Boosting service export: a roadmap for IoT-enabled business models ...

This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

Boosting service export: a roadmap for IoT-enabled business models Taru Hakanen * VTT Technical Research Centre of Finland, Tekniikankatu 1, 33101 Tampere, Finland. E-mail: [email protected]

Maria Antikainen VTT Technical Research Centre of Finland, Tekniikankatu 1, 33101 Tampere, Finland. E-mail: [email protected]

Pasi Pussinen VTT Technical Research Centre of Finland, Kaitoväylä 1, 90571 Oulu, Finland. E-mail: [email protected]

Matti Muikku Orfer Oy, Vaakatie 9, 16300 Orimattila, Finland. E-mail: [email protected] * Corresponding author Abstract: The Internet of Things engenders immense interest nowadays both in business and academia. Despite abundant available technological IoT solutions, companies struggle to develop competitive IoT business models. This paper applies a design science approach utilizing qualitative data collected in a researcher workshop and in an SME aiming for increasing service export with IoT services. This paper suggests that a service perspective and related customer-focus is central to IoT business model innovation. Reciprocal value co-creation within a service ecosystem and the central role of customers’ expectations for value and customer experience are then pivotal. There is a need for carefully designing service co-production and knowledge utilization processes and innovating new earning logics in IoT service business. As a result, an IoT business model canvas is presented, which can be used by business practitioners in boosting service export and planning a roadmap for the successful implementation of IoT business models. Keywords: IoT; business models; business model canvas; service export; service-dominant logic; service co-production; customer value; customer experience; managerial tool

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This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

1 Introduction The significance of services and digitalization in business has increased drastically over past decades. Digitalized services and, as the focus of this paper, in particular the Internet of Things (IoT) services, enable industrial companies, for instance, collect data from customers’ manufacturing process and utilize that data for enhancing customers and their own business. By definition, IoT is regarded as “a world where physical objects are seamlessly integrated into the information network and where the physical objects can become active participants in business processes”. The Internet of Things is basically a mechanism that transmits the information received from the smart connected products with expanded capabilities. In this paper, we concentrate on the industrial utilization of IoT, which is commonly referred to as industrial internet. Although technological IoT solutions are already abundant in the market, companies face several challenges in developing successful business models in order to gain a competitive advantage through IoT. Hence, instead of concentrating on technologies, companies should move the focus beyond technologies and seek for competitive advantage of the utilisation of IoT. Consequently, this paper argues that adopting a service perspective on IoT business model innovation enhances customer-focus in business model development and increases the likelihood of innovating business models that are attractive to business customers. Service perspective emphasizes reciprocal value co-creation within the service ecosystem, interaction between the actors in service coproduction and the customer experience that customers perceive to be the result of IoT service. All these aspects are regarded as salient, and should be carefully designed and addressed in IoT business model development. Despite the fact that several authors address the importance of developing IoTenabled business models and related academic knowledge (Dijkman et al., 2015; Leminen et al., 2012; Porter & Heppelmann, 2014), there is a need to increase knowledge of IoT business model innovation with a strong service perspective. Furthermore, as IoT enables many companies to start or expand international operations, service export is another issue to be taken into account in developing IoT business models. Companies can, for example, design remote services with IoT. A salient challenge is then how to organize service operations in global markets combining local presence and face-to-face interaction with customers and efficient service processes utilizing IoT and other digital solutions. This paper aims to increase understanding of IoT business model innovation in service exports. More specifically, the main research question is: What are the central issues related to developing IoT-enabled business models? In addition to bringing new research insight into the topic, this paper also answers the business practitioners’ needs for managerial advice and tools in developing IoT business models and enabling successful service export. Therefore, a service-oriented IoT business canvas is provided as a result to summarize the study results.

