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Analysis of a Software Company's Business Network
 

Analysis of a Software Company's Business Network

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    Analysis of a Software Company's Business Network Analysis of a Software Company's Business Network Document Transcript

    • 1 Analysis of Software Company’s Business Network University of Oulu Department of Information Processing Science Sari Juntunen Master’s thesis Date 14.1.2003
    • 2 Abstract Mobile markets undergo continuous change. Worldwide, there are major hopes for 3 G technologies and a dash to develop more desirable software products for mobile markets to fulfil customer needs. This thesis explores the ICT field and tries to define the roles of different software companies in the market. My main focus is on companies that develop software products for mobile markets. Software companies are generally involved in complex business networks and the role of different players in such networks seems quite unclear. Questions arise. Are the companies really concentrating on their core business? What is the product or service value for the final customer? There are certain factors, which are common to the entire software business. It is possible to define the core areas of networked businesses and analyse the strengths and weaknesses of particular companies. For such an analysis, it is also necessary to further expose the business networks so as to understand a company’s position in them. The analysis in this study is presented in the form of a value net – a certain process map – where value-creating activities and their interconnections are shown explicitly. On the basis of the analysis, it then becomes possible to define innovative ways for re-thinking software business models and value-creating activities relevant to the target domain.
    • 3 Table of contents Abstract .............................................................................................................................2 Table of contents ..............................................................................................................3 List of symbols and abbreviations....................................................................................4 Foreword ..........................................................................................................................6 1. Introduction..................................................................................................................7 1.1 Background .........................................................................................................7 1.2 Research problem and approach .......................................................................10 2. Business from emerging mobile services...................................................................14 2.1 Trends in mobile services and products ............................................................14 2.2 Business models and strategies for mobile commerce......................................18 3. Network-based view to software business..................................................................20 3.1 Value creation ...................................................................................................20 3.2 Customer value creation process.......................................................................20 3.3 Network of organisations vs. network organisations ........................................21 3.4 Value-creating systems .....................................................................................21 3.5 Value net - a model to investigate VCSs ..........................................................22 3.6 Examples of value net usage .............................................................................26 3.7 Building strategic nets vs. value nets ................................................................30 3.8 VCSs and strategic nets – a basis for the framework of the case analysis........32 3.9 Software business models – more blocks for analysis framework ...................33 3.11 The analysis framework completed ................................................................36 4. Case study: business networks for emerging mobile services ..................................39 4.1 Overview of the empirical data .........................................................................39 4.2 Analysis of the case...........................................................................................42 4.4 Value net for the case company ........................................................................51 5. Evaluation of the results ........................................................................................55 5.1 Summary of the findings...................................................................................55 5.2 Development of the case company’s business network....................................56 5.3 Business development suggestions ...................................................................61 5.4 Customer centred business through networks...................................................62 6. Conclusions ................................................................................................................67 6. References ..................................................................................................................68
    • 4 List of symbols and abbreviations AIP Adaptive Internet protocol AOL American online www-service ASP Application service providing B-to-B client Business-to-Business client B-to-C client Business-to-Consumer client CD-ROM Compact disc read only memory CTO Chief technology officer EPOC Operating system for mobile devices GSM Global system for mobile communication ICQ I seek you ICT Information and communication technology’ IM Instant mail Ipv6 Internet protocol version 6 IP Internet protocol ISP Internet service provider IT Information technology MMS Multimedia messaging service MNO Mobile network operator OEM Original equipment manufacturer PC Personal computer P2P Peer-to-peer PSTN Public switched telephone network R&D Research and development SIP Session initiation protocol SMS Short message service SWOT Strengths, weaknesses, opportunities and threats UMTS Universal mobile telecommunication system USA United States of America WAP Wireless application protocol – a set of protocols developed to deliver data services to mobile phones VAR Value added re-seller WASP Wireless application service providing
    • 5 VCS Value creating system WLAN Wireless local area network VO Virtual operator 3 G technology Third generation mobile technology
    • 6 Foreword “The future belongs to those who believe in the beauty of the dream.” (Eleanor Roosevelt) This thesis is the first step towards further studies and a deeper understanding of the software business. My earlier understanding of business in general has been put to positive use in this thesis. However, there are certain factors, particular to the software business, which can only be understood by exploring the business area itself. The impact of guidance and support is enormous for a student trying to piece together the theoretical and empirical data to finally achieve the goal - the solution to a research problem. Most of all I want to thank Professor Veikko Seppänen, who has guided and supported me throughout the process. His vision and inspirational advice has not only been positive for this study, but also to envisage further studies. I am also grateful to other Vertigo project researchers and company partners – especially Henry Nordström and Nina Helander who have helped me in the early stages. I also want to thank my opponent, Juhani Warsta, whose comments have enriched this thesis. During the research process, my understanding of the software business and its different phenomena has increased. Both my way of thinking, and writing, in a scientific way have developed. On a personal level the most rewarding development has been the enthusiasm I have discovered to further explore the software business, its business networks and customers more in depth.
    • 7 1. Introduction 1.1 Background This thesis sets out to explore mobile software products which are network-based and value-driven and belong to specific business networks. First this area is described on quite a general level, and later narrows to focus in on a certain software company. A single software company may have different roles in the networks with different partners. In the networked world of organisations, it is worth exploring the processes involved also in the networks, and not only the network actors. 1.1.1 Information and communication cluster One of the most developed industrial clusters in Finland is the information and communication technology (ICT) cluster (Hernesniemi et al. 2001, p. 163). In Finland the focus of the cluster has been on telecommunications (Baldauf 2001, p. 5). Characteristics of the traditional telecommunication cluster have changed during the past few years; many actors have entered new business areas and the cluster portrait has thereby become quite blurred – due in part to rapid technological changes, too (Baldauf 2001, p. 5). Lovejoy summarises this by stating that we are at the beginning of “turbulent times” in the ICT field (Lovejoy 2001, p. 45). The simplified value chain of the telecommunications sector (Figure 1) indicates that the position of industries is indeed changing. Still, there are certain key industries, such as ICT equipment (terminals, hardware and software), Operators (fixed and mobile networks, data networks etc.) and Service and Content Providers (basic voice and data services, value added services). Producers of supporting services may take care of parts and components manufacturing or contract R&D or manufacturing. Related industries like entertainment and health care give a totally new meaning to network operation, focusing on certain vertical markets. Associated services like different distribution channels are needed for service and content offering (Baldauf 2001, p. 6).
    • 8 Producers of Related Associated services Business to supporting industries business services clients ICT equipment Operators Service and manufacturers content providers Business to consumer clients Figure 1. A simplified value chain of the telecommunications sector. If we take a look at certain types of ICT equipment – smart mobile phones, for instance – it seems that the trend is to have as many features in equipment as possible. One can listen to music, surf the Internet, send e-mails, keep up with important contacts and calendar entries, and play games using just one single device. The smart phone is more than just a phone, it is an information device with different software and services for various needs. The same trend seems to be true in the development of digital television and other emerging digital channels. 1.1.2 Technological evolution towards 3 G Technologies change rapidly, and this requires fast but thoughtful reactions from software producers, as well as from many other actors, too. For example the WAP technology was expected to be widely used in new mobile services (Baldauf 2001, p. 39) as a standard protocol for wireless devices. However, this technology has not yet produced any great leap towards more advanced mobile services. In general, the so-called 3 G technology should offer quite novel opportunities, especially for the rich multimedia services (Figure 2). Some of the most important keywords for 3 G technologies are Bluetooth, Ipv6, Symbian, Palm OS and Windows CE (Baldauf 2001, p. 41).
    • 9 Figure 2.Terminal concepts for 3G, (http://nds1.nokia.com/press/photo/hot/jpeg/f4_idle.jpg). IP is an important convergence technology between other ICT technologies (http://www.nokia.com/networks/systems_and_solutions/solution_main/1,23797,40,00. html). The development of Ipv6 leads to the next generation Internet protocol (http://www.nikkeibp.asiabiztech.com/wcs/leaf?CID=onair/asabt/fw/135346). The protocol is needed for billions of wireless devices, it is hoped to be more efficient and secure. The Bluetooth technology is becoming a global standard for shortest range wireless connectivity (Baldauf 2001, p. 41). Moreover, WLAN (Wireless local area networks) is expected to compete with 3 G solutions (http://wlana.com/pdf/wlana_industry.pdf). Some of the most important operating systems for 3 G mobile devices will be Symbian (formerly EPOC), Palm (Palm OS) and Microsoft (Windows CE) (Karesto 2001, p. 42). 3 G development will be a common challenge for equipment, network and other wireless product developers as well as for software and content producers. In summary, the key trends in ICT are convergence, globalisation, networking, customer orientation and integration of software and services (Hernesniemi et al. 2001, p. 109 – 111). Convergence (Figure 3) can be seen as a process of melting together different components of ICT (Lovejoy, 2001 p. 45).
