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State Of the Art on Business Models

Colophon
Date : September 04, 2003
Version : Final
Change : Rewrite based on review Pals
Project reference: B4U/D3.2
Freeband reference : B4U/D3.2
Company reference : TI/RS/2003/112
URL :

Access permissions : Public


Status : Final
Editor :

Company :

Author(s) : 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


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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 co-
funding 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: Ferial Moelaert (TI-CO),
Project manager: Edward Faber (TI-CO),
Manager research TI-CO: Edward Faber ,
Manager research TU Delft: Harry Bouwman (TU Delft).
Manager research TNO Telecom: Nico Pals
Manager research TNO STB: Pieter Ballon
4. Date of first submission: 03-06-2003
5. Date of current project proposal:

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 Introduction 9

2 Business models in context 11


2.1 Customer value 14
2.2 Organisational issues 15
2.3 Technical arrangements 16
2.4 Financial arrangements 16
2.5 Metrics and performance 17

3 Business models and complex value networks 20


3.1 Customer value and complex value systems 21
3.2 Complex value systems and organisational arrangements 22
3.3 Complex value systems and technical arrangements 24
3.4 Complex value systems and financial arrangements 24
3.5 Complex value systems, performance and metrics 25

4 Mobile business models 26


4.1 Mobile business model and customer value 26
4.2 Mobile business model and organisational arrangements 28
4.3 Mobile business model and technical arrangements 28
4.4 Mobile business model and financial arrangements 29
4.5 Explaining the success of mobile business models 32
4.5.1 Causal model 32
4.5.2 Mobile business model, metrics and performance 34
4.6 Conclusion 35

5 References 37

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

Error! Reference source not found. 9


• 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
rd
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.

10 B4U/D3.2
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 dis-
intermediation 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.

Error! Reference source not found. 11


• 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

12 B4U/D3.2
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)

Customer Value
Of services
Defines Enables
(T1) (T0)
Based on (T1)
Organisational Technical
arrangements architecture

Redefines
Division of costs (T2) Generate costs
& revenues (T1)
Financial
(T3) 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

Error! Reference source not found. 13


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

14 B4U/D3.2
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 e-
services (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,

Error! Reference source not found. 15


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 IT-
functionalities. 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 web-
services 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 IT-
resources 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 cost-
effectiveness, 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) advertisement-
generated 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
TM
Creation Index, Value on Investment , Performance Measurement Matrix, Smart Pyramid, Macro Process

Error! Reference source not found. 17


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

TM
In the Value on Investment (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 key-
indicators. In the second phase the objectives are estimation of the value and costs for the eService

18 B4U/D3.2
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.

Error! Reference source not found. 19


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.

20 B4U/D3.2
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 re-
design 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.

Error! Reference source not found. 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.

22 B4U/D3.2
• 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.

Error! Reference source not found. 23


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 data-
networks like the (Mobile) Internet, object-oriented (.net, cobra, java and java beans) and mobile (Wap, I-
mode, 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.)

24 B4U/D3.2
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).

Error! Reference source not found. 25


4 Mobile business models
rd
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 B4U/D3.2
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 Actors in the mobile value web


Roles Definitions
Functionality related roles
Service provider Provides billable service to the end consumer
Network operator Operates the mobile telecommunications network over which the data (service)
is transmitted
Platform provider Provides the software that defines the general platform on which a variety of
services are run
Application provider Provides the software that makes a service possible and that sits on top of the
platform
Web hosting/ Operates and maintains the server that hosts a website that is an integral part
presence provider of the service, particularly relevant to the further development of content

Content supply chain roles


Raw content supplier Supplies content in a format unusable for the mobile service & terminal
Content developer Transforms raw content into content appropriate for the service as well as the
mobile terminal

Content provider Provides ‘appropriate’/transformed content to the service provider


Content aggregator Serves as an intermediary between the service provider and the content
providers
Hardware roles
Equipment provider Provides the hardware (physical components of network)
Handset supplier Supplies platform or service-specific handsets
Customer relation roles
Billing provider Provides billing services to collect revenues from end consumers
Marketing provider Markets the service
Customer support provider Point of contact for customer queries regarding the service; responds to
customer queries
Content quality manager Monitors and improves content quality
LBS roles
Content geo-coding provider Adds x/y coordinates to the content
User positioning Provides the position information of the mobile device
Positioning technology Supplies user positioning equipment
vendor
GIS provider Provides geographical information (and GIS services) necessary to indicate
location information of relevant content

Error! Reference source not found. 27


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
rd
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.

