Telecom Business Research Center Lappeenranta Working Papers 12

Toivo S. Äijö, Kirsi Saarinen

BUSINESS MODELS Conceptual Analysis

Telecom Business Research Center Lappeenranta Lappeenranta University of Technology P.O.BOX 20, FIN-53851 LAPPEENRANTA, FINLAND http://www.lut.fi/TBRC Lappeenranta 2001

ISBN 951-764-605-4 ISSN 1456-9132

ISBN 951-764-606-2 (URL: http://www.lut.fi/TBRC)

CONTENTS 1. INTRODUCTION …………………………………………………………… 1 2. DEFINITIONS OF BUSINESS MODEL …………………………………… 1

2.1. The Concept: General Business Model Definitions ……………………. 1 2.2. E-Commerce Business Model Definitions ……………………………… 3

3. HISTORY AND DEVELOPMENT OF BUSINESS MODELS …………….. 4 4. ALTERNATIVE APPROACHES AND CLASSIFICATION SCHEMES …. 5

4.1. General Business Models and Classifications…………………………… 5 4.2. E-Commerce Business Models …………………………………………... 8 4.3. Industry Value Chains and Networks ……………………………………. 18

5. AN OPERATIONAL DEFINITION OF BUSINESS MODEL CONCEPT …. 20

5.1. Business Model and Strategic Planning ………………………………….. 20 5.2. A New Definition of Business Model ……………………………………. 23

6. CONCLUSION ………………………………………………………………. 28 REFERENCES

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1. INTRODUCTION Business model is a popular term, every company in IT-business seems to be desperately seeking the new “killer” business model for the emerging digital economy. Indeed, many innovative ground-breaking business models have emerged, and the most innovative among them have already been granted IPR protection. In part, this search reflects the shift in business paradigm, which has sometimes resulted in confusing the paradigm shift with the concept of business model as will be shown later. However, to inject a notion of realism into the search, it is useful to quote Downes and Mui (2000:199-200) who write: “Red Herring and Upside, the leading investor-oriented technology magazines have been searching obsessively for what they call the ”Internet business model”. But asking how to make money with new technology is asking the wrong question. It’s really no different,. You have to serve your customers, integrating everything that you do.” Most writers on IT-business, electronic commerce and digital business today use the term, but the great majority of them do not seem to define precisely what is meant by the term. The few specific definitions that have been offered vary wildly. This paper sets out to survey the history, various uses and contexts for the term, to analyze the concept and its relationship to strategic planning, and to propose a new conceptual and operational definition for the concept. Business environments, including technologies and customer requirements are changing radically and rapidly. As a consequence, the ways of doing business are changing rapidly. It is difficult to predict the future business models that will be needed and that will evolve in response to changing technological and competitive environment and customer needs. However, we can analyze the concept of business model and the ways the business models are evolving, and extract the dimensions and components relevant to this change process. Barabba (1998:34-59) quotes Slywotzky’s well-known definition of business design (used as a synonym of business model) and concludes that activities and relationships are central to the definition. For him the question is, therefore, “how and why will they change?” He then proceeds to list three main phenomena that contribute to the uncomfortable situation where the playing field “is changing faster than our ability to respond using traditional methods.” These three phenomena are: 1. Customer needs are changing rapidly and are difficult to predict, 2. Communications technologies improve and enable businesses to acquire deep and

broad external knowledge of markets, allowing them “to better sense changes in customer requirements.” These technologies will also allow companies “to innovatively serve those markets.”

3. “Technology is redefining the nature of competition.” 2. DEFINITIONS FOR THE CONCEPT OF BUSINESS MODEL 2.1. The Concept: General Business Model Definitions A plethora of terms are being used: business model, business design, model of the firm, operating model, organizational design, organizational form, organizational model, corporate form, enterprise design, etc. Most often business model and business design

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are used interchangeably, as in describing Slywotzky’s definition quoted below. Tapscott et al. (1998) first refer to it as business design, and in 2000 the same authors quote the very same definition and call it business model. The confusion in terminology is faithfully reflected in the definitions. One of the earliest definitions was provided by Tapscott & Gaston (1993) in their, by now classic, book “Paradigm Shift” in a chapter titled “Reimage your Organization in a Business Model.” This definition emphasizes concepts such as vision; model of how the business will function; decomposing business functions into internal components of the value network; and management control view of the business. They specifically mention that it is not the same as an organizational chart and that it may not correspond to actual reality. In their own words:

By far the best mechanism for creating and communicating a new vision is to develop a model to represent the desired result. … a model of how the business will function in the future can be used to assess the impact of the proposed changes. The business model originates from the information view of the business context and proceeds to decompose the functions of the business into internal components of the value network … do[es] not resort to using the organization chart as the basis … it represents a management control view of the business and rarely corresponds to how the organization actually functions. (Tapscott & Gaston, 1993:202-203)

Adrian Slywotzky (1996:4) has given one of the most comprehensive definitions for the concept of business model; he defines business design as:

The totality of how a company selects its customers, defines and differentiates its offerings (or response), defines the tasks it will perform itself and those it will outsource, configures its resources, goes to market, creates utility for customers and captures profit. It is the entire system for delivering utility to customers and earning a profit from that activity. Companies may offer products, they may offer technology, but that offering is embedded in a comprehensive system of activities and relationships that represent the company’s business design.

This definition is quite extensive covering issues that have traditionally been considered as belonging to the domain of corporate strategy, resource allocation, business concept, business strategy, marketing strategy, differentiation, product concept, etc. However, in the last sentence he sums the definition of business design as “a comprehensive system of activities and relationships.” A somewhat unusual definition is offered by Boulton et al. (2000:31), who define business models in terms of company asset portfolios. In fact, this seems to be similar to a resource-based view of the firm, and it is quite different from other definitions. However, the assets are not traditional assets alone – physical assets and financial capital. Rather, the asset portfolios include diverse sources of value, including intangibles such as relationships, intellectual property and leadership. Boulton et al. divide assets into five core categories: physical, financial, employee and supplier, customer and organization. A company’s business model is the most important factor in its success or failure in the marketplace – more so than its industry designation or other factors:

New business models are emerging in every industry of the New Economy. In these emerging models, intangible assets such as relationships, knowledge, people, brands, and systems are taking center stage. The companies that successfully combine and leverage these intangible

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assets in the creation of their business models are the same companies that are creating the most value for their shareholders.

2.2. E-Commerce Business Model definitions Most writers on e-commerce and e-business, concentrate on describing examples of specific existing business models instead of trying to come up with a universal definition of the concept itself. While Cartwright and Oliver (2000) deal with e-commerce, they nevertheless offer a definition for business model that is applicable to any kind of business. The key terms used are: the how and where of business, customers, competitors, and major activities.

The business model describes how and where the firm engages in business, who its customers are, and often, who its major competitors are. Typically, the firm will also describe the major activities that it performs in the course of its business. It is this collection of activities that we call the Value Cluster. (Cartwright & Oliver, 2000:25).

However, when Cartwright and Oliver analyze the business mode of eBay, they specify the “how of business” by aspects, such as services offered, revenue stream, and key alliances. Mahadevan (2000) analyzes business models in Internet-based e-commerce, but he further limits his analysis to what he calls the Internet intermediary and commerce layers and excludes the Internet infrastructure and applications layers. At the two layers considered he finds three major roles: portals, market makers and product/service providers: - portals build communities of consumers/customers for product/service information

and funnel customer traffic into web sites managed by other intermediaries. They may cater both to business-to-customer and business-to-business segments.

