© C. Fine & M. Pagani, 2007
Value Network Dynamics in 3G-4G Wireless Communications: a Systems Thinking approach
to Strategic Value Assessment
Charles H. FineMassachusetts Institute of Technology
Sloan School of [email protected]
Margherita PaganiBocconi University (Italy)
CFP - May 31, 2007
© C. Fine & M. Pagani, 2007
Objectives
Purpose of the study is to develop a dynamic model to capture the dynamic forces that influence the structure of the 3G wireless communications value network and analyze:
The multiple dynamic driving forces that influence the 3G wireless communications value network structureChange patterns in the supply chain structure The interdependence among the components of the value network structure
© C. Fine & M. Pagani, 2007
Customer dynamics
Business Innovation dynamics
Step 1 - Strategic Value Assessment Model Framework
Competitive dynamics
Netwok capacity
Price competition
Service innovation
The design and development of the industry supply chain embedded in a complex value network
Technology innovation dynamics
© C. Fine & M. Pagani, 2007
Encourages entry of serviceproviders
Reducesserviceprices
Partiallyreducescosts of access network
EncouragesTotal Service
take-up
Total expectedbenefit to a new
adopter
AdoptionMarket penetration
Value per userdue to network
effects
Improves serviceattractiveness
Encouragesterminal adoption
Componentstandards
Outsourcing
Increaseterminal volumes
Terminal modularity
Lowerterminal prices
Low chip costs
User’s perceivedvalue of adopting
Technologicalbenefits
Terminal scales
Perceived ease of usePerceived usefulnessPriceEnjoyment
Competitionbenefits
Global standard development
Cost of spectrum to carriers
Successful liberalization
Network benefits
Market Saturation
Willingness topay
Step 2 - The system thinking approachFor each key change drivers we formulate and test multiple loops represented in causal loop diagram
© C. Fine & M. Pagani, 2007
Step 3 - Inductive System Diagram
We build a simplified model of value chain dynamics applying the Inductive System Diagram methodology (Burchill and Fine, 1997) which combines aspects of Grounded Theory methods (Glaser and Strauss, 1967; Glaser, 1978; Strauss, 1987) and System Dynamics (Goodman, 1974; Randers, 1980)
© C. Fine & M. Pagani, 2007
Research Methodology: Stages of analysisSTAGE OBJECTIVE
Conceptualization Develop hypotheses
Formulation Discuss the emerging loops
Testing Discuss empirical evidence to supporteach loop through data gathering tests
Problem Articulation The Value network framework
Policy formulationSimplified model of value chain dynamicsapplying Inductive System Diagrammethodology
Evaluation 15 workshops attended by 190 participants in Europe
© C. Fine & M. Pagani, 2007
The working model
System thinking approach
Research overview
Strategic Value Assessment Model Framework
Customer dynamics
Competitive dynamics
Technology Innovation dynamics
Business Innovation dynamics
3G CommunicationValue Network
ScenariosScenario 5
Scenario4
Scenario 3
Scenario 2
Scenario 1
Scenarios
Simplified Model of Value Chain Dynamics
© C. Fine & M. Pagani, 2007
Research Methodology: Stages of analysis
Conceptualization
Formulation
Testing
STAGE OBJECTIVE
Develop hypotheses
Discuss the emerging loops
Discuss empirical evidence to supporteach loop through data gathering tests
Problem Articulation The Value network framework
Policy formulationSimplified model of value chain dynamicsapplying Inductive System Diagrammethodology
Evaluation 3G Communications value network scenarios
© C. Fine & M. Pagani, 2007
3-D Concurrent Engineering
PRODUCT PROCESS
VALUE CHAIN
PerformanceSpecifications
Time, Space, Availability
Technology, &Process Planning
We build on the “three-dimensional concurrent engineering”framework (Fine, 1998), adding value chain engineering to augment the traditional two-dimensional concurrent engineering of products and processes (Nevins & Whitney, 1989; Ulrich & Eppinger, 1994; Fleischer & Liker, 1997).
