Designing metrics for business models describing Mobile ... - CiteSeerX

16th Bled Electronic Commerce Conference eTransformation Workshop on concepts, metrics & visualisation Bled, Slovenia, June 9 - 11, 2003

Designing metrics for business models describing Mobile services delivered by networked organisations 1

Harry Bouwman Delft University of Technology The Netherlands Work in progress

Abstract 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 You (B4U) we are designing an instrument to measure the performance of networks in delivering customer value. In the paper we will discuss literature with regard to business models, networked services and performance and propose a measurement instrument.

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Introduction

A large portion of the extensive body of literature on business models is devoted to the basic concept of what a business model is, what the main characteristics are or what typologies are available. In most cases the unit of analysis is the single firm or organization. A business model is 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 1 This paper is based on a state of the art report that is part of the B4U project and on work that was done in the BITA project. I want to acknowledge that part of this paper is based on work of Richard Hawkins TNO Strategy, Technology, Policy, Yashin Kahramaner, Carleen Maitland and Eric van den Ham, Delft University of Technology

Position paper Metrics for mobile business models

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 paper 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 exactly is a business model? - What business models are being distinguished? - What does a model for the description of a business model look like? With regard to the complex value systems we will discuss the following questions - What are complex value systems? - Are business models of complex value systems different from more general business models? With regard to the mobile dimension we will discuss the following questions - Are business models for 3rd generation mobile 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 develop a model that explains the performance of business models? - And what relevant indicators can be used to measure the concepts in this model? In this paper we will therefore discuss a number of definitions of business models, the concepts used to analyze 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 Fabers et al. (2003) position paper also presented in this session]. 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 models and what the causalities are between the concepts. Subsequently we will apply the model to the mobile domain.

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Business models

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 aspect 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. 2

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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-ofEnterprise/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. - 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. 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 organisation, technical and financial arrangements needed to provide a service that has customer value. 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 strategies 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 that a company has to make resources and capabilities available within the organisation and organise relevant (information) processes that will ensure the delivery of the product or

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Position paper Metrics for mobile business models

services. This is enabled by technologies, 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 in delivering valuable products and services to the end customer as well. It is clear that in addition to these three 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.

delivers

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Organisational arrangements Dived costs & revenues

Figure 1

Customer Value of Service based on

enables

Technical arrangements

redefines generate costs

Financial arrangements

Business model components

We will now discuss these four elements in greater detail.

Customer value Theres 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. Customer value can be seen as a new, innovative offer of a firm to its customers. In general, we will make the distinction between new-to-theworld 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. 4

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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 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 increasingly 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 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 eservice quality. Both approaches are backward-looking, discussing customer value from the point of view of existing customers and customer satisfaction. An alternative, forward– looking, approach 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.

Organisational arrangements In general, organisational issues revolve around the resources and capabilities that have to be made available. 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 an proposition at uniquely low costs or with unique qualities in relation to the industry in which the company is operating. Hedman & Kalling (2002, 2003) rightfully point out that the relevant literature 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, geographical markets, product range, structure, culture, position in value chain, resource bases, knowledge bases and technologies.

Technical arrangements Business requirements as defined in the strategy and business model determine the process and information infrastructure. Both specify the technical architecture. This way, business processes can be embedded in web-services which contain both ITfunctionality and data. 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 5

Position paper Metrics for mobile business models

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 a higher level still component 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. In this paper we will not discuss technology in detail. At a governance level web-services can also 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. In the next part of the paper we will briefly discuss technical arrangements with regard to internetworking.

Financial arrangements With regard to financial arrangements there are two main issues: investment decisions and revenue models. When it comes to investment decisions there are a large number of surveys available (Demkes, 1999; Renkema, 1996; Oirsouw, 1993). The authors of these surveys describe a large number of methods predominantly based on financial criteria. They discuss general financial methods as well as multi-criteria, ratio and portfolio approaches (Renkema, 1996). Financial methods are aimed at average costeffectiveness, net cash worth, and internal return. Multi-criteria methods are those found in Information Economic, Kobler Unit Framework and the Siesta-method, which is partly based on the Strategic Alignment model. The ratio-methods are those found in Returnon-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 methods. Generally speaking the cost side is reasonably well-charted. As far as the revenue side is concerned, which from our point of view 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, 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.

Metrics and performance Performance indicators for organizations have long ago ceased being determined solely on the basis of solid economic assets. In 1981, the book value of a company was equal to its market value. In the year 2000 the market value was 4.2 times the book value. In other words, the value of a company is determined not only by its tangible assets, but by its intangible assets, such as goodwill, as well (Boulton, Elliott, Libert & Samek, 2001), which include, for example, marketing costs for branding, patents, etc. There have been various attempts to quantify these assets by means of performance scales and indices, such as the Value Creation Index, Value on InvestmentTM, Performance Measurement Matrix, Smart Pyramid, Macro Process Model, the Balanced Score Card, the 6