- market makers also build communities of customers and/or suppliers, but, in addition, they facilitate the business transactions by providing value to the participants. The most common market maker categories especially in the business-to-business segment are auction sites, reverse auction sites, exchanges, and aggregators.

- product/service providers carry out the business transaction directly with their customers, be it in the business-to-business or business-to-consumer segments.

Mahadevan defines a business model as consisting of a blend of three components or streams: value stream, revenue stream, and logistical stream. Thus specific business models are formulated by different players in the three market roles by choices they make in terms of the three streams.

The value stream identifies the value proposition for the buyers, sellers and the market makers and portals in an Internet context. The revenue stream is a plan for assuring revenue generation for the business. The logistical stream addresses various issues related to the design of the supply chain for the business. (Mahadevan, 2000:59)

Definitions range from (1) more narrow and compact, mostly structural definitions (e.g. E-business models) to (2) wider and more encompassing definitions that seem to cover all aspects of an enterprise (e.g. Slywotzky) all the way to (3) most general definitions that could be likened to a new business paradigm (Barabba 1998; Moore 1998).

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3. HISTORY AND DEVELOPMENT OF BUSINESS MODELS Few writers present a comprehensive overview of the evolution of the business models. Most of them analyze the business model evolution simply in terms of old and new dichotomy: the old industrial model giving way to a new business form or new business forms. The nature of the new form or forms depend on the particular way of understanding business models of the author. Don Tapscott has been one of the most prolific writers on business models, especially in IT- and e-business context. In a recent book, Digital Capital – Harnessing the power of business webs (2000), Tapscott and his co-authors Ticoll and Lowy present one of the most comprehensive discussions of the history of business models in a chapter titled Popular Approaches To Business-Model Innovation. The authors argue that, “the first stage of innovation was the vertically integrated industrial-age corporation,” which lowered transaction costs through improved control. In a similar vein, one could argue that the modern industrial manufacturing company was a business model innovation with respect to pre-industrial artisans’ shops. According to Tapscott et al. “in the late 1970s, the vertically integrated mass-production manufacturing company went into crisis” as “the accelerating process of computer and communications technologies peeled back transactions costs.” (Tapscott et al., 2000:13) The authors see new challenges to this vertically integrated mass-production manufacturing company coming from two types of innovations in the business model: those related to process and structure. “Process innovations included concepts like agile manufacturing, total quality, supply-chain management, and business process reengineering (BPR).” Structural innovations were needed to help solve “attack the core issues of value innovation and strategic flexibility.” Tapscott et al. list the Japanese keiretsu, outsourcing, the virtual corporation, and the concept of the business ecosystem as examples of popular approaches to structural business model innovation. The Japanese keiretsu introduced tight, permanent linkages between strategic partners. However, in modern strategic partnerships, the linkages range from loose associations to conglomerates. According to the authors, outsourcing means choosing “a non-core activity and contract[ing] it out to a supplier who can do it more cheaply or better than you.” (Tapscott et al., 2000:14-15) In defining the more radical innovation of a virtual corporation, the authors borrow a definition by Davidow and Malone (1993) who describe it as “almost edgeless, with permeable and constantly changing interfaces between company, supplier, and customers. Job responsibilities will regularly shift, as will lines of authority – even the very definition of employee will change as some customers and suppliers begin to spend more time in the company than will some of the firm’s own workers.” In this view, virtual corporations also include temporary and opportunistic arrangements. In Moore’s (1996:26) words: “Complementary resources existing in a number of cooperating companies are left in peace, but are integrated to support a particular product effort for as long as it is economically justifiable to do so.” (Tapscott et al., 2000:15) Tapscott et al. like Moore’s (1996:26) “blazing insight” concept of business ecosystem, which they describe by quoting Moore’s own definition of it as “an economic community supported by a foundation of interacting organizations and individuals – the

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organisms of the business world.” This ecosystem includes customers, suppliers, lead producers, competitors, and other stakeholders, who, in Moore’s words, “coevolve their capabilities and roles, and tend to align themselves with the direction set by one or more central companies.” The authors criticize Moore’s concept for over-emphasizing the biological instinctive behavior instead of rational human behavior. Nevertheless they call it powerful and claim that it describes well the workings of many business models in contexts where “many companies and individuals innovate, cooperate, and compete around a set of standards.” They also see it illustrating many of the management techniques popularized by Bill Gates and practiced by developers of later business models, such as “Context is king. Ensure voluntary compliance with your rules. Facilitate independent innovation. Harness end-customers for value creation. Go for critical mass fast.” (Tapscott et al., 2000:15) Finally, Tapscott et al. develop their own concept of a b-web, which they see as the latest business model innovation and which is the main theme of their book. The b-web is similar to keiretsus and virtual corporations in many respects. However, it is more flexible than either one of them: it can either last long or be a temporary arrangement; also it may or may not use ownership to integrate the partnerships. The old-fashioned outsourcing is out, for in b-webs a single integrated company will no longer assign non-core tasks and functions to low-cost suppliers. Instead, b-webs “will begin with a customer value proposition and a blank slate for the production and delivery infrastructure. Through analysis, they will parcel out the elements of value creation and delivery to an optimal collection of b-web partners. The lead firm in a b-web will want to control core elements of its digital capital – like customer relationships, the choreography of value creation and management processes, and intellectual property.” (Tapscott et al., 2000:15-16) Moore (1998) sees a current shift from a so-called M-form business to an E-form business taking place in response to changes in the global business environment. The traditional form, the so-called M-form or “multi-divisional firm,” is what most enterprises use today. In Moore’s words: “As business ecosystems emerge, the introverted M-form organization is giving way to the ecosystem form, or, the ”E-form” organization.” These two business models are defined in the next chapter. Recently, Fortune-magazine discussed the change in business models: the “traditional buy-make-move-store-sell- cycle” has been turned into “an intricate electronic partnership” expanding “the view of a company’s supply chain beyond its own four walls to include the inner workings of several tiers of suppliers, distributors, and other corporate partners. In the traditional model, manufacturers partnered with one dancer at a time, whereas in the new model, “manufacturers, suppliers, distributors, and customers” dance “a complicated square dance with multiple prospective partners but no one calling the steps.” (Fortune, 2000:S3) 4. ALTERNATIVE APPROACHES AND CLASSIFICATION SCHEMES 4.1. General Business Models and Classifications In the chapter on the history and development of business models, a classificatory scheme of Tapscott and al. was mentioned. According to them, there are two distinct

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types of business model innovations: process innovations and structural innovations. Process innovations include agile manufacturing, total quality management, supply-chain management, and business process reengineering (BPR). Structural innovations improve value innovation and strategic flexibility and include keiretsu, outsourcing, the virtual corporation, and the business ecosystem approach. Barabba (1998) relies heavily on Stephan H. Haeckel (1995) who originally developed the idea of classifying businesses on the basis of how they interact with customers: a business either makes offers to them, or responds to requests from them. “All businesses do some of both, but each type of behavior calls for a different organizing principle.” These different organizing principles are called the older “make-and-sell” and the new “sense-and-respond” paradigms.