    • 10 Communications -Industry -PSTN -Cable -Satellite -Broadcasting -Mobile Networks Multimedia Online Multimedia Network Equipment Interactive Multimedia Information/ Content Industry - Data bases Computer -Information services Industry - Audio Visuals -Computers - Films ”Off-line - Music - Software Multimedia” - Interfaces - Photos Figure 3. Convergence of ICT (Lovejoy 2001, p. 45). Competition in global markets is a great challenge, too. Successful companies have the necessary know-how and are able to manage business networks and produce new products and services for global markets (Hernesniemi et al. 2001, p. 109). 1.2 Research problem and approach This study is part of the Vertigo project financed by Tekes and carried out by the University of Oulu, the Helsinki School of Economics and Business Administration and several software companies (www.vertigo.oulu.fi). The project aims at investigating and developing new business networks, service concepts and product strategies and transferring them into use in software companies. This study aims to give answers to the following questions: • What is the state of mobile services, in general? • How can a company’s position in business networks be evaluated and how can the position be developed? • What are the alternatives to the distribution of software products in the mobile services markets?
    • 11 The simple model shown in Figure 4 shows a software company with certain products and business strategies, distribution channels and markets and the threat of competitors. The competitors may use the same or other distribution channels as the focal software company. The company is struggling for the same markets as the competitors, and has to cross a barrier before it is able to reach the markets. Barrier Competitor The software Final company with Distribution Channels customers certain products and business strategies Competitor Figure 4. A simple software business environment model. The model shown in Figure 4 is, however, an overly simplified view of a software company’s business environment. It doesn’t include any direct interaction with customers, partners or competitors, in particular. The company simply produces software, which is delivered through distribution channels to customers. Competitors are lurking to get some information about the markets. However, even this simple model raises the most important issue, which is the importance of the final customer, the customer’s needs and demand for value from certain software products or services and the ability to reach the customer through some channel.
    • 12 This study focuses on this idea, and approaches and elaborates it in four phases: namely analysis, planning, development and evaluation (Figure 5) 4. Evaluation 1. Analysis Implementation and Analysing software evaluation of the companies’ network development plan positions and their development objectives 3. Development 2. Planning Preparation of a Creation of a network- development plan for a based and value-driven case company business strategy Figure 5. Structure of the study. 1) It is essential first to analyse software companies’ positions in the business networks in general, and to develop some alternative business strategies for the future. Then, a framework for analysing the business is needed, to map out a company’s internal factors and relationships with the external business environment. The main focus of the framework is its relationship with other companies, partners, customers and competitors. 2) Based on this analysis it is possible to develop product and network strategies for strategically important business areas. The intention is to find ways of networking and mapping out what the profits of strategic networks are. This also includes suggestions for accomplishing and keeping up any company’s network position with regard to a certain product strategy. 3) Based on the results of the analysis, a strategic development plan is presented for a single sample company. The object is to find and apply existing practices and theories for product development, marketing and sales, finance, service and implementation in a networked business context, to support the company’s business.
    • 13 4) Implementation and evaluation of the development plan was not possible in the case company. This study has been carried out both as a theoretical analysis and a case study. At first, it was necessary to analyse the literature dealing with the software business from different perspectives. To understand the position of a company in the markets, it was important to become familiar especially with theories concerning the software business, and its business networks. To be aware of new trends and technologies in ICT, supplementary empirical material was also gathered, mainly from web sites and different professional reports. The Internet was also very useful for gathering information about competitors with value- added mobile products. A few key persons (technological and marketing experts) in the case company were then interviewed, although no extensive empirical gathering of case data was possible as part of this study. This study aims at producing a model for analysing a software company’s position in business networks, in relation to a few key development areas. It also describes the position of the case company in its business networks and gives suggestions for the company’s future.
    • 14 2. Business from emerging mobile services 2.1 Trends in mobile services and products According to Baldauf et al. (2001) globalisation and networking open up totally new possibilities especially for smaller technology companies, when the old strategies do not work any more. A focus on customers, concentration on core competencies, understanding value creation and progress in the business environment, networking with others and speed and capability to finance fast growth are some raw materials for building a successful strategy in the ICT business. In particular, one key customer relationship can be a springboard not only to new customers, but also even to new businesses (Baldauf et al., 2001). Baldauf (2001) introduces a simple value chain of the telecommunications sector. However, it is more appropriate to build a network of different actors in the form of a whole mobile data value web (Figure 7), which means being and becoming a part of a complex network of businesses (Autio et al. 2001, p. 23). Figure 6. Mobile Data Value Web (Autio et al. (2001), p. 23).
    • 15 Autio et al. (2001) separates services (mobile network operators alias MNOs, virtual operators alias VOs and Portals), technology (network equipment vendors, enabling technology companies and handset manufacturers) and applications (Application providers, Content providers, Application Developers) from each other (Autio et al. 2001, p. 24). There have been many studies on the possible growth of mobile services. Autio et al. (2001, p. 19) claim that the number of mobile data end-users will grow rapidly between 2002 – 2005 and that, after 2002 the amount of SMS end-users will drop because of the new technologies. Järvelä et al. (2000, p.18) state that the value of electronic B-to-C commerce will grow by approximately 167 billion dollars until the year 2005. However, there is no guarantee of consumers’ behaviour and there is still a great need for development of 3 G technologies. 2.1.1 Mobile services If we take a narrower look at the ICT cluster, focusing on mobile data and services, it is possible to categorise different services to understand better the needs for software development. Mobile services can be understood as the interaction between service providers and mobile customers delivered through wireless networks. Usually services function on a certain platform software with built-in features (e.g. billing, statistics, etc.), software products and media content. One way to classify the services is to consider information, communication, transaction and entertainment services separately, so that they are targeted to the two main segments: consumers and businesses (Figure 7).
    • 16 Figure 7. Mobile Services Overview (Autio et al. 2001, p. 80). 2.1.2 Software production for mobile services Software applications may be essential to some businesses, but are often designed by outside vendors with limited ability to adapt to special or changing needs (Messerschmitt and Szyperski 2000, p. 5). Software production is also facing other challenges, opportunities and threats. Software increasingly affects other industries and knowledge has become an important capital for them as well (Hoch et al. 1999, p. 13). Software businesses are mostly categorised into software products, customised software and embedded software development businesses (Nukari and Forsell 1999, p. 13). Messerschmitt and Szyperski (2000, p. 8) state that the primary purpose of software is to serve the needs of its users and for the user, the only direct impact of technology is the need to acquire and operate a complementary infrastructure to support the execution of the applications, which includes hardware and software for processing, storage and communication.
    • 17 Product platforms are useful as basic elements for software product families. Platform products can be described as products, which are built on a common technical core system. (Sääksjärvi 1998, p. 8). A series of software products can be developed on a single platform. The platform with modular software can be installed for a customer and further on more pieces of software components can be offered to the customer through the same platform. “Product platforms are used by a software company or its partners to create individual software solutions for certain uses or market segments. Compared with products and parameterised products, product platforms are aimed at creating longer-term effectiveness and flexibility by sacrificing some short-term efficiency. Narrow product platform can be seen as market specific, as opposed to versatile platforms that are enhanced to fit new segments” (Meyer and Lehnerd 1997, p. 38). Software producers for mobile services usually operate in certain vertical markets (Nukari and Forsell 1999, p. 25). On the other hand, they also produce software for the infrastructure of the telecommunication industry, including solutions needed by mobile operators, service providers and portal owners. The demands for more advanced services will grow, because customers have become familiar with the recent technologies and services. They already have the ability to ask for more sophisticated and customised devices and services.
