final consumer, and an integration of upstream activities. This integration is either coordinated with market platforms or with hierarchical mechanisms. Coordination mechanism (Powell, 1990) may differ from network types to traditional market mechanisms.

3.2

Complex value systems and organisational arrangements

Of more interest are relationships between what we might call ‘structural’ participants in the value networks. The balance of theory suggests that there are many motivations for firms to assume such structural roles – ranging from simple opportunism to requirements for new technological and market knowledge – but that the solidity of the relationship will depend largely upon social and institutional antecedents. Depending upon which actor(s) contribute key assets in the creation of value and the operating risks involved (Kothandaraman & Wilson, 2001), a different configuration of actors is likely to result, some taking structural, integrative roles in the alliance and others taking supporting, facilitating roles. In deciding how to describe such a network is important to decide on the focal point of the value web and starting from there what the network looks like. It is clear that the description of the network or value web is dependent on the perception of the researcher and it is problematic to delineate a network or value web and to decide which actor belong to the core or periphery of the network. Although in reality, the lines between some of them may blur, we can identify at least three basic types of participants in any new value network:

• Structural or tier-1 partners provide essential and non-substitutable tangible and/or intangible assets to
the value web on an equity or non-equity basis. They play a direct and core role in making the customer value assumption and in creating the business model.

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• Contributing or tier-2 partners provide goods and/or services to meet requirements that are specific to
the value web, but otherwise they play no direct role in making the customer value assumption and in creating the business model. If the assets they provide are substituted, the value assumption and the business model could still stand.

• Support or tier-3partners provide generic goods and services to the value web, without which the value
web would not be viable, but which otherwise could be used in connection with a wide variety of value assumptions and business models. Structural partners make up the core of the network while contributing and support partners are loosely linked to the network. As firms create products and services and engage customers in value exchanges, partners are playing an important role and require careful management (Galbreath, 2002). A remaining consideration in this scheme is the nature and longevity of these relationships. In principle, the assets and roles of contributing and supporting partners could be obtained in the wider market, through long or short-term contracts, depending on circumstances. Many of such partners may only be required at specific points in time. Most structural partners would be in it for the long haul. Almost by definition, for the business model to survive, a structural partner leaving the alliance would have to be replaced by another partner bringing the same type of assets to the enterprise and fulfilling the same role. A variation may occur when a structural partner’s role is highly temporary – i.e. required to create and float the business model, but not essential to its subsequent operation. In such cases, it is likely that the assets contributed by this partner would be retained through a formal permission or license. In literature little attention is paid to what kind of resources should be shared in value webs and how they are organised. Although there are several resource typologies (Grant, 1991: tangible-intangible resources; Barney, 1991: physical, human and organisational capital resources; Das & Teng, 1998: financial, technological, physical and managerial, Miller & Shamise, 1996: property-based and knowledge-based) these typologies are too general for our research project. In our view access to critical resources is the key element in deciding which actors to incorporate. Critical resources for value webs that use the Internet are: access to the Internet and/or mobile infrastructure, to content, to content developers, aggregators and hosting providers, to software and application platforms, to customers, customer data, billing, customer support and management, based on the type of service providers of specific technology-related services, for instance mobile, location or positioning applications. Some of the resources may be found within a single organisation, whereas for others more than one organisation may be needed. Some resources may only be provided by one organisation (structural partners), for other multiple alternatives (support partners) are available.

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3.3

Complex value systems and technical arrangements

Value webs are supported by ICT. In the B2B domain there has been a shift from integrated applications and workflow management towards systems that support customer-oriented business processes, which in some cases will require complete business integration. These systems make use of the Internet and the TCP/IP protocol. Consequently, in addition to internal ICT-systems, web–services, etc., other relevant factors are fixed network technology, both traditional (mobile and wireless) telecommunication and datanetworks like the (Mobile) Internet, object-oriented (.net, cobra, java and java beans) and mobile (Wap, Imode, SIM, Camel, etc.) middleware services and Internet (HTTP, XML) and web server architecture technologies. With regard to services payments, trust, business oriented (CRM, SCM, ERP) and collaborative (CSCW, workflow) services are relevant as well. However, discussing these technologies in detail falls beyond the scope of this state of the art (Lankhorst et al., 2001).