© C. Fine & M. Pagani, 2007
Voice and/or data
consumer
Voice and/or data
consumer
DeviceManufacturers
DeviceManufacturers
Portals and Access
Providers
Portals and Access
Providers
ApplicationDeveloper
ApplicationDeveloper
Content ProviderContent Provider
Wireless network operator
Wireless network operator
Mobile PhonesPDAsSmart PhonesSIM PadsControls LANs
NetworkNetwork
NetworkequipmentNetwork
equipment
Sw. gamesmessaging
Voice,browsing, WAP
Third parties contentThird parties content
Softwareapplication developer
Softwareapplication developer
Hardware application developer
Hardware application developer
Photo cameraMP3 player, DVDGame consoles
Non-CircuitComponent
Manufacturers
Non-CircuitComponent
Manufacturers
Circuit BoardComponent
Manufacturers
Circuit BoardComponent
Manufacturers
PSTN/Internet component manufacturers
PSTN/Internet component manufacturers
Cell switching component manufacturers
Cell switching component manufacturers
Base Station component manufacturers
Base Station component manufacturers
Content AggregatorContent
Aggregator
Wireless infrastructure
operator
Wireless infrastructure
operator
Wireless service provider
Wireless service provider
Device value chain
InfrastructureValue chain
ApplicationValue chain
ContentValue chain
Network value chain
Platform infrastructure service
Service provisioning Billing Support
User contentUser content
Wireless Value Network Structure
© C. Fine & M. Pagani, 2007
Research Methodology: Stages of analysis
Conceptualization
STAGE OBJECTIVE
Develop hypotheses
Discuss the emerging loops
Discuss empirical evidence to supporteach loop through data gathering tests
Problem Articulation The Value network framework
Policy formulationA simplified model of value chain dynamicsapplying Inductive System Diagrammethodology
Evaluation 3G Communications value network scenarios
Formulation
Testing
© C. Fine & M. Pagani, 2007
Customer dynamics
Competitive dynamics
Business Innovation dynamics
Technology innovation dynamics
Roadmap Components: Dynamic Analyses
What are the driving forces behind user adoption?
© C. Fine & M. Pagani, 2007
Data collection and analysis
2 preliminary pilot study in Italy and US24 focus groups in 6 markets (Brazil, Germany, Italy,
Singapore, UK, US) Quantitative marketing research on a sample of 1.000
Italian mobile users (over 18). Sampling error (at 50%) of 3.1% (with a probability level of 95%)
© C. Fine & M. Pagani, 2007
Adoption model of multimedia mobile services
PerceivedPerceived EaseEaseof of UseUse (PEU)(PEU)
PerceivedPerceivedUsefulnessUsefulness (PU)(PU)
AttitudeAttitude towardtowardusingusing
Service offeringsDegree of mobilityCompatibility
BehavioralBehavioralIntentionIntention toto UseUse
FunInteractivity
Input deviceOutput deviceSoftware facilitiesBandwidth
Knowledge Perceivedinnovation
Enjoyment
PricePrice
© C. Fine & M. Pagani, 2007
The Market Saturation Loop
CustomerAdoption
UserPopulation
+
SocialExternalities
+
+
Propositions 1- 2 - Network externalities and market saturation loops
The Network Externalities LoopR1
NetworkExternalities
Loop
Willingness to payBy marginal adopter
+
B1
+
-Market
SaturationLoop
Total expectedBenefit to
New adopters
+
Value/User dueTo network effects
+
© C. Fine & M. Pagani, 2007
Technology innovation dynamics
Customer dynamics
Competitive dynamics
Business Innovation dynamics
Roadmap Components: Dynamic Analyses
Netwok capacity
Price competition
Service innovation
© C. Fine & M. Pagani, 2007
Market attractiveness indicators: methodology
16 face-to-face interviews with the IT manager of 16 network providers in Europe in order to analyze expected changes in market attractiveness indicators based on the migration to IP-based services. Interviews were conducted applying the protocol
suggested by Vennix (1996) to elicit feedback loops in an interview.