A make-and-sell organization … predicts what the market will demand, makes a product, then goes out and sells it. The make-and-sell enterprise views itself as an efficient mechanism for making offers, relying primarily on interchangeable parts and economies of scale. It depends on learning curves and interchangeable people - people who execute defined procedures in accordance with a prescribed business plan.

The sense-and-respond organization … says to customers, “help me to identify your needs and let’s work together to satisfy them.” A sense-and-respond organization sees itself as an adaptive system for responding to unpredictable requests. It is built around dynamically linked subprocesses and relies on economics of scope rather than economies of scale. The people in a sense-and-respond environment are empowered and accountable, and spend their time producing customized outcomes in accordance with an adaptive business design.

Barabba cautions against the hasty conclusion that the sense-and-respond- model would be automatically superior in all situations. Instead, he predicts that “what we’ll most likely see in the digital economy is a hybrid model of make-and-sell and sense-and respond.” Barabba analyzes the fundamental differences between these two types of companies using the following criteria: - basic business paradigm: business as an efficient mechanism vs. an adaptive system, - know how: embedded in products vs. in people and processes, - process: mass production vs. mass customization with modular products,

procedures, and services, - organizational priority: efficiency and predictability vs. flexibility and

responsiveness, - profit focus: profit margins on products and economies of scale vs. returns on

investments and economies of scope, - operations: functional and sequential activities vs. networked and parallel

activities, - governance mechanism: centralized and specialized, chain of command with

predefined value chain vs. teams in a shared enterprise context and common commitment management,

- information architecture: managed by function vs. enterprise management of essential information,

- IT management: host-centric, hierarchical top-down command and control management vs. network-centric. dynamic network of people and teams,

- market-leader criterion: share of offering market vs. share of customer spending on a class of needs,

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- articulation of strategy: strategy as plan to aim defined products and services at defined markets vs. strategy as adaptive business design to sense earlier and respond faster to unpredictable change.

Moore (1998) distinguishes between the traditional M-form organization (multi-divisional firm) and the new E-form organization (ecosystem firm).

The M-form organization is what most enterprises use today. It is made up of one or more operating business units, each reporting to a central corporate headquarters. The goal of the traditional corporation is to manage these operations so that they grow revenues and profits, and so that they live long. This form of organization rivets managers’ attention on two things: their core markets and their core operations.

Moore criticizes the “introverted” M-form organizations for creating a blindness “to developments outside their core. That is, the ”white space” between existing markets and operations is left, to a large extent, unattended. Yet … much of the opportunity facing businesses originates in the white space.”

E-form organizations are focused on markets and potential markets. They are able to manage the various elements of market development – ranging from customer selection, design, and testing of value propositions, to putting together the market relationships and complementary business models required to establish effective channels and sales support. In parallel, the E-form organization pulls together the functions needed to establish product architectures, end-to-end business processes, and the organizational networks and business arrangements essential to ensuring supply. An E-form organization must manage the … total ecosystem to its advantage.

Moore’s criteria or dimensions for comparing the M- and E-form businesses include: - customers: identifying customers and their needs and ways to engage them, - markets: identifying markets, their natural boundaries, gatekeepers and leaders as

well as ways to engage the important market makers, - products: identifying the necessary product and service architecture, choice between

providing integrated bundles with others and providing open interfaces that encourage alternative sources and solutions,

- processes: identifying necessary business processes, technical inputs and performance improvement, organizing the process architecture of the ecosystem to encourage process innovation,

- organization: identifying the necessary organizational structures and relationships, deciding which processes and technologies will be supplied by whom, what companies will own and sponsor what organizations, how the overall community of organizations will govern itself, and how intellectual property and other assets will be owned or shared,

- stakeholders and financing: structure of the ecosystem in terms of participating financial and nonfinancial organizations, financing of the whole ecosystem (different participating organizations), and financial relationships among the participating organizations,

- ecosystem development and resource acquisition: identifying resources that lie outside the firms, identifying the other power players who have an interest in the specific market space, developing the ecosystem by polling those power players to assess the degree to which various interests can be aligned, and working to create consensus and coordinated, mutually beneficial action.

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In his article titled ”Designing the New Digital enterprise,” Woolner (1998) borrows from Geoffrey Moore the notion of “the chasm” a start-up needs to cross to reach a larger (“mainstreet”) market. He argues that the new digital enterprises represent a new type of mature IT-businesses that are created to replace the informal, free-form start-up ventures. Instead of speed and technological innovation the company must learn to develop a sustainable organizational strategy. Woolner calls this challenge to develop an intentional enterprise design “an organizational chasm”. Woolner presents a list of seven critical “leverage points” in designing the new digital enterprise: 1. Vision-driven, value-based enterprise, 2. Rapid organizational prototyping: having a core set of organizational systems that

enables rapid organizational change and scalability 3. Aligned organizational systems: core elements of the organization’s infrastructure

such as strategies, programs, and tools for culture creation and performance management,

4. Knowledge, information, and technology infrastructure, 5. Extended enterprise mapping or extended enterprise strategy: clear lineation of

what will be managed internally and what aspects will be developed through external relations such as partnerships and alliances, this may entail complex relationships that include both collaboration and competition,

6. Leadership by reflective practitioners: leaders who are able to function well in ambiguous environments, demonstrate effective team-based competencies, provide a charismatic voice to the enterprise vision, and establish and maintain effective relationships characterized by emotional intelligence,

7. Innovative organizational form: for example a team-based, circular structure with a contribution orientation rather than a status orientation.

4.2. E-Commerce Business Models Murphy (1998) describes a new business model or paradigm that he calls alternatively an “internetworked (virtual) enterprise” or “extended enterprise.” These new enterprises “encompass channel partners, remote workers, suppliers, distributors, and consumers through a secure Web-based global network.” The Internet provides the infrastructure needed for new decentralized business models with coordinated communication framework. According to Murphy, in the digital economy or rather in the new interlinked business ecosystem, these new internetworked organizations “will compete together in groups, or e-business communities, rather than as individual companies.” Murphy’s extended enterprise is already rapidly becoming a reality in the growing e-business arena, although in a somewhat haphazard manner. Murphy’s contribution lies in presenting an integrated holistic view of the new business type, and in enumerating all the ingredients that must be present to make it work. First of all, the new organization must bridge all business functions (supply, purchasing, manufacturing, operations, transportation, financing, accounting, personnel, sales, and customer service), all stakeholders (business partners, suppliers, service and technology providers, distributors, retailers, outsourcing partners, remote workers, and customers, competitors, financiers, and regulators), and all organizational capabilities (information

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system, self-regulating and self-organizing organizational structure, and reinvented virtual supply chain). In a similar vein to Murphy’s e-business communities, Benjamin (1998) believes in the creation of what he calls “cybercommunities.” In contrast to Murphy, he emphasizes less the importance of digital technology: “Despite the hype surrounding today’s digital “everything,” the real secret to charting a successful course in cyberspace lies less in the paradigm of technology than in the construct of community. … The true “killer app” of tomorrow’s cyberspace will be a blend of hardware and software that lets us communicate easily, immediately, universally, inexpensively, and - most importantly – on our terms.” (Benjamin, 1998:298) Benjamin also describes the technology, “Multimedia Dialtone,” necessary for the creation of this cybercommunity. Today’s “converging connectivity foreshadows the emergence of a unified platform to support rich, relevant, and productive individual and group action online and provide infrastructure conducive to sustainable cybercommunities. … Multimedia Dialtone will allow instantaneous, zero-loss, simultaneous translation of protocols, computer languages, human languages, emotions, gestures, mood, interfaces, middleware, operating systems, and networks according to users’ individual preferences.” (Benjamin, 1998:306) Benjamin calls this “Multimedia Dialtone” alternatively a new communications paradigm or technology enabling new business models. The order of importance is clear to him: “But, the biggest challenge is not directly related to technological development of business models; rather, it concerns our ability to embrace a new communications – and community - paradigm. (Benjamin, 1998:309) Nevertheless, Benjamin discusses at length the technological developments needed for the creation of the Multimedia Dialtone, which consists of the following layers: 1. Core fabric: the basic communications transportation medium 2. IP layer: internetworking protocols conversion layer (including telecommunications

operators and ISPs) 3. Integration management layer: providers of communication services, such as

connectivity, messaging, security, content aggregation, search engines, content host server management, site design and consultation, document management and publishing, content services, retailer support, etc.