3.4

Complex value systems and financial arrangements

An important question is how investments are arranged within complex value networks. Important stakeholders in complex value systems are next to the core or structural actors, actors that invest, i.e. banks, or make investments possible, i.e. venture capitalists. Investment decisions weigh the interests of the actors involved and take the mutual benefits of multiple organizations into account. Organizations that are connected through intended relationships and interdependencies consider risk sharing, solving common problems, and acquiring access to complementary knowledge to be major motivators for collective investments. To facilitate inter-organizational investments, organizations go through a collective decision–making process. Compared to internal processes, these joint processes have the following implications (Demkes, 1999):

• They require a lengthy decision-making process • They demand multiple rounds of negotiations • There are conflicting interests to be sorted out (not always resulting in a win-win situation for all parties
concerned)

• There are large costs and possible subsequent disputes
Inter-organizational investments require explicit articulation and collective agreement on the terms of investment and timing (Miller & Lessard, 2000). The share of each participant and the corresponding partnership ratio must be defined. It will be determined what each member will contribute in terms of financial and technical expertise. The success of these arrangements hinge on whether or not the role of each member within the terms of institutional framework is clearly defined (ibid.)

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3.5

Complex value systems, performance and metrics

Vesalainen (2003) has developed a measurement instrument for measuring the (economic) performance and impact of virtual or networked organisations, starting from the central organisation (the point of gravity in a network, the organisation that holds control over access to the customer and has most roles combined within their own organisation). In a sense each organisation is unique, being the centre of its own network. The measurement starts at the organisation and its most important (buyer and seller) relationships, measured as dyads. The decision to start here to a greater or lesser extent less limits the network to cases where clear economical (input-output) relationships, often based on an exchange of services and product, exist, which means that less formalised networks are not taken into account. Nevertheless, Vesalainen’s approach offers a number of interesting indicators. He distinguishes between structural and social links (organizational integration) on the one hand and commercial exchange and strategic integration (business integration) on the other. In his view, whenever there is a low level of organisational and business integration, the inter-organisational relationship is typically market-oriented. High organisational and business integration reflects deep inter-organisational relationships. The four dimensions are measured using a number of measurable concepts (67 questions, answer categories 1 reflecting a thin, market-based relationship - to 5 - reflecting a deep partnership -):

• Structural links via interface structure (people of two companies work together), systems integration (in
the ICT-domain, but also quality management systems) and core process integration (typically a process that would normally be the responsibility of a single company, i.e. order delivery);

• Social structure through trust (reciprocity, loyalty, commitment), reciprocal relationships (personal
contacts), collective learning (from each others, from mistakes, innovative learning) and shared goals and values;

• Physical exchange (products delivered), value-adding services (R&D, logistics), exchange
centralization (focusing of buyer and seller behaviour);

• Strategic integration through strategic dependence (mutual dependence, result of asset specificity,
exchange volume and depth of relationship), shared partnership strategy (a common vision, strategy formation and network development), common risk taking and win/win (considering both cost based win/win, but also growth in business volume).