    • 18 2.2 Business models and strategies for mobile commerce After a brief overview of mobile technologies and services given above, I would now like to present and evaluate further information about the business models and strategies of emerging mobile businesses in more detail. 2.2.1 Mobile commerce value chain Paavilainen (2001, p.60) states that the five main components in a mobile commerce value chain are the network, m-commerce technology, the content, the interface and the customer. These components include sub-components as shown in Table 1. Table 1. The main and sub-components in the mobile commerce value chain (Paavilainen, p60). The main components The sub-components Network Back-end systems Web and WAP servers Internet Mobile network Mobile commerce technology Software development Payment solutions Security solutions Software platforms Content Content provision Content aggregation Interface Portals Device Customer ? The main components include the network, mobile commerce technology, the content, the interface and the customer. The sub-components are related to the main components and support the mobile commerce on a more practical level. The elements of a mobile
    • 19 commerce value chain are helpful to show and understand a total image of the mobile commerce field. 2.2.2 Mobile business models Mobile business models are born during the evolution of the mobile communications industry as part of the ICT field. Autio et al. (2001) claim that the most remarkable new business models will be the virtual operator (VO), the multi-access portal and wireless application service provider (Autio et al. 2001, p. 35). Virtual operators have access to the networks of mobile network operators. Services are offered to customers via these networks. Several types of virtual operators will possibly emerge, but the most common types are expected to be mobile service providers. They operate as intermediaries and provide a fixed line and mobile access to customers (Autio et al. 2001, p. 29.) The idea of application service provision (ASP) can be compared to time-sharing with some additional features in it. ASPs are usually third party companies hosting, managing and deploying several applications and services for the customer. WASP is the wireless form of ASP. It simply means extending the applications and services over mobile networks. Autio et al. (2001) claim that the key reasons why businesses choose to outsource their applications and services to WASPs include time-to-market, risk reduction, lower costs and increased focus (Autio et al. 2001, p. 37). The development and evolution of mobile commerce is in its early stages. Estimations and experiments have been presented. To succeed in the battlefield of mobile commerce, the creation of a desirable brand and direct customer relationships are essential when conquering the end-user segment (Paavilainen 2001, p. 60).
    • 20 3. Network-based view to software business Clearly, companies are involved in different business networks in different roles. A company may be a member of several networks. Business success may depend on the positions within this overall network structure. It is important to notice that all the network activities are targeted to customers – directly or indirectly. The network perspective therefore increases the activities and processes needed for profitable business through customer satisfaction. In particular, networked-based collaboration might open new global business opportunities also for smaller companies. When creating a network-based view of the software business, the first step is to extend the perspective from an individual company to customer value-creating systems (VCS) as a whole (Parolini 1999, p. 41), and separate the concepts of networks of organisations and network organisations. In the following sections, the meaning of the terms value, value creation, customer value creation, network of organisations vs. network organisations, value-creating systems and value net are explained, to provide an introduction to a network-based view of the software business. 3.1 Value creation The term value can be used for at least three different purposes, the customer value, value in a company’s organisation and value creation (Storbacka and Lehtinen 1997, p. 14). Customer value means the value of customers for a certain company. Value in a company’s organisation can be understood as the basic values accepted in that organisation. These values are decided individually by each organisation. Value creation means the customer’s processes to achieve a certain goal by purchasing and using a certain product. 3.2 Customer value creation process Anyone could think of him/herself as a consumer of some product or service. What is the value we give to the possibility of owning and using a mobile phone, for example? It
    • 21 largely depends on our individual needs and expectations for the product and the associated services. Customers have certain needs, when purchasing any product or service. Also when purchasing a software product, customers have a need to achieve a certain goal, when using the product (Storbacka and Lehtinen 1997, p. 14). 3.3 Network of organisations vs. network organisations Networks of organisations are formed by groups of actors, which are interconnected through direct or indirect exchange relationships. If we take a closer look at network organisations, there might be one hub-company managing it by coordinating resources and value activities. (Möller and Rajala, 2002). This differs from the more process-oriented view of the activities and relationships in a certain network, called the value net. Möller and Rajala (2002) suggest that there is one hub-company, which manages network organisations. In VCS, the orientation is more process and customer driven. 3.4 Value-creating systems According to Parolini (1999) a value-creating system can be defined as a set of activities creating value for customers for consumer activities (Parolini 1999, p. 62). When a customer buys, for example a CD-ROM encyclopaedia, there have been many parties involved in the process that creates value forthe customer through the service. Parolini (1999) distinguishes the absolute and differential net value of a product as follows: the absolute net value for a specific purchaser can be defined as the algebraic sum of the value attributed to the absolute benefits connected to the product and costs sustained by the customer in using the product itself; the differential net value for a specific customer is the difference between the absolute net value that the customer can receive from a given VCS and the absolute net value of a similar product offered by a
    • 22 competing system or even the absolute value of a substitute product (Parolini 1999, p. 116). 3.5 Value net - a model to investigate VCSs After a value-creating system has been defined as a set of activities creating value for customers’ consumer activities, it is possible to go further in value matters and design a model to understand and investigate VCSs. The value net (Figure 8) aspires to describe VCSs as clearly as possible (Parolini 1999, p. 68 - 69). Parolini (1999) lists the elements of the value in the use of personal computers: • The overall VCS in which the individual economic players operate (the perspective is extended to include all the activities and supply chains involved); • The make/buy/connect choices that the players in the system have made or can make; • The activities which ensure the greatest profitability; • The activities that add insufficient value in relation to the resources required, or which even subtract value for the system; • System bottlenecks; • The possibility of reconfiguring the role of final customers and their involvement in value-creating activities; • The possibilities for innovation in the system.
    • 23 Management of data banks Component production Telecommunication Hardware services assembly Retailing PC use Software production Assistance Figure 8. The value net perspective (Parolini 1999, p. 71). Figure 8 attempts to present the set of individual processes or activities relevant for PC use. The single box represents the activity – there can be many players involved in the entire process to produce value for the final customer e.g. the software production. These activities are targeted to offer value to a customer. All these elements are relevant and needed. These activities offer the opportunity for a customer to concentrate on his or her own core area – in the case of Figure 8 the use of PC. The final customer’s perspective and the activities in value-creating systems are the main characteristics in value net thinking (Parolini 1999, p. 69). On the basis of value net analysis it is possible to define a strategic “map” with nodes (value creation or consumption activities) and relationships (ties between the activities; also flows of material, information etc.) between them (Parolini 1999, p. 81), as is illustrated in Figure 9. The dotted line arrows represent supporting relationships and the solid ones show the relevant processes for consumerism in the figure.
    • 24 Consumption Figure 9. The value net with nodes and relationships (Parolini 1999, p. 81). When analysing VCSs, the starting point is to look at the activities that make it up – not the different actors participating in the network. This helps to avoid the risk of over emphasising the meaning of organisational boundaries, and gives space to network innovations. Parolini (1999, p. 81) also claims that the VCS has the further advantage of making it easier to compare the choices made by the different competitors in a given market, and thus clarify whether the differences are due to different VCS configurations in positioning within substantially similar VCSs. The traditional way of concentrating on organisations as actors is to analyse the situation in the value chain as consisting of individual companies. However, according to Parolini (1999, p. 88) it is more meaningful to concentrate on the value created for the final customer and the economic structure of activities behind the organisational façade. This also leads to a different classification of activities on the basis of overcoming the limitations based on individual companies (Parolini 1999, p. 88). Parolini (1999) divides the activities of VCSs into three broad groups: realisation (i.e. the activities aimed at the physical creation of a product and its transfer in time and
    • 25 space); support (the activities aimed at maintaining or improving the effectiveness and efficiency of other activities which do not intervene in the physical production of individual products or services); external transactions management (the activities aimed at managing and controlling the transactions arising in the presence of exchanges between distinct economic players) (Parolini 1999, p. 90). These activities are described in Figure 10. External transaction management Purchases Sales Drawing up of sale/purchase contracts New product development New process development Activities I.S. management and development Support Database management and development • To the system Human resource management • To individual companies Procurement policies • To individual activities Marketing Infrastructural activities Realisation Operations Quality control Transportation (transfer in space) Warehousing (transfer in time) Pre-sale customer services Post-sale assistance and services Figure 10. Value net activities classified (Parolini 1999, p. 89). The symbols (Figure 11) and style of presentation of the value net activities suit any VCS. Figure 11. The representation of different types of value net activities (Parolini 1999, p. 105).
    • 26 3.6 Examples of value net usage Parolini (1999) uses the electronic publishing industry as an example to illustrate a confluence of skills and technologies rising from diverse industrial sectors as traditional publishing, software production, telecommunications, information networks and entertainment (Parolini 1999, p. 161). Figure 12 illustrates the main activities and flows that can be found in value-creating systems for the electronic publishing industry. Figure 12. Electronic publishing industry’s value-creating systems (Parolini 1999, p. 162). Various support activities (content production, technical support, CD production and distribution) are needed from various industries to produce and distribute the product for the customer (information consumption). Technical support and CD-ROM production can be seen as an interface between the “artistic work” and distribution.