2 Service orientation in IoT business model innovation In line with the ‘rise of IoT’, interest in business models that can be created via IoT is increasing (Porter & Heppelmann, 2014). To address this issue, this paper draws on the literature on business models and service marketing. Business models have been widely

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This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

addressed in literature. A business model depicts the way in which an organisation creates, delivers, and captures value for its customers, and how it captures value for itself (Chesbrough, 2007; Teece, 2010; Zott & Amit, 2007). In other words, it describes the purpose of a company, its central strategical choices and how it makes money – a critical question that companies struggle with when building business from IoT. Another definition depicts a business model as “a representation of a firm’s underlying core logic and strategic choices for creating and capturing value within a value network” (Shafer et al., 2005). Thus, a business model can also be viewed from a network perspective – a service ecosystem, for instance – in addition to a single company view. One of the most cited and managerially utilised representations of a business model is Osterwalder’s business model canvas (Osterwalder & Pigneur, 2010). It is a commonly used tool for analysing and developing current business models of companies, or for creating totally new business models. It outlines a business model in terms of its central elements, namely key actors, key resources, key activities, value proposition, customer relationships, channels, customer segments, cost structure and revenue streams. Osterwalder’s business model canvas has been used and modified by researchers and practitioners for different purposes and contexts. However, the canvas has been criticized in terms of being too product-oriented (Hakanen & Murtonen, 2015) as it focuses on the manufacturing of products and the way products are consequently delivered to customers through logistics chains. Thus, the canvas refrains from taking into account the salient characteristics of service, namely that is inherently customer-focused, intangible, interactive and relational in nature (Edvardsson et al., 2005; Fitzsimmons & Fitzsimmons, 2008; Grönroos, 1990). Instead of ‘pushing’ products to markets through logistics chains, services can be regarded as relational processes which require interaction and customer participation (Hakanen & Jaakkola, 2012). As service-dominant logic states, the customer is always the co-creator of value (Vargo & Lusch, 2008), and how well interaction succeeds between the actors affects the customer experience and value perceived by the customer, but also the value perceived by the suppliers. This study views IoT as a business enabler, and regards the service mindset as pivotal in IoT business model innovation. After all, IoT is about service and interaction between different actors within a service ecosystem. The aim is to create value for all the actors within the ecosystem (Jaakkola & Hakanen, 2013). For example, in the repair and maintenance business, IoT helps collecting and utilizing data from customer’s production to be used in building more effective and satisfactory service for the industry customer. In order to succeed, all the actors need to accrue benefits from IoT. That is the core presumption of creating successful IoT business models. Additionally, an SME initializing service export at the same time brings another dimension into developing business models. After all, manufacturing and service companies face different challenges in export (La et al., 2005). This study builds on the previously developed SDL-oriented business model canvas (Hakanen & Murtonen, 2015), ensuring that the salient service characteristics are included in the IoT business model representations. SDL-based business model canvas consists of the following elements: key suppliers, key resources, key activities, value proposition, interaction with customers, customer understanding, cost structure, and financial income. Customer interaction, customer experience, and service co-production are then emphasised in developing the IoT version of the SDL-based business model canvas.

This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

3 Methodology This study employed a design science approach, that is, we used research insights as the basis of solving practical needs in companies (Gregor & Hevner, 2013; Van Aken, 2005). Companies need support in building new IoT-enabled business models and simultaneously plan the roadmap for service export. In this study, service literature was used in order to adopt a service perspective and give strong customer emphasis to IoTsolutions. Business model literature provided the business model canvas as the starting point to build the practical solution and a tool for business developers. Although this paper applies design science approach and mainly aims to provide insights and a practical tool for business managers, it also provides research insight in terms of the central issues of creating IoT business models in international markets. We utilized qualitative data, which we collected in a researcher workshop conducted at the Technical Research Centre of Finland (VTT) and in three meetings with a company representative, with whom the IoT-solution export project was planned. Ten business researchers attended the researcher workshop in order to identify the central issues in developing IoT-based business models. The workshop was based on the SDL-based business model canvas (Hakanen & Murtonen, 2015) so that the service perspective was included in the creation of the new business model canvas. The authors organized the workshop so that they provided an introduction and the SDL-based business model canvas for the task and documented the discussions. As a result of the workshop, the first version of the IoT business model canvas was created. The central issues that the researchers had noticed companies face in IoT business model development and service export were defined. In addition to the researchers attending the study, a case-company was selected in order to complement and validate the perceptions formed in the researcher workshop. In that way, it was ensured that the IoT business model canvas to be created suited the use of business practitioners. The selected case-company, Orfer Oy, is a medium-sized globally operating company. It provides manufacturing, robot automation systems and the related repair and maintenance and IoT services for business customers in various fields of industry. It is currently in the commercialisation phase of an IoT solution focusing on manufacturing process monitoring, diagnostics, remote-control and remoteoperation. The solution has been piloted in the production of Orfer, and the next step is to productize the solution, to clarify the related business model and to make a concrete roadmap for service exports. The discussions with the company representative were documented by taking notes. The authors of this paper analysed the notes and with the company representative updated the canvas according to the new insights they had gathered. Finally, the service-oriented IoT business model canvas was outlined with the central additions and corrections to the elements of the SDL-based canvas. Thus, the study produced a viable artefact in the form of a construct or a model in line with one of the basic principles of design science approach (Hevner et al., 2004). The study was conducted in the FIMECC S4Fleet research program in 2015.