4. Appliance layer: all information appliances from which to access services with standard but customizable user interface ranging from fixed home and office appliances to mobile personal appliances,

5. Location layer: ranging from fixed locations to mobile locations (car and person) 6. Customer layer: ranging from individuals to businesses to cybercommunities.

(Benjamin 1998: 307-308) Kalakota et al. (1999:27) present a brief description of the evolution of Internet-based business models: models evolve and wreak havoc to traditional channel relationships as a response to deepening trading partner interaction and rising customer expectations, and changing technological capability. In their view, “…in electronic business-to-business commerce, three new classes of business model have emerged – extranets, enterprise portals, and digital marketplaces.”

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Tapscott et al. (2000) borrow Moore’s ecosystem concept, and argue, in a similar also to Murphys e-business communities and Benjamin’s “Multimedia Dialtone” cybercommunities, that the future digital businesspace will be structured around “primary structures” that they call “b-webs.” All these constructs represent in part a new e-business paradigm, that is a view of how the digital businesspace is going to evolve as a whole. In part, they are descriptions of new types of e-commerce value networks or clusters. Tapscott et al. (2000:17) define b-webs as:

… a b-web is a distinct system of suppliers, distributors, commerce service providers, infrastructure providers, and customers that use the Internet for their primary business communications and transactions. Several b-webs may compete with one another for market share within an industry… Three primary structures of the b-web universe are internetworked enterprises, teams, and individuals; b-webs themselves; and the industry environment ... Internetworked enterprises, teams, and individuals are the fundamental components of b-web collaboration and competition. Typically, any single entity participates in several – sometimes competing – b-webs. … An industry environment (e.g. the software industry) is a distinct space where several b-webs compete.

Further, Tapscott et al. (2000:18-22) list nine salient features or key design dimensions of b-webs: 1. Internet infrastructure 2. Value proposition innovation 3. Multienterprise capability machine: partnership instead of build-or-acquire model. 4. Five classes of participants or classes, of value contributors (see below) 5. Coopetition 6. Customer-centricity 7. Context reigns: “…the context provider typically manages customer relationships

and choreographs the value-creating activities of the entire system. By defining, piloting, and managing the context, a b-web leader gets the captain’s share of the spoils. … Within its own b-web, MP3.com defines the core value proposition and is lead manager of the customer relationship, the competitive strategy, the admission of participants, the rules of engagement, and the value exchange. Other sources provide content and other services…”

8. Rules and standards: “…participants must know and adhere to the b-web’s rules of engagement. Voluntary adherence to open standards and technologies minimizes dependence on the proprietary methods… The context provider often originates rules and monitors compliance. But rules - and enforcement – can come from anywhere, including government, key customers, and suppliers.

9. Bathed in knowledge. These b-webs include five types of participants or value contributors: 1. Customers, who “not only receive but also, contribute value to the b-web.” 2. Context providers “facilitate the interface between the customer and the b-web. A

context provider leads the choreography, value realization, and rule-making activities of the system

3. Content providers 4. Commerce service providers “enable the flow of business, including transactions

and financial management, security and privacy, information and knowledge management, logistics and delivery, and regulatory services.”

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5. Infrastructure providers “deliver communications and computing, electronic and physical records, roads, buildings, offices, and the like.”

The terminology and conceptualization is not always clear. This becomes obvious when Tapscott et al. proceed to categorize b-webs on the basis of two main dimensions into five classes of b-webs (see Figure 1). It seems that in this context, they really are categorizing b-web leaders, such as context providers rather than b-webs themselves. In that sense, their b-web categories are actually new business models for the b-web world. Indeed, they compare the Alliance to the traditional industrial alliances and write:

Finally, in the physical world, one of the types of business models – the Alliance – is rare and primitive. In the world of b-webs, however, Alliances, including innovation collaboratives like Linux, become highly visible as powerful and dynamic drivers of change. (Tapscott et al, 2000:28)

The two dimensions used to categorize b-web business models are: economic control (ranging from hierarchical to self-organizing) and value/benefit integration (ranging from low to high). Hierarchical b-webs have a leader who controls the content of the value proposition, the pricing, and the flow of transactions. In self-organizing b-webs the market and its dynamics define the value and price of goods and services. B-webs focusing on high value integration integrate value contributions from multiple sources. Low value integration b-webs focus on selection, that is, providing a basket of choices rather than a single integrated solution. In between high and low value integration lie businesses that aggregate some aspects of the value creation and have a narrow focus in other aspects. (Tapscott et al., 2000:29-30) These two dimensions help define five categories of b-web business models. Each type may have several subtypes, and “every real-world b-web blends features of several types” (Tapscott et al., 2000:30). Self- organizing ECONOMIC CONTROL Hierarchi- cal

Low High VALUE INTEGRATION FIGURE 1. Categories of B-Webs (Tapscott et al, 2000)

VALUE CHAIN

AGORA ALLIANCE

DISTRIBUTIVE NETWORK

AGGRE-GATION

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Four of the five b-web business models defined by Tapscott et al. (2000:31-36) are interesting and seem to describe the e-business player categories well. However, the fifth, the Distributive Network, is the most dubious one. It does not seem to belong to the same world with the others. The categories are defined as follows: 1. Agora: refers to “markets where buyers and sellers meet to freely negotiate and

assign value to goods… An Agora facilitates exchange between buyers and sellers who jointly ‘discover’ a price through on-the-spot negotiations. …” Examples include consumer auctions (eBay), and business procurement sites (Freemarkets). “Internet Agoras offer significant benefits: many more sellers with a wider variety of products (benefiting buyers) and many more buyers to push prices up (benefiting sellers); convenience, low distribution and marketing costs, lots of information about all aspects of the deal; and entertainment – the thrill of the chase.”

2. Aggregation: “…one company – like Wal-Mart – leads in hierarchical fashion,

positioning itself as a value-adding intermediary between producers and customers… the lead aggregator takes responsibility for selecting products and services, targeting market segments, setting prices, and ensuring fulfillment. … An Aggregation offers a diverse variety of products and services, with zero to limited value integration.” Examples include retailers and wholesalers (Wal-Mart), and virtual stock brokers, such as E*Trade, which uses different content and service providers: “stock quote services (Reuters, Quote.com), news (Reuters, PR Newswire, Businesswire), proprietary issuers (Robertson, Stephens), research (Briefing.com, InvesTools), market trends and projections ( Baseline Financial Services), and personal financial tools (Quicken)

3. Value chain: “…the context provider structures and directs a b-web network to

produce a highly integrated value proposition… The output meets a customer order or market opportunity… The seller has the final say in pricing.” Examples include Cisco Systems that manages and controls the b-web value chain. “It reserves for itself the task of designing core technologies, coordinating processes across the b-web, marketing, and managing relationships. Other b-web participants do just about everything else, including most manufacturing, fulfillment and on-site customer service.