4.3 Mobile business model and technical arrangements

rd
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

28 B4U/D3.2
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 Circuit-
Switched 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

Error! Reference source not found. 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 Data revenue model Revenue source

Mobile intranet/extranet Mobile internet access with unlimited, Customer


premium or basic content subscription Revenue share content providers

Customer infotainment Volume-based charging or Advertising- Customer, reduced rate + revenue


rd
based models from ads 3 parties

Multimedia messaging Flat rate per content type Customer corporate

Mobile Internet Session-based charging/ Mobile Customer


Internet Access at basis content
subscription/ Flat rate per content type

Location-based services Mobile Internet access/ Premium Customer


content subscription Revenue share content providers

Simple voice Per message models/ Mobile Internet Customer


Access at basic content subscription

Rich voice Per message models/ Mobile Internet Customer


Access at basic content subscription/
Flat rate per content type

Source: Olla & Patel, 2002, p. 562

30 B4U/D3.2
HARDWARE SUPPLY CHAIN

MOBILE NETWORK MOBILE USER


INFRASTRUCTURE INFRASTRUCTURE
t Network Equipment
Handset Supplier
Provider

MOBILE NETWORK TECHNOLOGY


CUSTOMER SERVICE
MANAGEMENT
p q r
Customer Service

o
Marketer

MOBILE NETWORK FUNCTION


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

d e f
h

Content Aggregator
Platform Provider g
d
l
Content Provider d Application Provider s

i h
Webhosting
Provider
Content Developer
Roles of Actor
MOBILE APPLICATION ENABLER FUNCTION
j
Raw Content Functions in The Supply
Supplier Chain of Mobile Service

CONTENT SUPPLY CHAIN


MOBILE APPLICATION TECHNOLOGY Technical Functions

The delivered object of resource (excluding cost) :


a = wholesale airtime k = distributed mobile service for mobile users accross
b = service to aggregate and to distribute the mobile service network operator
across different network operators l = billable mobile service, distributed mobile handset
c = aggregated contents in the appropriate format for the m = collected revenue from mobile users
mobile service n = bill of the mobile service
d = contents in the appropriate format for the mobile service o = advertised information of the mobile service (promotion
e = platform (software) on which a variety of services are run of the mobile service)
f = software application p = after sales service
g = information on the development of software application for q = mobile handset with general (common) specification
mobile r = mobile handset with specific function or specification
h = server that hosts a website that is an integral part of the mobile s = information of the development technology in mobile
service handset
i = the transformed content into the appropriate content for the t = physical component of mobile network
mobile service u = access to the internet as the integral part of mobile
j = content in a format unusable for the mobile service service

Figure 4.1 Value streams in the mobile domain

(Source, Elisa, 2003)

Error! Reference source not found. 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 service-
specific 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

32 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 Common strategy (CVS)


Degree of control/
Value System
Assets (resources/ (new business model)
co-ordination
capabilities)

Complementarity of Common strategy (CVS) Division of revenues


Degree of Division
control/ of costs, risks Intended/delivered
Assets (resources/ (new business model)
co-ordination Customer value
capabilities)
(value proposition)
Supply Side Division of revenues
Division of costs, risks Intended/delivered
Customer value FIT Viable Service
Demand Side (market)
(value proposition)
Supply Side
Expected/Perceived
FIT Customer Value Viable Service
Demand Side (market)
(acceptation of value
proposition)
Expected/Perceived
Customer Value
(acceptation of value
proposition)

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.

Error! Reference source not found. 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 Common strategy (CVS)


Degree of control/
Assets (resources/ (new business model)
co-ordination
capabilities)

Division of costs, risks

Viable Service
Metrics

Access issues
Network level Organisational Financial Valuation
level Network/organisational
Network level Network Investment Investment Level
Size -Assets - Assets Revenue model
Inclusiveness content -Cost - Cost
related Tangible
Connectivity - Risk assessment - Risk assessment -Benefits
Density issues -- Tangible (revenu model)
Centralization Type of Stakeholder Stakeholder -- Intangible (trust, et cetera)
Symmetry co-ordination Market size (critical mass), position
Transitivity
Dimensions Dimensions
- M, H, N Growth, Scalability
- Investors - Investors
Individual level Out- or
- Employee - Employee Churn rate, Sustainability
a.o. degree, range co-sourcing
-Internal processes - Internal processes Intangible
et cetera SLA’s
- Network learning - Organisation Brand
Roles, i.e. Star,
learning Customer Satisfaction
Liaison

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

34 B4U/D3.2
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

Error! Reference source not found. 35


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

36 B4U/D3.2
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