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This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

4 Results As a result of the researcher workshop and the company cooperation, the central issues in relation to developing IoT-enabled business models in service exports were identified. Next, the central issues are outlined according to the elements of the SDL-based business model canvas i.e. key suppliers, key resources, key activities, value proposition, interaction with customer, customer understanding, cost structure and financial outcome:

Key suppliers An IoT-based business model depends on the key suppliers that create and produce the IoT service. If they fail to deliver their part of the service creation, it can cause the whole service creation to fail. Thus, it is critical to choose the right suppliers with the appropriate technology (compatible between other actors in the service ecosystem) for the service creation. Secondly, when starting service export, there might be pressure to get new local service partners from different market areas to deliver hands-on support for the customer when needed. Although Orfer collects data from a customer’s production line via the internet and analyses it in its location, a problem in customer’s production may require a maintenance crew to be dispatched to the customer’s location in order to fix the problem. Therefore, there may be a need for having a service partner locally to provide this with a short response time. This means that the service provider needs to expand their service creation ecosystem to include country-specific partners. In other words, a service ecosystem approach is often more suitable in IoT business models instead of a single company view. IoT services may induce totally new ecosystems and ecosystem actors that come from various countries in international business. Therefore, a company should aim to involve central partners and also customers in the business model generation. The basic prerequisite for finding and motivating companies in cooperation is to ensure that the cooperation accrues value for all the ecosystem actors.

Key resources Technology plays a crucial role as a needed resource for an IoT business model. This includes choices related to the IoT service creation such as the selection of an appropriate software platform for the creation of IoT services. By selecting one platform, it might be possible that some other business choices are made invalid because of technological incompatibilities between different software platforms and/or interfaces. This can affect the availability of business partners and even potential customers. In addition to the technological solution as a central resource, intangible resources such as data, knowledge, competences and services are central in building IoT business models. The kind of data available creates the prerequisites for various services and business models that can be created on the base of the data. When Orfer starts IoT business and service export, it needs new kinds of competences and should either acquire the needed resources from outside the company or develop its own competences both technically and business-wise. To sum up, the role of knowledge-intensive resources increases when formerly a product-oriented company proceeds to international IoT business and companies decide how to acquire the needed resources.

This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

Key activities In the world of IoT, selecting suitable technological solutions and technical integration of IT-systems and applications are salient activities when planning a new business model. This is self-explanatory, since the actors in the service ecosystem need to be able to share and exchange information between each other. However, incompatible legacy systems are hindering the co-operation, which causes even more pressure on the technical integration activity. It also requires that it is agreed with the customers which companies have access to data, as some customers of the IoT service may expect to own the data. It is then essential in building IoT business models to resolve availability, confidentiality, IPR, and information security issues among ecosystem actors. Another level of integration activities is on the business level, when the actors in the service ecosystem need to share competences and resources for the successful service coproduction. Then, in the case of several suppliers, it may be beneficial for the suppliers to share and analyse market and customer knowledge, together, in addition to the collected technical data. The complex nature of IoT service co-production calls for a clear distinction between actors and their activities in service co-production. The roles of the different actors need to be defined and agreed on within an ecosystem – which company, for example, operates a service integrator, ‘owns’ the customer relationships and builds and coordinates the international sales and service network. In the case of Orfer, it is the integrator who makes sure that services of several suppliers that operate within the ecosystem provide a seamless, coherent service for the customer. Usually, they sell the solution to the customer, but there are cases in which also their partner, the IT-provider, attends sales negotiations in order to provide their competence for the IT-aspects of the solution.

Value proposition The value proposition of the IoT service needs to be described and communicated through sales and marketing in an attractive way in various markets. It describes how the IoT service meets the needs of its customers. Then, the core solution is described compactly as well as how the service is co-produced and what customer experience and value is provided as the result of the service. However, it needs to be ensured that the IoT business model creates value – not only for the customer, but also for all the ecosystem actors.