    • 27 When the nodes and boundaries have been specified, the next step would be the structural analysis of the nodes. This helps to analyse the attractiveness of individual nodes by providing suggestions for making, buying or connecting choices (Parolini 1999, p. 192). Market segmentation based on VCS configurations is also possible. For example, different ways of using publishing products can be made visible. Figure 13 illustrates the segmentation of the publishing market. Figure 13. Segmentation of the publishing market (Parolini 1999, p. 196). Accessing information is critical for the customer and it affects distribution (Parolini 1999, p. 197). Accessibility has been used in Figure 13 to reveal customer needs and to create a basis for market segmentation. Parolini (1999) underlines the fact that the method of access depends not only on the product, but also on the type of reader (Parolini 1999, p. 198). The traditional VCS fails when there is a need for updating activities or if customers needs to access the information are sequential partial. Figure 14 offers a solution to the problem mentioned concerning segmentation. This innovative VCS includes a new form of access to information, which was not considered in Figure 12 (Parolini 1999, p. 200).
    • 28 Figure 14. Towards innovative value nets in electronic publishing (Parolini 1999, p. 199). When comparing the traditional electronic publishing industry with online bookshops (Figure 15), it is obvious that customers are given more possibilities of increasing their value-creating activities over the Web. The key activity is Web-site management, with the demand for developing online services. Customer requests are satisfied directly, which means investing in warehousing. The ability to manage complex logistic flows is also critical. Marketing and sales include advertising and publicity. These innovative activities have already changed the way of doing business in publishing. (Parolini 1999, p. 203 – 204).
    • 29 Figure 15. The value net of online bookshops (Parolini 1999, p. 202). Parolini (1999) presents rules and suggestions that may help in the formulation of strategies for changing and innovating VCSs. They can be summarised as follows: • compare the analysed system with emerging alternatives; • borrow strategies and solutions from similar systems; • identify system bottlenecks; • identify inefficient nodes; • identify new ways of involving final customers; • identify compromises in VCS configuration that can be overcome; • identify the consequences of technological trends; • redefine the boundaries of system players; • control support activities; • exploit the possibilities of extension. When comparing the existing VCS with emerging alternatives it is important not only to analyse the most successful new alternatives, but also to study the lack of success considering the less fortunate. Borrowing strategies and solutions from similar VCSs can be described as adapted “best practices” from other suitable systems. The
    • 30 limitations in productivity and capacity concerning the entire value-creating system are system bottlenecks. Identification of inefficient activity nodes often reveals system bottlenecks and means an imbalance between the value and the costs sustained. Inefficient activity nodes can be identified on the basis of value net analysis. Identifying new ways of involving final customers is related to both personalised and mass- produced goods, and makes it possible to assess the supply of service for example the availability of a dedicated staff. In the case of self-service costs can be reduced. Technological trends may change the structural attractiveness of nodes and lead to the construction of new value-creating systems with the emergence of new economic roles and players. Despite the customer’s prime position, the customer perspective is left incomplete in the value net model. The important business processes for consumers have been made visible, but the alternatives for customers to create value and be involved in value creating activities have not been presented in depth in the value net model. 3.7 Building strategic nets vs. value nets A company may start to build a new value net from scratch with its former partners. It is also possible to enter some international value net e.g. by partnering with some international hub-company (Möller et al. 2001). The elements of strategic net construction consist of contextual net analysis, construction of a network strategy and active networking. In the first phase, it is essential to identify the central actors and analyse the main trends in network development. In the second phase – after network analysis has been carried out – it is possible to reconsider the roles, positions, relationships and goals of actors. One of the most important issues for an individual company is to recognise the business opportunities in the net and consider the abilities and resources demanded by the net. Commitment and trust are common qualities for all actors.. In the third phase, a construction team is established to define the common goals and revenue logic for the net (Möller et al. 2001).
    • 31 Möller et al. (2001, p. 10) discuss three different types of strategic networks: 1. vertical value nets (supplier, distributor and customer networks, vertical total systems); 2. horizontal value nets (in forms of competition, marketing channels, resource development and forums for networking alliances), and 3. multi-dimensional value nets (hollow organisations, multi-dimensional business networks, new value-system networks). Vertical value nets are targeted for functional effectiveness of the total system. Usually the target is to develop the value functions. The most demanding effort is to link the developing, manufacturing, logistics and business management systems as a strategic network, which is guided by the hub-company. Horizontal networks are usually built to seek more powerful marketing or to develop new technologies. Competitor alliances between flight companies are common examples. Horizontal networking is used as well to resource and access alliances with competitors/institutions e.g. to develop new technologies or standards. Multi-dimensional strategic networks operate in the area of specified or emerging value networks. Strategic multi-dimensional networks can even be used to form new business models, which demand investments from different players and extend their know-how to each other (Möller et al. 2001, p. 10 – 11). Figure 16 illustrates the classification of strategic networks.
    • 32 Figure 16. Classification of strategic networks (Möller et al. 2001, p. 11). These elements lead again to the value net perspective, which was described in section 3.5. In Figure 16 the value net has been opened up and the different alternatives have been represented. 3.8 VCSs and strategic nets – a basis for the framework of the case analysis Models to build and analyse network structures are introduced in the following sections. To build a network and customer-driven analysis framework for software business requires the use of network-based tools. Parolini (1999) represents a customer value driven model – which defends its position for recent and up-coming software business models. Interest in peer-to-peer computing and open source software production are examples of the more consumer-oriented ways of doing business, and let the consumers be actively involved in value creation related to software business processes. Some software producers have already opened parts of their software code to the public via Internet.
    • 33 3.9 Software business models – more blocks for analysis framework In addition to bare network thinking, some other conceptual elements are needed to build the analysis framework. In particular, elements for modelling software business logic are needed. Such concepts can be constructed on the basis of Rajala et al. (2001), for example, where the software business is modelled as shown in Figure 16: • Product development model, • Revenue logic, • Marketing and sales model, and • Servicing and implementation. Competing Environment Customers Marketing & Sales Model Business Product Strategy Offering Revenue Servicing & Logic Implementation Product development model Financing Environment & Resource Environment Stakeholders’ Utilities Figure 16. Elements of the software business model (Rajala et al. 2001).
    • 34 1. The product development model The product development model describes what is the core software product and how the development of the core product is organised. The product development model describes how the value creation process is structured from the software company’s viewpoint (Rajala et al. 2001, p. 40). 2. The revenue logic Raymond (1999) has pointed out the need to recognise that computer programs, like all other tools or capital goods, have two distinct kinds of economic value. They have a use value and a sales value: 1. The use value of a program is its economic value as a tool, and 2. The sales value of a program is its value as a sellable commodity. Raymond also points out that people have a strong tendency to assume that software has the value characteristics of a typical manufactured product. However, he demonstrates that this assumption is false, because a code written for sale is only the tip of the programming iceberg and a great deal of the value is created when software is integrated into its environment and maintained (Rajala et al. 2001, p. 43). The use value is well suited tothe customer value creation view discussed above. The revenue logic describes how a software company finances its operations, in other words, how and from whom the revenue is generated. Rajala et al. (2001) suggest that the revenue model describes how a software company captures the sales value of the product or service that it is offering directly or indirectly to customers through some channel. There are different revenue model options. One of the most common models is licensing, where the customer pays for the right to use the software.