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Performance Dashboard and the Customer Value Index (this list was partly based on Marr & Neely, 2001). In the Value on Investment TM (VOI) approach a relationship is established between strategy, business models and modelling on the one hand, and implementation and innovation (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. Rayport & Jaworski (2001) also base their approach on the balanced score card, which in their view has a number of limitations. However, according to Rayport & Jaworski (p. 263), the balanced score card cannot be used to evaluate business models. They argue that in the BSC methodology there is no clear definition of strategy (or business models), no clear location of organizational capabilities or resources and no clear identification of strategic partners. Rayport & Jaworski have developed an alternative method. This method, the so-called performance dashboard, is equipped with a set of concrete indicators. They are: - measures for market opportunities, including market size and competitive environment, - business model measures, the unique value proposition, capabilities and resources, exclusive partnerships, investment in technology - measures for branding and implementation, brand awareness, but also indicators for system uptime, number of IT staff and the percentage of inaccurate orders. - measures for customer acquisition, customer share, purchases, service requests. - financial measures, such as revenues, profits, earnings per share and debt to equity ratio. Auer (2003) relates the Balanced Score Card method, in combination with other approaches to eServices. In his approach he makes a distinction between three main phases, the customer process integration, the eService scorecard and investment simulation and controlling. In the first phase the objectives are analysis of the customer processes, estimation of the value and costs for the user and the development of keyindicators. In the second phase the objectives are estimation of the value and costs for the eService 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 scenario's 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 fare we have mainly been concerned with individual organisations. However, in reality most services are developed in value networks.

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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 7

Position paper Metrics for mobile business models

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).

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 becomes dependent on each other strategically, functionally and financially. Continuous and repetitive interactions leads 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, 2002). Complex value systems or value nets have to strive for supporting customer processes to the maximum possible extent when thinking of improving customer value (based on Gronroos). 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 eservice. 8

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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 net-work 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. - 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.

Complex value systems and organisational arrangements Of more interest are relationships between what we might call ‘structural’ participants in enterprises and their associated 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. 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 enterprise 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. - Contributing or tier-2 partners provide goods and/or services to meet requirements that are specific to the enterprise, 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. 9

Position paper Metrics for mobile business models

Support or tier-3partners provide generic goods and services to the enterprise, without which the enterprise 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 support partners could be obtained in the wider market, through long or short term contracts, depending on circumstances. Many 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.

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 a 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 javabeans) 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 paper (Lankhorst et al., 2001).

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 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, acquiring access to complementary knowledge to be major motivators for collective investments. To facilitate 10

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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.)

Complex value systems, performance and metrics Vesalainen (2003) has developed a measurement instrument for virtual or networked organisations, starting from the central organisation (the point of gravity in a network). In a sense each organisation is unique, being the centre of it's own network. The measurement starts at the organisation and it's 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).

4

Mobile business models

3rd generation mobile business will be the combination of two value chains, the mobile telecommunication value chain and the electronic business value chain (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, 11

Position paper Metrics for mobile business models

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 (2002) 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. They also differentiate between online (real-time) and offline models with respect to technical complexity and customer value.

Mobile business model and customer value To a large extent, the customer value of 3G mobile services is stated in terms of anyplace, anytime, anywhere. 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, multimodal 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) and in specific application domains (healthcare, emergency, extended enterprise logistics, education learning, entertainment) may help to define applications that offer value to end-users. 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. Hardware device manufacturers provide the physical mobile devices to end-users that enable them to access a mobile network, to run mobile applications, etc. They discuss the customer value device manufacturers, equipment vendors, content providers, application providers, payment agents, mobile network operators, ISPs and regulatory authorities, who set the legal framework for the customer value.

Mobile business model and organisational arrangements Camponovo & Pigneur (2002) highlight the increasing importance that the organizations in the mobile business market attach to building partnerships. Participants of 3rd 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 12

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market have a number of assets they can use to create a competitive advantage in the market. 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 is just one of the strategic ways to enter the market, 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.

Mobile business model and technical arrangements 3rd generation mobile data services will follow an evolutionary route. Initially, two variants rd for the development path towards the 3 generation mobile were envisaged. 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 large number of customers that can immediately make use of these services. At the moment, GSM offers the possibility of transmitting data at a speed of 9.6 Kbps. Although this is adequate for transmitting messages of up to 160 characters, as is the case with the short message service (SMS), voicemail, e-mail and a limited number of information services, it is inadequate for most data communication services. Nevertheless, developments in the field of General Packet Radio Service (GPRS), High-Speed CircuitSwitched Data (HSCSD) and Enhanced Data rates for GSM Evolution (EDGE) make an evolutionary development to higher data rates possible, which means that it is possible that the so-called 2.5 G may just be good enough for most 3 G applications. 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. 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.

Mobile business model and financial arrangements Olla & Patel (2002) 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)

13

Position paper Metrics for mobile business models

Portal type Mobile intranet/extranet

Data revenue model Mobile internet access with unlimited, premium or basic content subscription Customer infotainment Volume-based charging or Advertising-based models Multimedia messaging Flat rate per content type Mobile Internet Session-based charging Mobile Internet Access at basis content subscription Flat rate per content type Location-based services Mobile Internet access Premium content subscription Simple voice Per message models Mobile Internet Access at basic content subscription Rich voice Per message models Mobile Internet Access at basic content subscription Flat rate per content type Source: Olla & Patel, 2002, p. 562

5

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

Customer Revenue share content providers Customer Customer

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, 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.