4. Alliance: “… strives for high value integration without hierarchical control… Its

participants design goods or services, create knowledge, or simply produce dynamic, shared experiences. … Alliances typically depend on rules and standards that govern interaction, … and the determination of value. Often, end customers play a prominent role in value creation as contributors to an online forum as designers… Where products come from an Alliance, the end-customers often handles customizing and integrating the solution. Alliance b-webs often enjoy network effects. The more customers who buy PalmPilots, the more developers who decide to create applications. The value cycle is continuous and accelerating.. Smart managers appreciate the power of Alliance b-webs. They willingly sacrifice some control over product evolution for the extra momentum that hundreds or even thousands of contributors can provide. Examples include online communities, research initiatives, games developers (MP3), as well as development and innovation communities (PalmPilot and Open Source).

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5. Distributive Networks: “… are the b-webs that keep the economy alive and mobile.

In addition to the roads, postal services, telephone companies, and electrical power grid of the industrial economy. Distributive Networks include data network operators, the new logistics companies, and banks. … Distributive Networks, in their purest forms … service the other types of b-webs by allocating and delivering goods – whether information, objects, money, or resources – from providers to users. Along with Alliances, Distributive Networks often evince network effects: The more customers who use a Distributive Network (e.g. a telephone network), the more value it provides to all its customers. … Distributive Networks are “pure” hybrids. Their value integration is both high and low. … Control of a Distributive Network is both hierarchical … and self-organizing...”

Timmers has defined a business model as follows (Timmers 1998: 4 and 2000: 32):

• An architecture for the product, service, and information flows, including a description of the various business actors and their roles; and

• A description of the potential benefits for the various business actors; and • A description of the sources of revenue.

According to Timmers, a systematic approach to identifying architectures for business models can be based on value chain deconstruction and reconstruction – that is, identifying value-chain elements – and identifying possible ways of integrating information along the value chain (Timmers 2000: 33). Timmers has classified the business models for electronic markets into the following categories (Timmers 1998: 5-7 and 2000: 35-40):

1. E-shop (Web marketing of a company or a shop) 2. E-procurement (electronic tendering and procurement of goods and

services) 3. E-auction (offer an electronic implementation of bidding mechanisms

also known from traditional auctions) 4. E-mall (consists of a collection of e-shops, usually enhanced by a

common umbrella, for example of a well-known brand) 5. Third party market place (an emerging model that is suitable if

companies wish to leave Web marketing to a third party) 6. Virtual communities (focus on added value of communication between

members) 7. Value chain service provider (specializes on a specific function for the

value chain, such as electronic payments or logistics, with the intention to make that into their distinct competitive advantage)

8. Value chain integrators (focus on integrating multiple steps of the value chain, with the potential to exploit the information flow between those steps as further added value)

9. Collaboration platforms (provides a set of tools and an information environment for collaboration between enterprises).

10. Information brokers/ trust providers (business information and consultancy, trusted third-party services).

Timmers has used qualitative mapping of these business models on two dimensions (see Figure 2). The first dimension is the degree of innovation. “This ranges from

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essentially an electronic version of a traditional way of doing business to more innovative ways, for example by externalising via the Internet functions that previously were performed within a company or by offering functions that did not exist before” (Timmers 2000: 41). The second dimension is the extent of integration of functions. That ranges from single-function business models (e.g. e-shops that only provide the marketing function over the Internet) to fully integrated functionality (e.g. value chain integration).

Multiple

functions /

integrated

Functional

integration

Single

function

lower higher

Degree of innovation FIGURE 2. Classification of Internet business models (Timmers 2000: 41)

Also Trombly has written about e-business models. He defines an e-business model as “an approach to conducting electronic business through which a company can sustain itself and generate profitable revenue growth. The business model spells out how a company plans to make money online and how it’s competitively positioned in an industry” (Trombly 2000: 61). Examples of e-business models are:

1) B2B – Companies that sell to one another, sometimes through online exchanges, such as Covisint, a supply-chain partnership of major automakers.

2) B2C – Businesses sell to consumers via Web sites such as Amazon.com. 3) B2G – Business-to-government services. 4) P2P – Peer-to-peer, where individuals trade goods with one another, e.g.,

Napster.com. 5) E-marketplaces – Where buyers and sellers trade their goods online (Trombly

2000: 63).

E-shop

E-procurement

E-mall

E-auction

Value chain service provider

Virtual business community

Collaboration platform

Third-party marketplace

Value-chain integration

Trust services

Info brokerage

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Martinez (2000: 1-3) has also written about online business models, and discussed how companies can find the right and profitable business models. Martinez classifies e-business models into five categories: offline facilitators, context provider, commerce destination, online exchange and gateway. The distinction between the business models is marked by companies’ primary focus (“content and community” versus “orders and transactions”) and market scope (serving single or multiple markets) (see Figure 3):

1) Offline facilitator: These companies promote their brands online, but never take a Web-based order. They want to avoid any potential channel conflict.

2) Context provider: Sometimes known as affinity groups or content aggregators, these businesses are typically expert in a particular domain, and are aligned with a specific value proposition. Their businesses might be based on subscriptions, advertising or transaction fees.

3) Commerce destination: These direct sales channels exist primarily to sell a company’s products and services.

4) Online exchange: Whether auctioneers, financial exchanges or market makers, these entities bring buyers and sellers together to help seal deals. Revenues come primarily from transaction commissions, but can also be supplemented by advertising or subscription fees.

5) Gateway: With a variety of origins – such as a search engine, ISP or shopping agent - these companies provide an easy way for users to find what they need on the Net. As a frequent and often first stop for Web users, these online businesses derive most of their revenue from advertising.

Multiple

markets

Single

market

Content and community Transaction

focused focused

FIGURE 3. Finding the right e-business model. (Martinez 2000: 2)

According to Robbins (2000), a business model is quite simple: “It is a brief statement of how an idea actually becomes a business that makes money. It tells who pays, how much, and how often. The same product or service may be brought to market with several business models” (Robbins 2000). Robbins takes brick-and-mortar brokers vs. E*Trade as an example:

Gateway * Portals * Shopping agents * ISPs

Online exchange * Auctioneers * Market makers * Financial exchanges

Offline Context facilitator provider * Product * Affinity brands groups

* Content aggregators

Commerce destination * Online store * Direct brand sellers

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Traditional brokers make money by charging a commission on purchases and sales. The commission is a percentage of the transfer amount, so brokers may be happy with clients who trade infrequently, as long as they buy and sell enough at a time to generate a nice commission.

E*Trade charges a low, fixed amount per trade. Their business model is to attract high-trade-volume customers. The customers are more likely to trade often when commissions are fixed and low, and E*Trade is pushing to make up in volume what the traditional brokers make by charging a percentage (Robbins 2000).