    • 35 3. The marketing and sales model The marketing and sales model describes how the marketing and distribution are organized and who the sellers and marketers are of the software service or product. The marketing model consists of the overall marketing efforts involved in the company’s business strategy. (Rajala et al. 2001, p. 46.) Sales may be direct or indirect. 4. Servicing and implementation model The servicing and implementation model explains how the core software product is made available to the end users as a working solution (Rajala et al. 2001, p. 8). According to Rajala et al. (2001), the servicing model represents all the installation and deployment activities required to achieve a working solution based on the software product. Software implementation almost always requires servicing, whether it is a question of self-service or on-site delivery (Rajala et al. 2001, p. 48). Every software company has a certain business strategy with product development, revenue logic, marketing and sales, and service and implementation. Both financial and human resources are needed to carry out the product offering for the customers. There are also competitors competing for their share of the customers. A software company with its various operations and related organizations can be seen as a business ecosystem. A business ecosystem can be any organisation with economical activity, which is supported by other interacting organizations and individuals. Customers, suppliers, lead producers, competitors, and other stakeholders are members of the ecosystem. A common practice for these members is that they all follow the directions set by one or more central companies. The leader is valued, because it enables others to get nearer to their visions and achieve an economically profitable supportive role in the community. (Moore 1996, p. 26.) According to Parolini (1999, p. 43) the company profile that seems to be best suited to respond successfully to current environmental changes includes the following elements:
    • 36 • A focus on core competencies; • the ability to participate simultaneously in more than one value-creating system; • the ability to ensure organic connections with the other economic players participating in the value-creating systems to which it belongs (interconnected companies); • a high degree of internal integration (integrated company) and a streamlined organization (lean companies), and • internal and external flexibility. Obviously this leads to a view of the software business on a more complex level – not only from an individual company’s perspective with its business model including, for example, product development, revenue logic, marketing and sales or service and implementation as in Rajala et al. (2001). These elements are included in the process, which aims for a profitable business by networked organisations (VCS) in complex business ecosystems. 3.11 The analysis framework completed When the elements of value nets and the software business model are put together, a combined model for analysing networked software businesses can be presented. As it is necessary to study the offered value for customers, the emphasis is on the final customer. Customers have expectations and the software product should fulfil those needs and value expectations. The barrier must be passed before a product or service offering reaches the customers. It demands great efforts in the marketing phase. The product should be completed by then. A certain value net (including customer) has been involved in the production, marketing, delivery, service, etc. As a result of combining these elements, the frameworks illustrated in Figure 18 a and 18 b can be presented. VCS with business processes The final customer • a person • a company Final B • a non-profit customer’s Software organisation expectations a product or • other for the value r service and offering involvement r in the value i creating e r
    • 37 Figure 18 a. Elements for a customer-oriented business analysis framework. Customer’s involvement in VCS Figure 18b. Customer-oriented software business analysis framework. Figure 18a defines the elements required for a customer oriented software business model. The VCS has a software product or service offering activities to customers. Customers have certain expectations for the value. However, the customers’ involvement in the value creating processes is passive. The barrier exists between the VCSs and the customers. In Figure 18b the customer has become a member of the VCS. The customer is involved in certain processes. More open business models would allow end-customers to interact in the service development processes, too – something that Parolini (1999) considers but does not make explicit. The meaning of VCS was introduced in section 3.4. VCS has its software business processes representing product development, revenue, marketing and sales, service and implementation, as introduced in Section 3.9. Between the software product or service offering and the final customer, there is a barrier to be overcome. At that point, the customer is not involved in the processes of the VCS yet. The customer’s involvement in value creating (and to better fulfil the expectations) is possible by inviting the customer to act as a part of the VCS. This will lead to a more customer-centred business. A simple software business environment model was introduced in Figure 4. The degree of complexity increases in Figure 18b when the emphasis is not on a relation
    • 38 between a single company and the markets, but on the value creating system including the relevant processes and activities for customer value creation.
    • 39 4. Case study: business networks for emerging mobile services Trends in wireless services and products were introduced in section 2.1 to get an overview of the present situation in the mobile markets. In the next section, a case is introduced and analysed using the framework explained in Section 3.10. The case company is developing platform software and applications for mobile services targeted to customers via third parties. 4.1 Overview of the empirical data For this case study, three key persons in the case company were interviewed. They are responsible for the marketing, sales, and product development. The Internet was used as an information source for the case company, too. Some general data concerning mobile business was gathered from public reports and Internet. The empirical data gives an overview of the present situation and describes the structure of the network of organisations in which the case company is involved. 4.1.1 Value-added services for mobile markets The case company develops software to serve, produce and manage value-added messaging services to mobile phones for international operators and other businesses. Value-added services can be understood as “nice to have” features for mobile devices. The services are visible to the final customer in the form of e.g. multimedia messages and personal calendars. The product family consists of independent applications developed to function with a certain product platform. The services are targeted at final customers to customise their mobile phones. 4.1.2 Owner relationships The main owner of the case company is a Finnish tele-operator, which has not traditionally operated in the mobile business area. The company has, however, built a new image to change from a traditional operator towards an ICT company. All business areas are connected to telecommunication and information technology – i.e. to IT solutions, end-users, service operators, network operators and local cable television
    • 40 operators. The parent company’s strategy has been to buy smaller IT companies to strengthen and to develop its business opportunities. The parent company is partly owned by another telecommunication operator with an approximate 51 % share. The company has a service provider, a mobile business, a network business, an international business and some other business areas. The case company is a part of a business group, which has been divided into software products, IT and new media integration services and software production services. 4.1.3 Product development The company first concentrated on customised software development projects carried out based on customer requirements (CTO, 13.6.2001). The development of their own products began in co-operation with a Finnish mobile operator. On the basis of the first product for adding value to mobile phones, – a whole product family was developed. Nowadays the company’s product line is based on a certain product family for mobile operators, service providers and portal owners to offer value-added services to their customers. The idea is that all the products developed are compatible with another. (Director, production development, 13.6.2001.) Between 1998 and 1999 the company moved to use Java servlet technology. In 2000, a decision to invest in product business was made. There has been a move towards newer Java technology, but compatible still with the older technology. Java AIP, for example, is more scalable than the servlet technology used earlier. (CTO, 13.6.2001.) The product family contains end user applications and business management tools. The applications are built on a special product platform, which is easy to customise to client environments. According to the interviewee, there is a need for tailoring in almost every customer case. (Director, production development, 13.6.2001.) Tailoring in this context means the change of some individual technical characteristics during the installation process, which is done by the case company’s own personnel.
    • 41 The product platform offers basic tools to develop and manage value-added services in an open software environment. Additional administration and service management tools are offered for configuration, pricing, reporting, etc. Messaging, voicemail and calendar are examples of the kind of services which can be provided e.g. via Internet. The final customers (subscribers, internet users) can access the services to discuss anonymously, to send MMS messages, to maintain their own calendar, and so on. 4.1.4 Customers Finnish and international customers consist mainly of mobile operators, Internet service providers (ISP), application service providers (ASP) and portal owners. These customers offer the services to their final customers who want to personalise their mobile devices. The case company does not strictly serve consumers as end-customers, but certainly the services are meant for individual persons or for groups of them. (Director of Production Development, 13.6.2001.) 4.1.5 Revenue Product development is partly financed by the parent company. Most revenue comes from international product sales based on license payments dependent on the amount of users. The growth of product sales was 45 % from 2000 to 2001. 4.1.6 Marketing, sales and distribution Marketing and sales are taken care of by strong, international retailers; some smaller customers are looked after by the company itself. (the Director of Production Development, 13.6.2001.) The company has international distribution and retailing contracts with two big international distributors. 4.1.7 Internationalisation The company operates in global markets. The goal is to become one of the leading European companies developing and supplying software and product platforms for mobile Internet. The case company aims to achieve this target by buying other
    • 42 companies involved in mobile software production, which would enable them to provide a wider range of products to customers. 4.1.8 Competitors One strong Finnish competitor is operating in the same field with a major portion of Finnish valued-added markets. The competitor also operates globally. In the global market, the most challenging competitors come from the USA and are heavily focused on this vertical sector. (the Director of Production Development, 13.6.2001.) To summarise, Table 2 shows an overview of the case company. Table 2. Overview of the case company. Business area Activities Products End user applications and business management tools Owner relationship Owned by Finnish tele-operators Customers Mobile operators, service providers and portal owners Revenue License sales, product development financed by parent company Marketing, sales and distribution Mainly by retailers, also some direct activities and by original equipment manufacturers (OEM) Partnerships Partnership-network with international telecommunication companies and equipment- and network manufacturers Internationalisation Operation in global markets Competitors One strong domestic competitor, globally the most challenging competitors from the USA Table 2 shows an overview of the case company and leads to its analysis, which is reported below in section 4.2. 4.2 Analysis of the case Based on what was said in Chapter 3, it is essential to study the case company’s present and future situation and its position in relation to business networks including its customers, competitors, distribution channels and other partners. This includes an analysis of the company’s product strategy and offering.
    • 43 4.2.1 Product development Rajala et al. (2001) have only the core product as an element in their analysis framework, they have no additional products or services. However, it would be necessary also to analyse the idea of the whole product delivered to the customer, which includes product-related additional products and services. The product that is distributed to final customers includes all the additional features even those manufactured by the different networked partners. If one part of the whole product is missing or fails – the final customer’s expectations remain unfulfilled, which may affect every company involved in the network negatively. Moore (Moore 1995, p. 179) suggests providing the whole product to please the customers so they do not shop around and keep the competition still open. The framework presented in Figure 18b leads us to consider customers’ involvement in the processes of VCS in relation to product development activities. Mobile messaging has high potential, which would suit the case company’s application development line, e.g. instant or multimedia messaging. To date, the first multimedia messaging services have been launched – now only the devices are lacking. Autio et al. (2001) have compiled a list of the different consumer applications (Figure 19), which should be viable, based on the key success factors of mobile services. They point out four important factors, which will provide significant added value for the end- customers: location-based, personalised, immediate, and available. The mobile messaging services are assumed to have high potential when immediacy and mobility or personalisation are important market success factors. Mobile potential is considered to be significant.