© C. Fine & M. Pagani, 2007
Market attractiveness indicators
Competitor Entry
Barriers to exit
Customer power
Nature of Competition
Substitution Threats
Supplier Power
Low High
LowHigh
High Low
Price Non Price
High Low
LowHigh
More or lessattractive AttractiveUnattractive
© C. Fine & M. Pagani, 2007
NetworkUsage
+
New Entrant& Incumbent
Innovation in Services
& Applications
+
+
Service &Application
Profits
+
Customer Adoption
Service &ApplicationRevenues
+
+NetworkCapacity
+ + PriceCompetition +
NetworkRevenuePer user
-
Service &ApplicationInvestment
& InnovationLoop
R2
+
PriceCompetition
LoopB2
NetworkRevenue
+
Network &Technology& InnovationInvestment
+
Networkinvestment
Loop
R3
Propositions 3, 4, 5 - Price competition, innovation and investment loops
© C. Fine & M. Pagani, 2007
Customer dynamics
Competitive dynamics
Business Innovation dynamics
Technology innovation dynamics
Roadmap Components: Dynamic Analyses
© C. Fine & M. Pagani, 2007
Customer Adoption
TerminalVolumes
++ Component
Standardization& Outsourcing
+Terminal
Prices
TerminalCosts
-
-- R4 Terminal
Scale Economies
Loop
Proposition 6 - Terminal scales economies loop
© C. Fine & M. Pagani, 2007
Customer dynamics
Competitive dynamics
Business Innovation dynamics
Technology innovation dynamics
Roadmap Components: Dynamic Analyses
© C. Fine & M. Pagani, 2007
Customer Adoption
ContentConsumption
+
ContentProfit
Opportunities
++
R5For-profit Content
GenerationLoopPiracy
Innovations
+
-
B3Piracy
InnovationLoop
R6Free-ContentGeneration
Loop
+
ContentProvided +
Proposition 7 – The content generation and piracyinnovation loops
© C. Fine & M. Pagani, 2007
Research Methodology: Stages of analysis
Conceptualization
Formulation
Testing
STAGE OBJECTIVE
Develop hypotheses
Discuss the emerging loops
Discuss empirical evidence to supporteach loop through data gathering tests
Problem Articulation The Value network framework
Policy formulationA simplified model of value chaindynamics applying InductiveSystem Diagram methodology
Evaluation 3G Communications value network scenarios
© C. Fine & M. Pagani, 2007
-
ContentConsumption
+
ContentProfit
Opportunities
ContentProvided
+
++
R5For-profit Content
GenerationLoopPiracy
Innovations
+
-
B3
PiracyInnovation
Loop
R6Free-ContentGeneration
Loop
+
+
TerminalVolumes
TerminalPrices
+ -
-+ Component
Standardization& Outsourcing
TerminalCosts
-R4
TerminalScale
EconomiesLoop
Customer Adoption
New Entrant& IncumbentInnovation in Services
& Applications
Network &Technology& InnovationInvestment
NetworkRevenuePer user
NetworkUsage
Service &Application
Profits
+
+
+
+
+
+
+
Service &ApplicationInvestment
& InnovationLoop
Service &ApplicationRevenues
+
NetworkCapacity
+ + PriceCompetition +
-
PriceCompetition
LoopB2
R2
NetworkRevenue
+
+
Networkinvestment
Loop
R3
+
+User
Population
+Value/User due
To network effects
Willingness to payBy marginal adopter
+
Market Saturation
Loop
B1
R1Network
ExternalitiesLoop +
+Total expected
Benefit toNew adopters
SocialExternalities
Inductive System Diagram
© C. Fine & M. Pagani, 2007
Research Methodology: Stages of analysis
Conceptualization
Formulation
Testing
STAGE OBJECTIVE
Develop hypotheses
Discuss the emerging loops
Discuss empirical evidence to supporteach loop through data gathering tests
Problem Articulation The Value network framework
Policy formulationA simplified model of value chaindynamics applying Inductive System Diagram methodology
Evaluation 3G Communications value network scenarios
© C. Fine & M. Pagani, 2007
3G CommunicationValue Network
ScenariosCycles of entry &
bankruptcy
Stableoligopoly
Free for all
Appearance of a new dominant
force
Piracydevelopment
Future scenarios
Based on 15 workshops attended by 190 participants in Europe
© C. Fine & M. Pagani, 2007
3G CommunicationValue Network
ScenariosCycles of entry &
bankruptcy
Stableoligopoly
Free for all
Appearance of a new dominant
force
Piracydevelopment
Future scenarios
© C. Fine & M. Pagani, 2007
Entry of new service providers encouraged by the successful liberalization and new profits opportunity Some business models stable (e.g., eBay), some unstable (e.g.,
service provider/content providers, dot.coms, etc.) as a result of high entry and establishment costs and intense competition. The combination of competition in infrastructure and service
provision and the creation of global markets for 3G infrastructure and terminals may prove to be a challenging environment for sustainable business models, with benefits for consumers.