Causal model In the model we link organisational, technical and financial arrangements to 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. The degree of complexity refers to network characteristics: the number of actors involved and the number of roles they have to fulfil. The degree of control/co-ordination refers to the governance of the network of actors that provide the service. The complementarity of resources and capabilities refers to the specific roles that have to be fulfilled, and more specifically to the fact that for a service to be provided certain resources and capabilities are essential. They can either be seen in terms of in access to critical resources such as capital, both financial as social, but also of more mundane forms of access, for example 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 most important. When the actors involved fail to receive a fair share of the 14

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revenues they are likely to abandon the network, which will make it more difficult to establish the fit between customer value as intended to be delivered and the customer value as experienced.

Degree of complexity Value System

Complementarity of Assets (resources/ capabilities)

Degree of control/ co-ordination

Division of costs, risks

Common strategy (CVS) (new business model)

Intended/delivered Customer value (value proposition)

Division of revenues

Supply Side

FIT Demand Side

(market)

Viable Service

Expected/Perceived Customer Value (acceptation of value proposition)

Figure 2

Causal diagram explaining the viability of a mobile business model

Of the many feedback loops that can occur within the model we have only drawn the one between the viability of the services and the common strategy. Needless to say a business model will have to be redefined if it turns out that the service it represents is unsuccessful. Whether or not this will also have an impact on the network arrangements is a question that lies beyond the scope of this paper. The model we are proposing is a dynamic one, and testing it requires indicators for its basic concepts..

Mobile business model, metrics and performance In our model we make a distinction between supply and demand. Both sides require different units of analysis. Customer value as intended and delivered can only tested empirically with consumers as the unit of analysis. We propose using policy capturing to assess the potential success of a service that have yet to be marketed. In this paper we will not discuss the demand side in further detail (see Bouwman & Van de Wijngaert, 2003). At the supply side the unit of analysis is the network of collaborating organisations. Network-related metrics, both at the network level and at the level of individual companies, 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 relevant coordination mechanisms (markets, hierarchies or networks) (see Powell, 1990, Wigand et al, 1997). Financial metrics play a role both at the input and the output side. At the input side costs and risks are central both at level of networks and of individual organisations. The performance of the services is indicated by their viability. Financial output metrics, including both tangible and intangible benefits, also play an important role both at the network level and at the level of individual organisations. Metrics we use, are partly based on Kaplan & Norton (1996) and Neely et al (2002). The latter approach is more attractive because it distinguishes in many cases between input and output metrics. However, the metrics still need to have a lower degree of granularity. Furthermore, based on earlier experiences (Holland et al, 2000; 2001) we expect that the availability of relevant data is and will continue to be problematic. 15

Position paper Metrics for mobile business models

Degree of complexity Value System

Complementarity of Assets (resources/ capabilities)

Common strategy (CVS) (new business model)

Degree of control/ co-ordination

Division of costs, risks

Viable Service

Metrics Access issues

Network level Size Inclusiveness Connectivity Density Centralization Symmetry Transitivity

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

Figure 3

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

Investment

Organisational level Investment

-Assets -Cost - Risk assessment

- Assets - Cost - Risk assessment

Stakeholder Dimensions

Stakeholder Dimensions

- Investors - Employee -Internal processes - Network learning

- Investors - Employee - Internal processes - Organisation learning

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

Intangible Brand Customer Satisfaction

Causal diagram of a viable mobile business model and metrics

The model and metrics are still open to debate, but will be used to analyse business models on the basis of a set of case studies available within the BITA and B4U project, concerning mobile information and entertainment services, location-based services, micro-payments, mobile tracking and tracing services, communication and community services and services that provide access to the back office. Case studies will be used to develop the causal model further and to assess the reliability and validity of our metrics.

6

Discussion and conclusion

Based on extensive research into literature on business models for individual firms, complex value systems and 3G mobile services and beyond we have developed a descriptive and causal model to describe and explain the viability of business models in the 3G mobile services domain. Both models are static in nature, while business models appear to be volatile in nature and change quickly over time. Trying to predict viability of 3G services that have yet to be created is problematic in itself. Although on the basis of policy capturing we can draw some conclusions regarding the potential customer value of services, data concerning the services themselves is still not available. 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-tothe–world´ business models and business models that are versions of earlier, more or less successful business models that were originally applied in different settings, i.e. Internet models that are used in 3G services. The financial issues related to business models are difficult to pin down as well. First of all, the distinction between investments and exploitation plays an important role. In addition, traditional investment methods fail to take the intangible nature of services in account. Other complicating factors are the lack of financial data and the difficulty in comparing when they are available. It is clear that developing a model to explain the viability of business models can help us understand the performance of business models and support the design of future 16

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services as discussed in the Faber et al. (2003) paper. Design models have to take the results of the empirical testing of our causal model into account.

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