    • 44 Figure 19. An assessment of consumer services (Autio et al. 2001, p. 83). The advanced mobile messaging solutions (3G) offered, should be the winning applications according to Autio et al. (2001). The case company has placed emphasis on mobile communication services. As earlier mentioned, the product family is based on a certain product platform based on the Java programming language. In this particular case, product development is carried out with Java specialists. It seems that concentration on Java technology is a benefit, because new mobile devices support Java. For example, Nokia 9210 Communicator was among the first Java technology-supported mobile phones, when it was launched in 2001. From 2002 a Java expansion is expected among mobile solutions development (http://www.nokia.fi/puhelimet/teknologiat/java.html). More mobile devices with Java support are coming onto markets. The use of Java also makes it possible to involve more customers in the product development processes. There are plenty of young Java specialists who are able and willing to give their best shots to product development.
    • 45 The product platform is the company’s own solution based on Java. It also has features of parameterised products (Rajala et al. 2001, p. 42), because there is a need for some tailoring in every customer case. Because of the short product life cycles, speed in product development is important. Completed product development is bound to the customers’ situation, and there should be continued co-operation and follow-up between the case company and its customers thereafter. 4.2.2 Revenue logic The company is a part of an international corporation. It is listed in the Helsinki Stock Exchange. The latest interim report shows a negative result in the software product business. The total turnover of the corporation is presented in Table 3. Table 3. Net sales distribution Sales 2002 2001 Year (in million euros) Q1 Q4 Q3 Q2 Q1 2001 Software projects 3,20 2,98 2,55 3,79 3,46 12,76 Software products 1,14 0,47 0,81 0,17 0,61 2,05 Service operator 7,30 7,48 6,94 7,32 7,25 28,99 Network operator 7,04 10,26 7,38 6,66 6,99 31,29 Cable television 0,91 0,75 0,70 0,68 0,45 2,57 Parent company 0,59 0,51 0,51 0,48 0,59 2,09 Intra-group sales -6,24 -5,47 -5,43 -5,70 -5,76 -22,37 Consolidated net sales 13,94 16,98 13,44 13,39 13,58 57,40 The total result is presented in Table 4 for different business areas. Table 4. Revenue distribution. Revenue distribution 2002 2001 Year (in million euros) Q1 Q4 Q3 Q2 Q1 2001 Software projects -0,63 0,05 -0,34 0,41 0,40 0,52 Software products -1,25 -0,63 -0,21 -0,71 -0,60 -2,14 Service operator 0,36 0,80 0,60 0,34 0,19 1,93 Network operator 1,80 2,52 1,89 1,33 5,93 11,67 Cable television 0,19 0,09 0,12 0,11 -0,03 0,29 Mother company -0,80 -0,77 -0,50 -0,92 -0,24 -2,43 Depreciation of goodwill -0,46 0,29 -0,25 -0,49 -0,14 -0,59 Group, total -0,79 2,34 1,32 0,07 5,51 9,25
    • 46 According to the interim report, the consolidated equity ratio is 66.6 % and the financial position has remained stable. As Table 3 and 4 show, the most profitable areas of business of the case company are the network operations and the service operations with cable television that has kept on the positive side. On the other hand, software projects and products are not managing so well. The overall situation in the markets has been difficult for project and product business. Telecom customer investments have been considerably lower than estimated. Product development and internationalisation efforts have required considerable investment in product business. The company’s intention has been to develop a “standardised”, easy-to-copy product, which is cheap to reproduce and which could be distributed easily by CD-ROM or by data networks to customers. This has not been the case, but there is nearly always a need for some product tailoring, this in turn takes resources from the product development – which should be the core business area. The parent company has supported product development. The money flow has been quite significant. This has guaranteed product development efforts especially in the early stages, when there was not much revenue from product sales. Mobile communication has a number of revenue opportunities, which crop up at different times with unstable characteristics. SMS messaging will become less important and new service areas like multimedia messaging, mobile e-mail, instant messaging, emergency, healthcare and advertising take its place in order to gain new revenue flows for software companies and their interest groups, such as investors (Figure 20).
    • 47 Figure 20. Mobile communication revenues in Europe split by revenue sources (Autio et al. 2001, p. 87). The case company’s intention to concentrate on communication services could open up new revenue possibilities e.g. in multimedia messaging services. The turnover in the case company’s group level is expected to increase by 15 % yearly. The recent years have been non-profitable, because of the difficult situation in the global markets. 4.2.3 Marketing and sales The customer-oriented software business analysis framework was presented in Figure 18b. The analysis framework showed that the customers are participating in value creating processes and the barrier to this participation has vanished in the case of more open business models. Marketing and sales would become more efficient by letting the customers become active partners in VCS. McHugh (1999) has classified the channel partners for software business. His classification includes: • Agents • Dealers • Distributors • Republishers • Resellers • Retail Outlets (McHugh 1999, p. 93 – 96)
    • 48 This list could be completed with integrators (Rajala et al. 2001, p. 48) and original equipment manufacturers (OEM). Direct sales are purely the interaction between the software company and its customers. Interviews pointed out, that there were some mistakes in efforts to secure the first customers. The competitor managed better in direct sales. This also affected later efforts, because the competitor launched a whole product package that customers accepted. The co-operation between operators and original equipment manufacturers has been quite successful. They share in common product development activities and give valuable references to the company when planning the next steps to conquer the international markets. 4.2.4 Servicing and implementation Some channel partners are focused on servicing co-operation -one group related to this case is a group of system integrators (Rajala et al. 2001, p. 49). According to the interviews, the case company handled the platform implementation of the customer’s systems. These were carried out as unique customer projects. 4.2.5 The Customer Perspective As mentioned earlier, the main customers of the case company are operators and other businesses. There is no direct interaction with the end-customers. As presented in Figure 18, the final customer is in a crucial position with regard to value expectations. The barrier is between the product/value offering and product/value expectation. The value-added services should fulfil the needs for certain purposes. There is already a huge number of SMS users, and SMS based services have conquered the customers’ mobile communication needs. SMS is at the moment on top from an economical point of view, according to Autio et al. (2001). The growth of SMS will decrease after 2002, but it will keep its position in customers’ everyday life if no service can replace it. Up to
    • 49 now, consumers have accepted SMS, because it is easy and cheap to use and short messages can be sent at any time or in any place. The latest 3G services have proved unstable to date. The first devices with multimedia enabling technology have been launched and some early enthusiastic customers will try them. The price of the devices is quite high at the moment, and there have been difficulties with 3G networks, so there are some barriers before the value-added 3 G mobile services can enter the markets. After the service launch there is the question of whether customers are willing to buy and use them. What is the value received and how expensive is that value? The use of the Internet has stabilised its position. For example, e-mail is a common way to send short messages and younger customers are used to using different chat services. E-mail will remain the most used messaging system on the Internet (Autio et al. 2001, p. 88). Alternative ways to deliver new services are wireline or wireless Internet. The Internet instant messaging services are popular as well. There were approximately 40 million AOL Messenger users and 84 million ICQ (comes from the words “I seek you”, a web-based community) users globally (Autio et al. 2001, p. 88). Customers do not pay any great attention to the device (pc, laptop, mobile phone, 3G device etc.) when the service matters. Messaging services (SMS, instant messaging) are widely used by teenagers. They should also be available easily to them. Certain web portals are popular among youngsters and almost everyone has a mobile phone. To launch the new services and the possibility for customers to get involved in the design processes, to try some services or devices free or design some service independently could offer a new, more customer oriented perspective for software companies production. Examples of peer-to-peer computing (e.g. Linux, Napster) have pointed out the customer’s willingness to get involved in the service design and delivery processes. These opportunities could also be economically profitable for a software company and they could give rise to new communities of customers and help the marketing efforts. 4.2.6 Competitor analysis
    • 50 What went wrong in the early stage in marketing and sales? It is crucial that there was another player in the market, which was heavily investing in marketing and sales efforts. It could win the race of niche markets in the early stages and also offer more value to some customers, because they changed the supplier. When competing in vertical markets, where the customer segment is not very broad, the marketing operations, branding and customer lock-in are crucial. In the next sections, the main areas according to the competitor’s product development, namely revenue logic, marketing and sales with service and implementation are explained and compared with those of the case company. The value chain describes the core area in the competitor’s business and its connections with partners and customers (Figure 21). Figure 21. The competitor’s value chain. However, the value chain illustrated in Figure 21 is very static and it does not show whether there is any interaction between the competitor and its customers. 4.2.6.1 Product development The competitor’s product has similarities to the case company’s offering. However, the competitor is more oriented towards mobile entertainment, though there is a platform solution, which enables the use of entertainment directed applications. Compared to the case company, the difference results in a more versatile selection and use of applications, e.g. games and downloading java files are possible with the competitor’s solutions. Product development is concentrated purely on mobile entertainment software. Constant innovations are needed. The product development life cycle with innovations has actively followed the needs of the markets and the first MMS have already been launched and are available in the newest end-user devices.