Kraemer, Dedrick and Yamashiro have studied Dell’s business model and defined it by two elements: direct sales and build-to-order. This business model can be considered to be a key to Dell’s success. This model is simple in concept, but highly complex in its executions, especially under conditions of rapid growth and change. Dell has continually refined and extended its business model while striking a balance between control and flexibility (Kraemer, Dedrick and Yamashiro 2000: 5-21).

One example of quite narrow business model definitions is the one by Johnson (2000). He has written about outsourcing as a business model, especially in the banking industry. According to him, outsourcing will be the best business model in the future (Johnson 2000). Also Kalakota and Robinson have written about outsourcing as a business model. According to them, new entrants in e-business are increasingly using outsourcing alliances as business model to gain market position against a leader (Kalakota & Robinson 1999: 9).

According to McKinsey & Company, a business model arises from the definitions of the activities of a company and the interrelationships between those activities. In other words, a business model defines how a company produces a product or a service and how it is delivered to the customer. The business model is a way of understanding company’s business activities. The activities are usually presented as the functions presented in Figure 4 (McKinsey & Company 1999: 86).

FIGURE 4. Flow of Business Activities (McKinsey & Company 1999: 86).

The figure above describes the business model that is typical to almost every industries and companies. Therefore the model needs to be adapted to every company’s needs.

Re Maintenance and Services

R Distribution

Re Marketing and Sales

Re Production

Research and Development

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According to Durlacher Research Ltd, new mobile business models include: WASP (wireless ASP), VOs (virtual operators) and multi-access portals (Durlacher 2001: 33). WASP

“Applications service providers (ASPs) and third party companies that help deploy, manage and remotely host a wide range of applications and services for enterprises and operators. WASPs extend the functionality of applications and services to mobile devices over mobile networks” (Durlacher 2001: 35).

Virtual Operators

“VOs have access to networks of one or more MNOs (mobile network operator) and offer services to customers using that network” (Durlacher 2001: 38).

Multi-access portals

“Multi-access portals enable customers to access a wide variety of personalized services through a variety of communications services. The most important driver for a multi-access portal strategy is the fact that customers need access to their services and applications from any device, at any time, from any location. The challenge is to optimise the user experience (determined by device, access channel and the type of service and/or application). Additionally, portal owners need to understand how their users move across different access channels and devices. When new type of access devices, channels and methods emerge, portal owners need to be able to quickly integrated them into their portal platform. Obviously, such developments offer many new opportunities to interact with customers, but they also give rise to a whole range of new complexities” (Durlacher 2001: 44).

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4.3. Industry Value Chains and Networks

An early, somewhat chaotic chart of the telecommunications industry value network (or “cluster”) was provided in 1996 by ETLA (see Figure 5). The players and products were grouped under three columns, titled Specialty inputs, Key products and Related industries. Specialty inputs Key products Related industries Materials & components Outsourcing services: assembly programming Machinery Assembly machines Hardware Software Associated Services Education Research Consulting Entertainment industry Media industry Data bases Telecom equipment distributors Regulation

Equipment industry Fixed & cellular network systems Terminal equipment Operation Network planning, construction & maintenance Basic voice & data services VANS Telematic services Intellectual/virtual network Services Enhanced services Messaging services Data transmission services

Information technology Automation Consumer electronics Buyers Household Organisations Traffic Logistics Banking, financing Health care Education

FIGURE 5. Telecommunications Industry Value Network (ETLA, 1996)

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Another chart of similar structure, this time of the Information and Communication Technology (ICT) industry value network (cluster) in Finland is presented by ETLA (2000:21). This time the three main categories of players and products are supporting industries and associated services on the left, key industries and their buyers and appliers in the middle as a core, and related industries on the right (see Figure 6).

FIGURE 6. Information and Communication Technology (ICT) Industry Value Network in Finland (ETLA, 2000) In another chart this diagram was simplified into a three-step linear chart (see Figure 7), (ETLA, 2000:27). FIGURE 7. A Simplified Information and Communication Technology (ICT) Industry

Value Network (ETLA, 2000)

SUPPORTING INDUSTRIES (specialty inputs) • Part and

component manufacturing

• Contract manufacturing

KEY INDUSTRIES INFORMATION AND COMMUNICATION EQUIPMENT INDUSTRY• Fixed and mobile

networks • Communication

equipment • Computer hardware

and software INFORMATION NETWORK OPERATION • Telephone networks • Data networks • Internet • Cable television

RELATED INDUSTRIES (complementary products and/or share activities in the value chain) • Content

provision • Value added

network services

ASSOCIATED SERVICES (enhance functional preconditions) • R&D on

technology and engineering

• ICT consultancy • Equipment

distribution channels

• finance

BUYERS / APPLIERS

COMPONENT AND CONTRACT MANUFACTU-RING

ICT EQUIPMENT NETWORKS AND RELATED SERVICES

TELECOM SERVICES

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Durlacher (2001) Research Inc. presents a linear Mobile Commerce Value Chain that consists of the ten following links (see Figure 8): 1. Technology Platform Vendors: deliver the operating systems and microbrowsers for

mobile devices. There is a battle for the dominating standard on both fronts. 2. Infrastructure & Equipment Vendors: such as Ericsson, Lucent, Motorola, Nokia,

and Siemens supply the mobile network infrastructure equipment and drive the industry. According to industry analysts the technology is ahead of the market, since applications are lagging behind.

3. Application Platform Vendors: provide so-called middleware structure, i.e. for example WAP gateways at either the mobile operator’s site or at the corporate customer’s site. The standards formulation process is under way.

4. Application Developers: are building applications for mobile environment fir example on Windows CE, Symbian EPOC32, PalmOS, or WAP technology platforms.

5. Content Providers 6. Content Aggregators 7. Mobile Portal Providers 8. Mobile Network Operators 9. Mobile Service Providers 10. Handset Vendors 11. Customers

FIGURE 8. Mobile Commerce Value Chain. (Based on Durlacher, 2001)

5. AN OPERATIONAL DEFINITION OF BUSINESS MODEL CONCEPT

5.1. Business Model and Strategic Planning As was shown in Chapter 2, the definitions of business models range from narrow technical definitions to all encompassing broad definitions. The narrow technical definitions see business model as a specific distribution arrangement or as a specific pricing approach. The broadest definitions include in business model practically everything that a company does: strategic planning, business concept, organizational structure, cooperation arrangements, distribution, and pricing arrangements. Few, if