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4
rd

Mobile business models

3 generation mobile business will be the combination of two value chains, the mobile telecommunication value chain and the electronic business value chain (Harmer & Friel, 2001; Barnes, 2002; Sabat 2002). It is expected that this combination will lead to a wide variety of new possibilities. There are various conceptual illustrations of this model. Actors within the 3G value network are in the infrastructure domain: network operators, service providers, mobile virtual network operators; in the content or end-services domain: content and portal providers/organisers, hosting and access providers, application providers, transaction or payment processing providers, while attention should also be paid to system security providers. The absence of third-generation mobile services prevents us from describing the exact business models. Organizations mix their assets at different proportions and introduce new value propositions and business models (Boulton, 2000). As a combination of mobile telecommunication and electronic business value chains, business models of third generation shall inherit elements from the business models from both these markets. The business models are extrapolated by considering the models present in e-business with respect to the variations, and the models being used in 2G and 2.5G mobile markets (Li & Whalley, 2002). Panis, Morphis, Felt, Reufenheuser, Bohm, Nitz & Saarlo (---) discuss the business models for location-based services, micro-payments, gambling and intelligent advertising, MacInnes, Moneta, Carbarato & Sami (2002) for mobile games. Ballon, Helmus & Pas (2001) lists some of the variations found in models with respect to the focus or range of customer group, the function or goal in the value chain, the description of the roles of the actors involved in value creation, and the type of services they use. They also point out the evident variations resulting from differentiation in the mobile business market landscape, namely the functionality of mobile devices and the quality of service provided by the network operators. Maitland, Van de Kar, When de Montalvo, & Bouwman (2003) base their distinction on the types of mobile services being offered and classify the models according to their value web complexity and level of intermediation. The models on which they focus offer mobile information and entertainment services, and location-based mobile services, except productivity-centred services.

4.1

Mobile business model and customer value

To a large extent, the customer value of 3G mobile services is stated in terms of anyplace, anytime. However, this is very general description of customer value. Future mobile and wireless technologies enable applications and services that are situation and context aware, augmented and virtual, and use speech recognition, multi-modal interaction and human supervised computing. Crisler, Anneroth, Aftelak and Pulil (2003) assume that research into user behaviour, across classes of applications (e.g. context aware), broad user groups (segmented by age, culture, geographic region, special accessibility needs)

26

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and in specific application domains (healthcare, emergency, extended enterprise logistics, education learning, entertainment) may help to define applications that offer value to end-users. Table 4.1
Roles Functionality related roles Service provider Network operator Platform provider Application provider Web hosting/ presence provider Content supply chain roles Raw content supplier Content developer Supplies content in a format unusable for the mobile service & terminal Transforms raw content into content appropriate for the service as well as the mobile terminal Provides billable service to the end consumer Operates the mobile telecommunications network over which the data (service) is transmitted Provides the software that defines the general platform on which a variety of services are run Provides the software that makes a service possible and that sits on top of the platform Operates and maintains the server that hosts a website that is an integral part of the service, particularly relevant to the further development of content

Actors in the mobile value web
Definitions

Content provider Content aggregator Hardware roles Equipment provider Handset supplier Customer relation roles Billing provider Marketing provider Customer support provider Content quality manager LBS roles Content geo-coding provider User positioning Positioning technology vendor GIS provider

Provides ‘appropriate’/transformed content to the service provider Serves as an intermediary between the service provider and the content providers Provides the hardware (physical components of network) Supplies platform or service-specific handsets Provides billing services to collect revenues from end consumers Markets the service Point of contact for customer queries regarding the service; responds to customer queries Monitors and improves content quality Adds x/y coordinates to the content Provides the position information of the mobile device Supplies user positioning equipment Provides geographical information (and GIS services) necessary to indicate location information of relevant content

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Camponovo & Pigneur (2003) describe the value each actor within the mobile business domain is going to deliver, which ultimately will add up to the final customer value. Table 4.1 gives an overview of the most important actors (Maitland et al, 2003).