    • 51 4.2.6.2 Revenue logic The competitor is the market leader in the field of mobile entertainment solutions in Finland. The number of mobile entertainment users is estimated to grow rapidly according to the competitor (Figure 22) and this possibly means new revenue flow, because of the speed in product development and innovation processes presented in Section 4.2.5.1. Figure 22. Growth of mobile entertainment usage 2001 – 2005. 4.2.6.3 Marketing and sales The competitor is marketing itself as a market-leader. It has successfully managed to create a desirable brand. The strategies, visions, partners, customers etc. have been made visible on the web, which increases reliability. Sales operations are mostly carried out by value added resellers. The major customers are international mobile service providers in the mass-markets. The competitor has developed programs, alliances and partnerships with other parties. Alliances have been established for example with device manufacturers. 4.4 Value net for the case company The idea of value net was introduced in Section 3.5. The value net for the case company can be structured from the existing information. As Parolini (1999) introduced the VCS and the value net, besides analysing the business model and single functions in it, now it is appropriate to build a strategic map to illustrate the case company’s key value net nodes and flows.
    • 52 Because the starting point is the final customer, the set of individual processes or activities relevant for mobile services use are illustrated in Figure 23 Network/operator service Internet services Service immediacy Content production Content personalisation Mobile services use Service usability Software production Retailing Mobile device assembly Assistance Component production Figure 23. Mobile services use from the user’s perspective. Individual mobile services users are simply interested in buying a suitable mobile device from a retailer. The mobile device usually includes software with sets of specific features. The company creates the basic contents of the service, but the individual user has an opportunity to personalise these contents. The Network/operator is in a critical position to provide access and immediacy to the service.
    • 53 When these critical processes and activities have been analysed, it is obvious that an individual companies’ business processes are highly relevant for the individual customer. By analysing these critical processes and activities it is possible to build a value net for the case company and suggest innovative and more customer –oriented ways to get revenue flows. The case company co-operates with many other companies, too. All of them have different roles and positions in the network. From the customer’s point of view there is no individual company representative – only processes (and a brand which combines these processes under the whole product which is accessible e.g. from the internet). To analyse the overall VCS, the making/buying/connecting choices, the most/least profitable activities, system bottlenecks, the possibility of reconstructing the role of final customers and the possibility for innovations, the value net for case company is illustrated in Figure 24. Software production Technical support Consumer interface partner Analysis Tailoring Direct sales Online service (Internet, WAP etc. Installation OEM Design Mobile Consultancy services Value-added consumers Programming resellers Operator / Testing Integration: network software services product Design Content production Implementing Figure 24. The key nodes and flows of the value net for the case company illustrated.
    • 54 On the basis of the case company’s value net, it is possible to define the main processes and activities important for the customer. Software production and technical support are the supporting activities and the more visible part of the processes are the channels and consumer interface partners. The software vendor is quite distant from the end-user. The value net analysis forms a basis for business development suggestions in Sections 5.3 and 5.4.
    • 55 5. Evaluation of the results On the basis of the case analysis, the summary of the findings and development proposals for the case company’s business network are presented in the following sections. 5.1 Summary of the findings The product family has succeeded in the later? markets. Product development has to constantly analyse the core areas for 3 G devices and the customer needs for new value added services. The aim to concentrate on mobile messaging services seems to be the right approach in product development. Different mobile messaging applications are generally regarded as the “killer-applications” in the 3 G environment. The possibilities are widening and no company has conquered the majority of the 3 G value added services markets up to now. Revenue logic is based on license sales. There could also be alternative possibilities for generating revenue flows. In the early stages, the main owners have supported product development, but the negative results in software production should be balanced in the short term and generate revenues from product sales and additional services. The investment made in buying other software companies has affected negatively the overall financial result. Marketing and sales have encountered problems in the early stages. There were not enough efforts to secure the first customers, who could bring the revenue needed for product development. The big equipment manufacturers and operators have a positive effect as references in marketing. They are just not enough marketing and sales network partners for smaller software companies. Direct sales must be the approach in global markets, when the product development life cycle is short and technology is developing towards 3 G. The distribution is mainly handled by value-added re-sellers, original equipment manufacturers, operators and portal owners. The use of different distribution channels
    • 56 should always answer the question “How could we reach our customer best and how can our customer reach us?” A deeper analysis of the effectiveness of different distribution channels could be one way to find the answers to that question. Service and implementation has been part of the software company’s business portfolio. However, system integrators are companies offer only services without their own software products (Rajala et al. 2001, p. 50), which is not the situation in this case. The most critical issue for marketing, sales and distribution in software production seems to be to succeed in marketing and sales, contracting, management of distribution channels and value-added services for certain product. Moreover, the push to internationalise is too low for many Finnish companies and only a few products can survive (Nukari and Forsell 1999, p. 40). 5.2 Development of the case company’s business network The company’s position in the network may vary depending on the offering. The case company acts as a software vendor by offering software products for a customer segment. It also acts as a system integrator by installing and testing the software product. And finally, it acts as a service provider by providing the after-sales service. 5.2.1 Product vendor, system integrator or service provider To make the roles of product vendor, system integrator and service provider visible in the value creating process, the model represented by Messerschmitt and Szyperski (2000) is presented in Figure 20.
    • 57 End-user organisation Application Application software supplier service provider (ASP) System integrator Infrastructure Infrastructure service provider software supplier (ISP) Figure 20. Natural businesses partitioning of the value chain (Messerschmitt and Szyperski 2000, p. 29). The application software supplier typically bundles the analysis and development functions together with the customer to define the requirements. The infrastructure software supplier must be similarly aware of the requirements of the various applications. The system integrator specialises in providing and acquiring software from both application and infrastructure with the aim of testing and installing and checking compatibility. An application service provider (ASP) operates the application and the infrastructure service provider (ISP) purchases and operates the hardware and software infrastructure (computers, networks etc.) (Messerschmidt and Szyperski 2000, p. 28). 5.2.1 Product vendor It seems that application developers are divided into those who provide platform middleware and those who provide pure applications (Autio et al. 2001, p. 26). The case company could decide to concentrate on developing applications (e.g. Springtoys or Spyglass) or choose the other alternative of producing middleware software for emerging mobile services needs.
    • 58 In either case there is a need for a network structure involving application developers (Figure 25) Figure 25. Application developers (Autio et al. 2001, p. 26). As Figure 25 shows, the application developer is a part of the network. The case company has to find the best network structure to support value delivery for its customers and to get customers involved in the value creating processes. 3 G software products are in their early stages and investment in product development is massive. The case company has already developed platform software, which could also serve the needs of 3 G products – the idea of platform software’s re-use is considerably more efficient with time and investment. If the platform is developed to support application development in longer term, the concentration on application development is better secured. The networks with other mobile platform software producers could be more versatile by offering the possibility to integrate the case company’s applications directly into the product by offering multiple network players. 5.2.2 System Integrators The company could also act as a system integrator by developing a specific product platform middleware.
    • 59 The service consists of integrating networks and operating units with applications used as an entity and then rebuilding the processes. Figure 26 illustrates an example of an end-to-end solution (http://www.wcl.com/techno1.html) containing the system integration service. Figure 26. Example of an end-to-end solution for mobile commerce (http://www.wcl.com/techno1.html). At the moment the case company also handles the system integration aspect by taking human capital and money from the software development side. The company, which owns the case company, also owns another business unit that concentrates on customer tailored software projects. System integrating could be handled by this partner and let employees get on with developing new software products. In the early stages of a product’s life cycle, a lot of custom service is needed, but towards the end the need for custom service decreases. However, system integrating is constantly needed, because some products are always at the beginning of their product life cycle.
    • 60 Collaboration with a suitable system integrator network partner is suggested in this case – the move from the software business towards a service-based business might be too much. 5.2.3 Service providers Software implementation requires servicing. The way to offer servicing may vary from self-service to IT consulting (Rajala et al. 2000, p. 48). Installation and deployment activities are needed to finish the software product as a working solution for a customer. Service providers are needed to complete the whole product with the application developers and system integrators. Service providers should not have any fixations on any particular whole product opportunity – instead the relationship should be transient (Moore 1995, p. 171). The service should match the customer needs and offer additional pieces to finish the value proposal offered to the customer. This leads us again to consider the framework presented in Figure 18b, where the customers’ involvement in VCS has been realised. Some application developers also try to handle the application service provision aspect, but most depend on application providers with the WASP distribution model (Autio et al. 2001, p. 27). The case company has tried to act as a service provider, but again resources are taken from the software development. The leap towards a whole product is taken by completing the software product offering with service providers. In this case several partnering alternatives in service provision could be considered. Because outsourcing service provision is common in bigger IT companies, the case company could also seek a compatible partner from the outsourcing companies. In some situations, the outsourcing companies are the customers, because they decide the IT purchases for the end-user company. Self-service is one alternative to the impact on services for end-users. The case company could offer tools and knowledge to help the customers maintain and repair the software e.g. in the form of web-services.