Interaction with the customer IoT may induce several changes in customer interaction. More interaction starts to take place via IT interfaces instead of at face-to-face meetings, for example. Apart from multiple new data sources and data sharing, with IoT there will be new interfaces for interaction. IoT may enable a lot of new kinds of interaction based, for example, on sharing data from different sources. Since the amount of data exchanged between customer and service provider grows rapidly in IoT focused business, there is pressure to communicate the essential things to the customer for the service co-creation. What data and what kind of interaction is actually needed and hoped for from the customer perspective is another important issue to tackle in developing IoT business models. Which channels of interaction are in use between the suppliers and between the suppliers and their common customers, is a central issue to tackle in IoT business model creation.

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This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

In order to be able to co-produce IoT services effectively, global service operations and processes need to be defined and mapped, placing an emphasis on knowledge flows and utilisation and on the way in which local customer interaction is conducted in various markets. As service is always co-produced with the customer, customers’ activities in the repair and maintenance process also need to be defined. It should also be considered that a successful IoT service co-creation requires some technological input from the customer as well, for example in the form of sharing data and allowing access to IT-systems and applications. In order to design service processes and also the customer’s role in service co-production, for example a service blueprint can be used in building international service processes. Then, a distinction is made between the activities that takes place in the so called ‘front-office’, at touchpoints with the customer, and the activities that take place in the ‘back-office’ being invisible for the customer but still necessary for accomplishing the service. The service export aspect challenges especially an SME in building effective service operations globally. For the customer, interaction in the co-creation of the IoT service may be between the actual service provider or one of their partners – depending on the phase of the service. This needs to be approached carefully, as the customer may be confused if there are many faces representing the company offering. The customer might benefit from a unified view of the service, where one company will act as the ‘face’ of the service, even though there are multiple actors participating in the process. This will have an effect on the perceived service experience of the customer. There might be deviations to this, as strong company brands might influence the customer experience if the customer is aware of a high-value brand being a part of the service creation. This is the case, for example, with Orfer, too, as they are a medium-sized company, and their IT-partner is a large company with a known brand. It needs to be considered how partners may also affect the total customer experience, and in the case of Orfer the partner selection may increase the credibility of their IoT solution and thus help them in building a successful IoT business model. Thus, suppliers need to analyse, plan, and ensure a satisfactory customer experience locally in different markets. In service export, customers in different markets and business fields expect different kinds of interaction as well as density and depth of supplier cooperation. In a situation with several suppliers serving a common customer, a seamless customer experience at different touchpoints should be ensured.

Customer understanding When an originally product-oriented company (such as Orfer) starts to create and commercialise IoT services, their pool of potential customers may change partly or totally. Identifying potential customers in global markets then becomes a central issue. Building successful IoT business models requires thorough customer understanding in terms of the customers’ business and business environment, as well as their purchasing behaviour and competence with regard to purchasing IoT services. Customer understanding is considered to be a key issue in developing IoT business models – mainly because customers need to understand what IoT is and what kind of value they can create with it. In order to convince different customers, it could be beneficial to define value in terms of different aspects to it, such as strategic, economic, practical and emotional value. Service provider needs to be able to present their IoT service to be of value for the customer in their context of business. Currently, majority of the customers of Orfer do not have a really deep knowledge of IoT and the possibilities

This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

related to it. Therefore, they need to convince their customers with concrete examples or with quantitative calculations of benefits accrued with IoT. Some customer segments realize the potential of IoT sooner than others, which happen with new technologies all the time – some are quicker to adapt new technologies than others. For an IoT business model, the customer segment should be one where the adaptation of IoT technology is sufficient that customer can start to envision the potential benefits of IoT together with the service provider. As there is a significant technological aspect to an IoT business model, it is likely that customer needs can vary significantly even in the same customer segment, For example, customers in a seemingly similar customer segment might face different legacy systems and therefore needs for different technological approaches. Technological maturity may vary considerably globally in different countries, which affects the decisions made in how to proceed in service export.

Cost structure and financial income The earning logic of the ecosystem and the way an IoT business model creates revenue for the suppliers is a core issue to be addressed in business model development. In terms of the cost structure, IT systems, applications, and licences need to be included in it. All in all, the cost structure may become lighter when removing the focus from manufacturing and distributing goods globally towards producing IoT services. The financial income depends largely on the benefits that can be accrued for the customer. As IoT-services are complex in nature with multiple actors providing different resources, the sharing of risks and benefits is crucial for the successful creation of IoT-service and IoTbusiness. Potential risks with costs can then be shared as well as revenues, if the business model proves to be successful.