Technology Platform Vendors

Infrstructure & Equipment Vendors

Application Plaform Vendors

Application Developers

Content Providers

Content Aggregators

Mobile Portal Providers

Mobile Network Operators

Mobile Service Providers

Handset Vendors

Customers

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any, of the authors have specified the relationship between business model and strategic planning. Rajala et al. (2001: 37) come closest to specifying how business model relates to strategic planning. Using McHugh’s (1999: 84) ideas, they define business model as “an action plan derived from strategy to accomplish the strategy objectives of a company with a give product and service offering, in a given market. … We describe a business model as a combination if different functional models of product development, revenue, sales, marketing, servicing and implementation.” Thus they define business model as an action plan being derived from strategy and limited to a specific product-market situation. Their model includes four dimensions or ‘models’: 1. Product development model, 2. Revenue logic, 3. Marketing and sales model, and 4. Servicing and implementation model. However, while discussing decisions involved in these four areas Rajala et al. clearly introduce types of fundamental issues that cannot be delegated to an action plan level. All writers seem to imply that business models are closely related to strategic planning in a fundamental way, as evidenced by the language used in the definitions quoted above: vision, model of how the business will function, configuration of resources, who the customers are, how utility is defined and delivered to customers, comprehensive system of activities and relationships, how and where the firm engages in business, etc. Tapscott and his co-authors have analyzed the historical evolution of business models. In their analysis, organizational structures and processes were important components of business models. Writers on e-business concentrate on describing and categorizing new business models instead of trying to give a comprehensive definition for the basic concept. Consequently, most writers seem to define business model broadly, therefore, the challenge is to find a meaningful way to separate business model from strategic planning. Grant (1998) presents a comprehensive analysis of strategic planning and quotes some of the classical definitions. Besides emphasizing long-term goals and objectives, these definitions include expressions such as: courses of action, allocation of resources, selection of the product-mix that the firm will produce and the markets to which it will sell, as well as a plan of action that will develop a business’s competitive advantage and compound it. All these expressions are close to the expressions used in defining business models. Grant (1998) continues to analyze the differences between the different levels of strategic planning:

Corporate strategy defines the scope of the firm in terms of the industries and markets in which it competes. Corporate strategy decisions include investment in diversification, vertical integration, acquisitions, and new ventures; the allocation of resources between the different businesses of the firm; and divestments. Business strategy is concerned with how the firm competes within a particular industry or market. If a firm is to prosper within an industry, it must establish a competitive advantage over its rivals. Hence, this area of strategy is also referred to as competitive strategy. Using slightly different terminology, Jay Bourgeois has referred to corporate strategy as domain selection and business strategy as the task of domain navigation. … The purpose and the content of a firm’s strategy is

22

defined by the answer to a single question: How can the firm make money? This question can be elaborated into two further questions: “What business or businesses should we be in?”

The Traditional strategy term that comes closest to business model is business concept. In fact, it has been often used as a synonym for business model. However, business model is definitely a broader concept. Business concept has traditionally referred to the definition of the firm’s product market sector: what kinds of products it is going to sell and to what kinds of customers. As products are provided in cooperation with complementors, system integrators, outsourcing companies, etc., the definition of products is no longer simple. As companies need to understand the downstream supply stream, the definition of customers is no longer easy or simple. Consequently, there is definitely a need for expanding the notion of business concept. The terms domain selection and domain navigation that Grant (1998) borrowed from Bourgeois (1980), can be of help in differentiating business model from strategy. However, it is important to realize that there is a domain selection task involved both at corporate and at business levels. Domain selection or definition at corporate level refers to business portfolio definition, to business concept definition at the business level, and to various functional concepts, such as marketing concept, at the functional level. If the essence of strategy is “a plan of action that will develop a business’s competitive advantage and compound it”, then business model concentrates largely on the domain selection and definition. In conclusion, business model is an integral part of strategic planning: it represents the necessary expansion of the older term ‘ business concept’. The other components of the new business model concept stem naturally from the way we need to define products and customers: the new expanded business concept needs to incorporate issues that deal with various forms of cooperation with other producers and with various layers of the customer chain. Business model defines the domain selection, and definition, as well as domain infrastructure dimensions of the strategy. The rest of the strategy includes the definition of the unique bases of competitive success (core competencies, and superior customer benefit), as well as the actions based on them (within resource allocation strategy, competitive business strategy and functional strategies) The contents of strategy are summarized in Figure 9.

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LEVEL CONTENTS CRITERIA

CORPORATE / GROUP LEVEL

DOMAIN SELECTION = BUSINESS PORTFOLIO STRATEGY RESOURCE ALLOCATION STRATEGY GENERAL BUSINESS / SBU STRATEGIES

Core Competence (Superior Customer Benefit)

BUSINESS / SBU UNIT LEVEL

DOMAIN SELECTION = BUSINESS CONCEPT / BUSINESS MODEL COMPETITIVE BUSINESS STRATEGY GENERAL FUNCTIONAL STRATEGIES

Core competence Superior Customer Benefit

FUNCTIONAL LEVEL

HRM STRATEGY FINANCIAL STRATEGY ---------------------------------- SCM STRATEGY INNOVATION MGMT STRAT. POM STRATEGY MARKETING CRM STRATEGY

Core Competence Core Competence Core Competence Core Competence Core Competence Superior Customer Benefit

FIGURE 9. Contents Of Strategy At Different Levels 5.2 A New Definition of Business Model As mentioned before, it is becoming clear that the old business concept is too narrow and that it needs elaboration and expansion to serve the needs of new and changing businesses. Business model is a useful concept for that purpose. However, its definition can be neither too narrow nor too broad to the point of rendering it meaningless from operative point of view. Business model is defined here along two dimensions: 1) Focus of activity (business definition or value stream), and 2) Perspective of activity (internal or external/extended) (see Figure 10). The resulting definition matrix has four fields:

1. Internal business definition, 2. Internal value stream. 3. Extended value stream, and 4. Extended business definition.

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FOCUS OF ACTIVITY

BUSINESS

DEFINITION

VALUE STREAM

INTERNAL

1.INTERNAL BUSINESS DEFINITION

2. INTERNAL VALUE STREAM

PERSPECTIVE OF ACTIVITY

EXTERNAL/ EXTENDED

4.EXTENDED BUSINESS DEFINITION

3. EXTENDED VALUE STREAM

FIGURE 10. A New Conceptual Definition of Business Model The following check list and Figure 11 present the aspects included in each field of the business model –matrix in more detail:

1. Internal Business Definition

1.1. Organization 1.2. Product concept

- core product in terms of customer’s needs, and customer´s customer’s needs, and needs fulfillment

- core product in terms of know how, platform, product, or service - degree of customization: project, customized, customizable

(parameterized), or standard - degree of finalization: plausible promise, upgrades (smoothing), or

finalized total product 1.3. Technology concept

- compatibility: non-compatible technology or compatible technology - degree of openness: compatible technology with exclusive rights by the

producer (controlled migration) or open compatible technology with several suppliers (open migration)

- degree of discontinuity: radically new discontinuous technology or tried-out standard technology

- degree of competition: unique or highly competitive (several suppliers) 1.4. Customer concept

- what are the customer types that the company will serve - what is the customer chain: who are the immediate customers and the end

users, customer’s customers - what is the decision-making chain, influencers, decision-makers, users - customer purchasing behavior: why and how does the customer buy

1.5. Revenue stream/model/concept - who pays: direct customers, final customers, third parties - what is paid for, what activity brings in the money - price definition: what is included in the price

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- phasing of the payment: giving the product for free initially to build a customer base vs. charging the full price from the start; “sell it – free it” (licensing first, then changing it into open source)

- method of payment and financing - revenue model options:

- effort/cost-based pricing, - licensing,

- product use licensing - brand licensing: open source product, but use of brand is licensed

- revenue/profit sharing, - charging by contact time: e.g. customers of an operator and/or portal - surrogate pricing:

- loss leader/support sellers: free or low price product in order to stimulate demand for related offerings,

- support selling: revenue comes from associated products (books) and services

- “widget frosting” (main product is hardware) or “accessorizing” (software offered as an accessory to physical goods)

- service enabler: software enables the use of online services, which is the actual revenue source

- media model: advertising revenue, ”selling eyeballs to advertisers” - monetizing visitor traffic in the future: ”harvesting strategy”: offering

free products and services to maximize the traffic, so that it can be sold (monetized) in the future to advertisers, as market information, as membership fees, or in terms of auxiliary sales.