4.2

Mobile business model and organisational arrangements

Camponovo & Pigneur (2002) highlight the increasing importance that the organizations in the mobile business market attach to building partnerships. Participants of 3 generation mobile business markets need to work together in a large number of areas. Even separate mobile network operators, who are congenital competitors, resort to sharing their network infrastructures due to a discreet mutual interest in speeding up investments and roll-out (Maitland, Bauer & Westerveld, 2002). Members of value webs cooperate in the development of enabling technologies, the integration of corporate information systems and the development of middleware solutions, open platforms and standards (Camponovo & Pigneur, 2002). In addition to the technical cooperation, they develop their billing and pricing schemes (ibid.). Organizations in the 3G mobile business market have a number of assets they can use to create a competitive advantage in the market. These assets will be discussed below. It is believed that the cooperation of network providers and content providers from fixed communication, Internet and mobile services of 2G will generate the highest quality of service (Maitland, Bauer & Westerveld, 2002). The tendency of network providers to develop mobile content in-house is diminished due to a shortage of adequate expertise and capital (knowledge and finance). There are three main scenarios for network operators entering into partnership with third-party service providers, namely the open, walled garden and closed approach. The open approach means that there are no limitations for external parties, whereas the closed approach excludes content provider from taking part in the value chain. In the walled garden approach particular content providers are allowed to take part on the basis of pricing and content reserving privileges. Though in e-business building alliances is one the most important ways of creating value, it seems that for content and network providers it is just one of the strategic ways to enter the market, and to increase their competitive position (Camponovo & Pigneur, 2003). The access to key functions of billing and information sharing appears to be of great importance in the competition and creation of viable business models for the organizations. Each member will utilize its market position, negotiating power and access to the critical resources to get a bigger piece of the pie.
rd

4.3
rd

Mobile business model and technical arrangements

3 generation mobile data services will follow an evolutionary route. The assumption with regard to the evolutionary route is that the GSM technology is subject of further development. Services offered by UMTS are made possible by upgrading GSM. As the core of the network, GSM offers several commercial benefits. Firstly, the investments of the existing GSM providers are protected. Secondly, there is already a

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large number of customers that can immediately make use of these services. At the moment, GSM offers the possibility of transmitting data at a speed of 9.6 Kbps. Although this is adequate for transmitting messages of up to 160 characters, as is the case with the short message service (SMS), voicemail, e-mail and a limited number of information services, it is inadequate for most data communication services. Nevertheless, developments in the field of General Packet Radio Service (GPRS), High-Speed CircuitSwitched Data (HSCSD) and Enhanced Data rates for GSM Evolution (EDGE) make an evolutionary development to higher data rates possible, which means that it is possible that the so-called 2.5 G may just be good enough for most 3 G applications (see for an extensive discussion of -regional- standards in the mobile and wireless domain, Steinbock, 2003). 3G and beyond are assumed to carry video and sound clips. Wireless technologies based on the WLAN- standards family (802.11a, b, f) and public hotspots are increasingly seen as a competitive technology for 3G and beyond. The same goes for Bluetooth. However we also see trends towards service platforms that will enable seamless hand-over of services between the different mobile and wireless technologies. Future outlooks are directed towards the personal area and wearable networks, with the so-called I-centric services adapting to individual requirements (Popescu-Zeletin, Abranowski, Fikouras, Gasbaronne, Gebler, Henning, Van Kranenenburg, Postschy, Postmann & Raatikainen, 2003). I-centric communication starts from the human behaviour to which the activities of IP-based and wireless (mobile) communication systems adapt. Context awareness, personalisation and adaptation are important requirements. They define service composition, control, creation, environment monitoring, service deployment and services management (see for an extensive overview of developments with regard to I-centric computing or the Multi-level sphere concept, Mohr, 2003)

4.4

Mobile business model and financial arrangements

Three topics should be paid attention to when discussing financial arrangements with regard to 3rdG Business models, i.e. investments decisions, revenue models and pricing. With regard to investment decisions we advocate that attention should be paid to investment portfolios taking the life-cycle of a service into account. From an investment appraisal perspective, a business model can be expressed in terms of a portfolio comprising particular rewards at a price of threatening risks (Renkema, 1999). The main purpose is justifying the allocation of organizational resources and scarce funds for a particular project in the mobile domain. Thus, to justify a selected business initiative it is necessary to investigate if that particular investment portfolio offers more value for price compared to other competing investment alternatives. The business value following the realization of business initiative is the collection of the efforts, earnings and uncertainties making up the reward-risk portfolio. Earnings and necessary efforts have to be dismantled into a set of business impacts. Disaggregating the earnings and efforts into specific business impacts using structural analysis techniques facilitates identification, measurement and management of the effects; thus providing insight and means of intervention on the dynamics shaping the