    • 61 5.3 Business development suggestions The mobile communication services segment provides growth and revenue opportunities for service providers, application developers and systems integrators. SMS messaging has already proved itself to be a “killer-application”. Multimedia messaging, mobile e-mail, instant messaging, advertising, emergency and healthcare services may offer a new drive for the mobile world. Messaging software developers, device manufacturers, middleware developers, ASPs, systems integrators and Internet portals have all noticed the expected growth in the mobile messaging area. Messaging software developers are creating the possibility for mobile access to their e-mail platforms. Middleware developers provide interfaces to legacy messaging systems and portals are implementing unified communication platforms and services to offer a solution for better customer need management. The convergence of different communication channels causes the need to manage the user’s distributed messaging services. Technologies such as SIP (Session Initiation Protocol) are needed to manage the communication flow around a unified address. (Autio et al. 2001, p. 89.) Figure 30 illustrates the expected convergence within the Internet and mobile messaging services affected by the introduction of packet-based mobile IP networks. Messaging Convergence INTERNET MOBILE IM SMS E-MAIL Media-rich Ubiquitous Desktop device Phone device Distinct culture Distinct culture Own address space Own address space
    • 62 Figure 30. Messaging convergence (Autio et al. 2001, p. 89). The acute problem regarding the launch of advanced multimedia messaging services is the bandwidth and the development of devices. Furthermore, the problems concerning messaging between devices by different manufacturers might be crucial. The case company is heading towards mobile messaging application developing, which seems to have a good financial prognosis according to Autio et al. (2001). The development of new products requires investments and skilful employees. The concentration on more pure application development could save costs and allow the employees concentrate on the development of core product messaging applications. For the new software products the appropriate partners in the fields of product development, marketing and sales and service and implementation should be assessed and the involvement of end-users in the business processes should also be considered. 5.4 Customer centred business through networks Profitable business is possible with more user-centred business strategies and models. It is obvious that the issue of users/customers is increasingly more important, as the competition rises in the software business. In previous chapters, personalisation has been mentioned frequently, and Parolini (1999) has stressed the importance of the involvement of customers. Customers are willing and able to personalise the goods they are buying. They also are willing to become involved in the product development processes. Feedback is given and suggestions for improvements have to be taken seriously. Some of the customers are also willing to take personal responsibility for some value-creating activities (Parolini 1999, p. 218). One company alone has less competence to satisfy the user needs than several networked companies with their special core business areas combined. Networked
    • 63 companies have better possibilities to offer a complete product with additional features to the customer. Customers may in any case join the pieces of the puzzle to personalise the product or service offered by certain networked business group. My suggestion is to move the thinking towards a more customer centred business model. The customer’s position has also been emphasised by Parolini (1999). Autio et al. (2001) stress that the importance of understanding customer’s situation and utilities cannot be overemphasised. This leads us to reconsider new software business models as peer-to-peer and open source, which allow for more customer interaction in the business processes. The ideologies of open source and peer-to-peer programming (P2P) - including software production - may encounter new opportunities (and threats). Some of the most famous applications have been programmed and distributed by a community of users, not by just one company. Open source is software in which a source code is distributed for a given product, usually free of charge (Autio et al. 2001, p. 61 – 62). P2P programming has developed from the communities of programming Internet users. The story of Napster is quite famous. “Napster proved to technologists and entrepreneurs alike that you can get people to collaborate and share information freely, and you can have them build an entire network capable of growing quickly and easily through the users’ piecemeal additions of resources”, states Fattah (2002, p. 11). From the company perspective, the most relevant risks are connected to revenue logic. With regard to open source, eight possible business models have been identified by Hecker (2000): - Support sellers, in which the revenue comes from selling books, manuals, CDs and support services and training; - Loss-leader, in which the software is available for free in the hope that it will stimulate a demand for a related offering the company has;
    • 64 - Widget-frosting, in which the company’s main business is hardware. By making the needed drivers open the vendor can ensure that they are debugged and kept up to date. This is similar to the loss-leader model; - Accessorising, which can be used by companies selling mainly physical goods like books. These companies do not participate in the development but offer the software incorporated into their goods that inform and educate users about the open source products; - Service enabler, in which the software enables the use of online services, which are an actual source of revenue. This is again, similar to the loss-leader model; - Sell it, Free it, which means changing the licensing of the software over time. First the software is released as a commercial product but then changed into open source as it becomes popular; - Brand licensing, in which a company makes the product itself open source, but retains an exclusive right to the brand name; - Software franchising, which is derived from support selling and brand licensing. Here a successful support seller sells other companies the right to use its brand in other geographical areas or vertical markets. The list above points out that there are several options for making money on open source software (Autio et al. 2001, p. 65). Looking at the different theories and cases, it is clearthat the aspect of customer is always mentioned and even emphasised, but in practice this was not very high priority from the software business point of view. Fortunately the software business models and theories could be complemented with marketing and networking theories. The case company’s business supports the idea of a new software business model and also more innovative ways to build the networks. The case company is quite distant from its customers at the moment according to Figure 24. More interaction between the case company and its customers - also in the business sense - could be attained by developing a virtual market place and community (e.g. Amazon) for customers and software developers and the various partners. Virtual community in this context means a special portal or mobile (3 G) service, where the
    • 65 network of companies offers software and service purchasing as self-service. This includes the possibility for the customer to influence the products or services and is part of the value creation process. The possibility for direct feedback is offered. The community supports interaction between the network and its customers and could lead to the birth of a smaller user and developer communities, which would be important sources of information for the networked companies. Personalisation of the products or services is highly relevant. Part of the software could be offered freely on the Internet for example based on the loss leader or service enabler business models (Hecker, 2000). The community may bring together a range of software products and related services under a mutual brand. One company in the network may act as a network-builder and integrate different products and services by using existing distribution channels – very often on the Internet. The leap towards a multi-dimensional network strategy has been taken according to Möller et al. (2001, p. 12). For example, many Finnish software product or content companies are small on the international scale, and the move towards e-commerce could offer them more revenue possibilities by combining products under a mutual brand. This would also bring them closer to the customer. The efforts in marketing, sales and customer services in one single company are also quite reduced when compared to the possibilities for several networked companies. An idea for one way of moving towards a more customer-oriented business network for the case company is presented in Figure 31. It shows how the traditional company – distribution – customer-approach could be turned around and the desired value could be produced by a certain value creating system via mobile or internet services. Markets Company a Mobile Virtual market services place and consumers community for the case Company x company customers by networked companies Company b companies from a to c Company c belong to the x:s value net
    • 66 Figure 31. A virtual market place and community of customers through networked companies. Figure 31 is a very simple way to illustrate the common interface for customers and networked companies producing mobile products and services. Company x is operating as a network builder. The simple model attempts to show how the different mobile services and products producers are able to interact with the customer and combine their offering in a common virtual market place and community under one brand. Figure 31 is very simple and abstract in this study, but for further studies the investigation of a proper company/consumer network would develop this model on a practical level with activities and processes, and the model illustrated in Figure 31 would become more complex. On the question of further studies, the meaning of mobile services consumerism is rather interesting. Certain theories have emphasised the meaning of the customer and consumerism, but still it remains a grey, undefined actor. It could be very interesting to open up the concept and investigate the customers’ needs and willingness to acquire mobile services. Furthermore, as third and fourth generation mobile services are emerging and suitable business models and network structures form, it would be interesting to study this field more closely to understand the variety of software business models, the formation of certain business networks – including the customer aspect.
    • 67 6. Conclusions This study presented an overview of one case software company studied between 2001 - 2002. The cited literature and theories gave a solid framework for the case study. Unfortunately, it was difficult to gather relevant case data and material because of the case company’s confidential business strategy. However, it was possible to analyse the different roles of the case company in business networks. The analysis revealed that, in relation to different customers, the company had the roles of product vendor, system integrator and service provider. The business focus seemed to be unclear, but the company wished to concentrate on the product vendor’s role. That could be achieved by networking in other business areas. It was not possible to develop a business plan for implementation and evaluation, and therefore the development model in this study remains very abstract. Parolini (1999) left the customer perspective incomplete in the value net model. The customer’s involvement in value creating activities was not presented. This gives a starting point for investigations targeted at the customers and the different alternatives for customers to create value. With a view to further studies, the cited theories – especially Parolini’s (1999) value net theory- together with this case analysis form a good basis for continuing the investigations into different types of nets and to explore the different areas in software business models in more depth.
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