5 Contributions to business model literature This study contributes to the business model literature by applying a service perspective on IoT business models and depicting the central issues in generating IoT business models in service exports. The central role of customers’ expectations for value and customer experience, designing customer interaction in service co-production and knowledge utilization, and innovating new earning logics in IoT service business are then emphasised. Furthermore, all these issues need to be carefully addressed in service export when suppliers and customers are located remotely from each other and service processes take place partly remotely via IoT and partly in face-to-face interaction. How that is organized and anticipated customer experience is achieved in different markets become a central issue for companies pursuing service export. All in all, the study pinpoints removing the emphasis from technological solutions and product-oriented ‘push’-models towards customer-focused thinking with the service perspective. Customer focus is suggested to increase competitiveness of companies in IoT business models. Thus, the study extends current business model representations (Hakanen & Murtonen, 2015; Osterwalder & Pigneur, 2010) with the perspectives of IoT services and service exports. This study inspires future research in several ways, especially motivating further application of service perspective in IoT business model innovation. More research is called for on value creation and service co-design and co-production in IoT service ecosystems. For example, the value drivers of various actors could be identified and used

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This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

as the basis of developing business models. Furthermore, the service development process often proceeds with iterative loops and experiments with customers. Therefore, instead of aiming to produce a ready business right away, rapid experiments could provide a means to proceed in business model generation and acquiring direct feedback from customers and other stakeholders on the course of the development process. As customer experience may change due to the implementation of IoT, another topic for future research is proving insight into designing customer experience within the IoT context. For example, reducing face-to-face interaction between suppliers and customers due to IoT may have its impacts on customer experience that need further investigation. Service export is another issue for continued research as IoT opens up several possibilities of, for example, remote service. Thus, more research is called for on various ways to organize and manage global service networks and the utilization of IoT respectively.

6 Managerial implications As a managerial implication, the IoT business model canvas (Figure 1) is presented as a refinement of the previously published SDL-based business model canvas (Hakanen & Murtonen, 2015). The IoT business model canvas aids practitioners in creating a roadmap for successful IoT-enabled business models, as they can evaluate the development situation in each of the elements of the canvas and plan a roadmap with specific steps to ‘fill in’ all the elements of the canvas. In addition, the business model canvas aids in creating a common view of the central deficiencies and strengths, as well as concrete development steps between the service ecosystem actors. As a result of the combination of the research and managerial insights, the study supports companies in building a roadmap for new innovative business models in service exports.

Acknowledgements This study has been conducted as a part of FIMECC S4Fleet – Service solutions for fleet management – programme. The authors gratefully acknowledge the financial support from the Finnish Funding Agency for Technology and Innovation (Tekes) and VTT spearhead programme ‘Productivity Leap with Internet of Things’ (Pro-IoT).

This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

KEY SUPPLIERS - Key suppliers - Complementing suppliers - Possible new partners in the service ecosystem

KEY RESOURCES - Service offering - IoT-solutions - Knowledge (availability, confidentiality, IPR, information security) - IoT, service and business competences KEY ACTIVITIES - Role and task division between the suppliers - Suppliers’ offering integration - Integration of ITsystems and applications - Service network coordination - Integration and utilization of technical and market knowledge

VALUE PROPOSITION Service concept: - Core solution (what, to whom?) - Service operations and processes (who, how?) - Service experience - Customer value and value for all the ecosystem actors

COST STRUCTURE

INTERACTION WITH CUSTOMER - Channels of interaction (direct and indirect) - Service process (back-office and front-office) and knowledge flows - Touch points with the customer and customer’s activities in the service process - Density and depth of cooperation with the customer - Customer perceived service experience

CUSTOMER UNDERSTANDING - Potential customers - Customer segments - Customer’s business field and environment - Customer’s business and future aims - Customer’s problem and needs - Customer’s purchasing organization, decision-making process and purchasing competence - Customer value (strategic, economic, practical, emotional)

FINANCIAL INCOME

Figure 1 Service-oriented IoT business model canvas.

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This paper was presented at The ISPIM Innovation Summit, Brisbane, Australia on 6-9 December 2015. The publication is available to ISPIM members at www.ispim.org.

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