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29

consequences. Accordingly, structural identification and analysis of the business impacts are the cornerstone of valuing options. Our argument is that structural analysis methodology should be used in the mobile business domain in order to identify what kind of potential impacts can materialize and the value of the initiative can be assessed. However we are not aware of such a methodology being applied specifically for investments in 3G mobile services domain. However the individual value activities of actors in the value web can be broken down. Figure 4.1 offers such an overview. Existing analyses are mainly directed to revenue models or pricing schemes. Olla & Patel (2002) for instance present an overview of the revenue models that are used by what they describe as portal type actors within a value web for 3G services (see table 4.2). Their overview is more or less a specification of more general revenue models for the mobile (portal) domain.

TABLE 4.2

REVENUE MODELS FOR MOBILE PORTALS

Portal type Mobile intranet/extranet

Data revenue model Mobile internet access with unlimited, premium or basic content subscription

Revenue source Customer Revenue share content providers Customer, reduced rate + revenue from ads 3 parties Customer corporate Customer
rd

Customer infotainment

Volume-based charging or Advertisingbased models

Multimedia messaging Mobile Internet

Flat rate per content type Session-based charging/ Mobile Internet Access at basis content subscription/ Flat rate per content type

Location-based services

Mobile Internet access/ Premium content subscription

Customer Revenue share content providers Customer

Simple voice

Per message models/ Mobile Internet Access at basic content subscription

Rich voice

Per message models/ Mobile Internet Access at basic content subscription/ Flat rate per content type

Customer

Source: Olla & Patel, 2002, p. 562

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B4U/D3.2

HARDWARE SUPPLY CHAIN MOBILE NETWORK INFRASTRUCTURE Network Equipment Provider MOBILE USER INFRASTRUCTURE Handset Supplier

t

MOBILE NETWORK TECHNOLOGY

CUSTOMER SERVICE MANAGEMENT Customer Service Marketer

p

q

r

o

MOBILE NETWORK FUNCTION Billing Provider Mobile Network Operator Internet Service Provider c u a b Mobile Service Provider m Mobile Service Aggregator n k l CUSTOMER (MOBILE USER)

d

e

f h

Content Aggregator Platform Provider d l Content Provider i Content Developer j Raw Content Supplier CONTENT SUPPLY CHAIN d Application Provider h s g

Webhosting Provider Roles of Actor

MOBILE APPLICATION ENABLER FUNCTION Functions in The Supply Chain of Mobile Service Technical Functions

MOBILE APPLICATION TECHNOLOGY

The delivered object of resource (excluding cost) : a = wholesale airtime b = service to aggregate and to distribute the mobile service across different network operators c = aggregated contents in the appropriate format for the mobile service d = contents in the appropriate format for the mobile service e = platform (software) on which a variety of services are run f = software application g = information on the development of software application for mobile h = server that hosts a website that is an integral part of the mobile service i = the transformed content into the appropriate content for the mobile service j = content in a format unusable for the mobile service

k = distributed mobile service for mobile users accross network operator l = billable mobile service, distributed mobile handset m = collected revenue from mobile users n = bill of the mobile service o = advertised information of the mobile service (promotion of the mobile service) p = after sales service q = mobile handset with general (common) specification r = mobile handset with specific function or specification s = information of the development technology in mobile handset t = physical component of mobile network u = access to the internet as the integral part of mobile service

Figure 4.1 Value streams in the mobile domain (Source, Elisa, 2003)