- hybrids and magic

2. Internal Value Stream: Internal value generating activities 2.1. Upstream supply chain management: purchasing and logistics 2.2. Innovation management: technology and R&D 2.3. Production and operations 2.4. Marketing, sales and customer service - direct selling

- product selling: standard product or service to several customers - product consulting with moderate degree of customization - solution consulting: customized solutions (may be based on standard

products or on customer specific solutions) - customer partnership

- indirect selling: - agents - distributors, VADs - dealers - OEMS, republishers - Resellers: VARs - Retailers - Strategic partners, affiliates

2.5. Organization 2.6. Support activities: Financing, HRM, MIS

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3. Extended Value Stream 3.1. Which value stream activities are handled outside the company by outsourcing

companies or carried out in cooperation: - Upstream supply chain management: purchasing and logistics - Innovation management - Production and operations management - Marketing, sales, customer service, and downstream customer network

management - Support activities: HRM, financing, MIS

3.2. Who are the members of the extended value network 3.3. What kind of relationship does the company have with the value network members

- Supplier, vendor - customer relationships - affiliates - partnerships - strategic alliances - community - channel partner relationships:

- IT consultants - System integrators - Outsourcees - Service providers: ASPs, HSPs, ISPs, CSPs

3.4. What kind of role does the company have within its extended value network 3.5. What are the modes of operation used

- contractual cooperation - licensing, franchising - joint venture - acquisition, merger

4. Extended Business Definition 4.1. How is the extended business organized 4.2. How is the extended product concept defined and implemented in the value

network - Servicing options:

- Implementation - Consulting - Training - Hosting - Maintenance or technical support - Product upgrades - New modules and or new products

4.3. How is the extended technology concept defined and implemented 4.4. How is the extended customer/market concept defined and implemented 4.5. How is the extended revenue model defined and implemented

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1.INTERNAL BUSINESS DEFINITION - Organization - Product Concept - Technology Concept - Customer/market concept - Revenue stream model/concept

2.INTERNAL VALUE STREAM - Upstream supply chain: purchasing,

logistics - Innovation, technology and R&D - Production and operations

management - Marketing, Sales and Service mgmnt - Organization - Support activities

4.EXTENDED BUSINESS DEFINITION - Organization of extended business - Extended product concept - Extended technology concept - Extended customer/market concept - Extended revenue stream

model/concept

3.EXTENDED VALUE STREAM - Outsourcing and cooperation - Extended value network members - Relationships within extended value

net - Role of the company within the

extended value network - Modes of operation

FIGURE 11. Detailed Contents of the Business Model Concept It is important to realize that business model concept must be flexible and dynamic in order to account for constant changes and development in business activities. Geoffrey Moore’s (1991) model for business life cycles is especially suitable for serving as a framework for analyzing the evolution of IT business models (see Figure 12).

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The Mainstream Market Main Street The Tornado The Chasm The Bowling Alley End of Life Early Market

1.Innovators, 2. Early 3. Early Majority 4.Late 5. Laggards Technology Adopters Pragmatists Majority Skeptics Enthusiasts Visionaries Conservatives

Application breakthrough Requires a beachhead / Niche-specific solution Technology product with Whole Product Fully integrated A lot of customer service begins to mature commoditized whole Direct selling Indirect selling product Recruit partners Eliminate partners Find caretakers The chasm: the period of crossing from early market into the mainstream market Bowling alley: niche-based adoption success validates product architectures within

limited segments of the mainstream, which helps the tornado to start Tornadoes require the commoditization of the whole product, characterized by “killer

applications” Main street: application breakthrough becomes standard operating procedure FIGURE 12. Market and Customer Life Cycles as a Framework for Business Model

Development. (Based on Moore, 1991)

6. CONCLUSION Business model offers a useful and innovative way to expand the strategic planning concept, and especially the old business concept. It is difficult to predict the future. However, Tapscott et al. (2000:23,28) give a prediction by stating: “Who knows where all this will end up? The first twenty years of the new century will be a golden age of business model innovation, which will set the course for decades to come. … Second, business model innovation becomes the basis of competitive advantage.”

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PUBLICATIONS OF TELECOM BUSINESS RESEARCH CENTER (TBRC)

Research Reports

1. A State-of-the-Practice Survey on Requirements Engineering in Small- and

Medium Sized Enterprises. Nikula, Uolevi; Kälviäinen, Heikki; Sajaniemi, Jorma, 2000

2. Imatran seudun IT-alan yritysten verkostoitumisen resurssi- ja ydinosaamispohjainen tarkastelu. Ahola, Jyrki; Blomqvist, Kirsimarja; Tuimala, Aija; Salmi, Pekka, 2000

3. Tietoliikennetoimialan PK-lisäarvopalvelutuottajat Suomessa – Tutkimusraportti. Puumalainen, Kaisu; Varis, Jari; Saarenketo, Sami; Niiranen, Jukka; Blomqvist, Kirsimarja; Kuivalainen, Olli; Kyläheiko, Kalevi; Porras, Jari; Virolainen, Veli-Matti; Äijö, Toivo; Savolainen, Petri, 2000

4. Elicitation of Customer Requirements with Group Methods in Software Engineering. Reinikainen, Lea, 2001

5. Requirements Elicitation Using a Combination of Prototypes and Scenarios. Mannio, Markus; Nikula, Uolevi, 2001

Working Papers WP1: International Strategies of Telecommunications Operations. Äijö, Toivo, 1999 WP2: Analyzing Core Competence and Value Add of Small Software Firms in

Telecommunications. Torkkeli, Marko; Virolainen, Veli-Matti; Niiranen, Jukka; Tuominen, Markku, 1999

WP3: Asymmetric Partnerships – Different Characteristics and Motivation of Small and Large Technology Firms. Blomqvist, Kirsimarja, 1999

WP4: Networking as a local development strategy: Leadership in Network Organizations. Ahola, Jyrki; Tuimala, Aija, 2000

WP5: Application Visions and Business Opportunities of Bluetooth - A Wireless Technology for Local Data Transfer. Sainio, Liisa-Maija; Niiranen, Jukka; Sikiö, Taina, 2000

WP6: The Possibilities of IP Networks in Strategic Partnership Development. Puska, Tiina, 2000

WP7: Industrial Districts and Regional Development: Towards a Knowledge-Based View. Blomqvist, Kirsimarja; Ahola, Jyrki; Kyläheiko, Kalevi; Salmi, Pekka, 2001

WP8: Immateriaalioikeuden lähtökohtia. Hurmelinna, Pia, 2001. WP9: Sähköisen liiketoiminnan liiketoimintamallien patentointi Euroopassa.

Karkulahti, Miikka, 2001 WP10: Required and Optional Viewpoints: What is Included in Software Architecture?

Smolander, Kari; Hoikka, Kimmo; Isokallio, Jari; Kataikko, Mika; Mäkelä, Teemu; Kälviäinen, Heikki, 2001

WP11: Applying Real Option Theory to the Evaluation and Selection of R&D Projects. Hellsten, Ismo, 2001

WP12: Business Models – Conceptual Analysis. Äijö, Toivo S.; Saarinen, Kirsi, 2001