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31

Revenue models are based on pricing schemes. Pricing is a difficult topic within the 3G-services domain. Pricing new mobile services too high will result in a low take-up of the service, whereas pricing too low could result in low and unsatisfactory revenues. Although pricing theory is extensive, pricing of innovative services is under-researched and problematic (Jonason & Holma, 2002). Traditional pricing theory is mainly directed towards optimising the price-level, pricing is seldom considered as a part of innovations themselves. Jonason & Holma try to define pricing parameters and to lay a basis for a proper pricing optimisation method. Based on questions like how valuable an application will be for an end-user, how many times a week the respondent expects to use a service and what an acceptable price would be for the use of wireless services like music and video download, e-mail messaging, browsing, wireless photo’s, banking, micro-payments, interactive games and positioning, tracking services, remote control and emergency alarm, they conclude that every application has an individual price-demand relation. Private entertainment related services show a low, but relatively stable price elasticity, whereas consumers were more price sensitive when it comes to their willingness to pay for business-related services, such as wireless email. In general the conclusion is that the pricing of applications needs to be taken at a servicespecific level to generate satisfactory profits in 3G.

4.5

Explaining the success of mobile business models

Although there is a large body of knowledge with regard to business models and complex value systems and with regard to business models for 3G and beyond, case-related empirical analysis is scarce and there are no cross-sectional data. One of the main problems is the fact that, although there are a great number of more or less descriptive models, models that explain the viability and feasibility of business models are still lacking. This is due partly to the complexity of the subject, and partly to its dynamic character (basically it is a moving target) and partly to a lack of proper data. Nevertheless, we would like to present an initial causal diagram that may help us understand the underlying causalities. We will give some indications about how we would expect these concepts to be measured.

4.5.1 Causal model

In the causal model we relate organisational, technical and financial arrangements with a common strategy or clearly defined business model and customer value that at the end will be decisive with regard to the viability of a business model of a specific mobile service. Degree of complexity refers to network characteristics: the number of involved actors and the number of roles they have to fulfil. Degree of control/co-ordination refers to the governance of the network of actors that deliver the service. Complementarity’s of resources and capabilities discus the specific roles that have to be fulfilled, more

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B4U/D3.2

specifically within a network that has to bring a service forward some resources or capabilities are essential. In a certain way these resources and capabilities can be defined in access to critical resources such as capital, both financial as social, but also more mundane access issues access to the Internet and/or mobile infrastructure, to content, to content developers, aggregators and hosting providers, to software and application platforms, to customers, customer data, billing, customer support and management, based on the type of service providers of specific technology-related services, for instance mobile, location or positioning applications. Financial arrangements have two sides: the input and the output side. At the input side distribution of costs and risks is essential, while at the output side the division of revenues is essential. If involved actors don’t get a fair share of the revenues they are most likely to drop out of the network and hamper the viability of the business models; defined as the fit between customer value as intended to be delivered and the customer value as experienced.

Degree of complexity Value System

Complementarity of Degree of complexity Degree of control/ Value System Assets (resources/ co-ordination capabilities)
Complementarity of Assets (resources/ capabilities)

Common strategy (CVS) (new business model)

Common strategy (CVS) Degree of Division of costs, risks control/ Intended/delivered (new business model) co-ordination Customer value

Division of revenues

(value proposition)

Supply Side
Division of costs, risks

Division of revenues Intended/delivered Customer value (value proposition) (market)

FIT

Viable Service

Demand Side Supply Side
Demand Side

FIT Customer
Expected/Perceived Customer Value (acceptation of value proposition)

(market) (acceptation of value
proposition)

Expected/Perceived Value Viable Service

Figure 4.2

Causal diagram explaining viability of a mobile business model

Within the model there are multiple feedback loops possible, we only did draw a feedback loop between viability of the services and the common strategy. It will be clear that the common strategy as materialized in the business model will be redefined in the case that the service is not successful at the targeted market.

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33

If this will also have consequences for the network arrangements we will leave outside our scope. The model is intended to be dynamic and be tested therefore we need indicators for the concepts in our model.

4.5.2 Mobile business model, metrics and performance

We make a distinction in our causal model between supply and demand side. The unit of analysis at both sides are different. The customer value as intended and delivered can only be tested by empirical research with consumers as unit of analysis. We opt for policy capturing as research method that can be useful to assess the potential success of a service that is not yet on the market. We will not discuss the demand side in more detail (see Bouwman & Van de Wijngaert, 2003).

Degree of complexity Value System

Complementarity of Assets (resources/ capabilities)

Degree of control/ co-ordination

Common strategy (CVS) (new business model)

Division of costs, risks

Viable Service

Metrics
Access issues

Network level Network content related issues
Type of co-ordination - M, H, N Out- or co-sourcing SLA’s

Network level
Size Inclusiveness Connectivity Density Centralization Symmetry Transitivity

Investment
-Assets -Cost - Risk assessment

Organisational level Investment
- Assets - Cost - Risk assessment

Financial Valuation Network/organisational Level Revenue model Tangible
-Benefits -- Tangible (revenu model) -- Intangible (trust, et cetera) Market size (critical mass), position Growth, Scalability Churn rate, Sustainability

Stakeholder Dimensions
- Investors - Employee -Internal processes - Network learning

Stakeholder Dimensions
- Investors - Employee - Internal processes - Organisation learning

Individual level
a.o. degree, range et cetera Roles, i.e. Star, Liaison

Intangible
Brand Customer Satisfaction

Figure 4.3 Causal diagram of a viable mobile business model and metrics At the supply side the network of collaborating organisations is the unit of analysis. Network related metrics, both on the network level as on the level of an individual company, play an important role in determining the complexity of the network. Degree of control and co-ordination has several dimensions that have to do with the co-ordination mechanisms in place, and that can be qualified as markets, hierarchies or networks (see Powell, 1990, Wigand et al, 1997). Financial metrics play a role both at the

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input and the output side. At the input side costs and risks are central both on the network level and the level of the individual organisation. The performance of the services is indicated by the viability of the services. Financial output metrics, both tangible and intangible benefits, play an important role again both on the network level and the level of the individual organisation. We make use of metrics as being suggested both by Kaplan & Norton (1996) and Neely et al (2002). The last are more attractive because they distinguish in many cases to input and output metrics. However the metrics still have to have a lower degree of granularity. Furthermore based on earlier experience (Holland et al, 2000; 2001) we expect that availability of data is and will be problematic. The model and metrics are still open to debate, but will be used to analyse business models based on a set of case studies as available within the BITA and B4U project, that discuss mobile information and entertainment services, location based services, micro-payments, mobile tracking and tracing services, communication and community services and services that deliver access to the back office. Case studies have to be used to further develop the causal model and to assess the reliability and validity of our metrics.

4.6

Conclusion

Based on extensive literature research in which we reviewed literature on business models for individual firms, complex value systems and 3G and beyond mobile services we developed a descriptive and causal model for the description and explanation of the viability of business models in the domain of 3G mobile services. Both models are static while business models appear to be volatile in nature and change quickly over time. Trying to predict viability of not yet existing 3G services is problematic in itself. Although we can based on policy capturing (Wijngaert 1996; Bouwman & Wijngaert, 2002, 2003) draw some conclusions on potential customer value of services data on the services it self is still missing. 2.5G services offer an interesting alternative as forerunners of the 3G services. Another complicating factor is that it is hard to account for difference between new to the world business models and business models that are versions of earlier more or less successful business models that originally were applied in different settings, i.e. Internet models that are used in 3G services. Also the financial issues related to business models are difficult to pin down. First of all there is the distinction between investments and exploitation that plays an important role. Furthermore traditional investment methods do not take the intangible nature of services into account. Other complicating factors are the availability of financial data and the lack of comparability of these data. It is clear that developing a model to explain the viability of business models can help to understand the performance of business models and support the design of future services as discussed in the Faber et al paper (2003) and Shubar & Lechner (2003, for an assessment tool of business models for WLAN in a

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35

design phase). Design models have to take the results of the empirical testing of our causal model into account.

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5

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