Scenario 1 – Cycles of entry and bankruptcy
If the "price competition loop" is strong with significant entry and price cutting for basic network capacity and/or for basic services and applications
© C. Fine & M. Pagani, 2007
3G CommunicationValue Network
ScenariosCycles of entry &
bankruptcy
Stableoligopoly
Free for all
Appearance of a new dominant
force
Piracydevelopment
Future scenarios
© C. Fine & M. Pagani, 2007
Incumbents can discourages market entry by new service providers. Incumbents may sustain relatively high service and terminal prices. A breakdown in collaboration on telecoms and software standards
worldwide could lead to a small number of global alliances each developing their own de facto standards for multimedia delivery, limiting opportunities for economies of scale. Service interfaces might be too complex for consumers and little
account might be taken of their personal tastes and preferences.If governments auction third generation licenses, that may increase
the cost of access and limit competition.
Scenario 2 – Stable oligopoly
If the “Network Investment Loop" is strong and dominated by incumbents
© C. Fine & M. Pagani, 2007
3G CommunicationValue Network
ScenariosCycles of entry &
bankruptcy
Stableoligopoly
Free for all
Appearance of a new dominant
force
Piracydevelopment
Future scenarios
© C. Fine & M. Pagani, 2007
Information Society is foreseen to have reached the masses. Governments might allow much more unlicensed spectrum; Successful liberalization would encourage market entry by service
providers and the development of global standards helps to reduce service and terminal prices (handset companies powerful). Service attractiveness is improved and intense competition in
service provision draws users and creative entrants. The combination of competition in infrastructure and service
provision and the creation of global markets for third generation infrastructure and terminals, push prices steadily down and allows free services.
Scenario 3 – Free for all
If the “Service and application investment and innovation Loop" “Content generation loop” and “Free content generation loop” are strong
© C. Fine & M. Pagani, 2007
3G CommunicationValue Network
ScenariosCycles of entry &
bankruptcy
Stableoligopoly
Free for all
Appearance of a new dominant
force
Piracydevelopment
Future scenarios
© C. Fine & M. Pagani, 2007
Increased barriers to entry while global standards help reduce service and terminal prices. High-capacity storage media allows fast cheap access to vast
volumes of information, and lowers the cost of providing information services. A stable regulatory environment encourages highly competitive
service provision market.Innovative and diverse Internet services appear (i.e. traditional
broadcast services are integrated with on-demand TV, video and interactive entertainment). Development of services that are simple to use and understand. Terminals are relatively cheap, attractive, easy to use and highly portable.
Scenario 4 – Appearance of a new dominant force
Appearance of an innovator entrant becoming a dominant force
© C. Fine & M. Pagani, 2007
3G CommunicationValue Network
ScenariosCycles of entry &
bankruptcy
Stableoligopoly
Free for all
Appearance of a new dominant
force
Piracydevelopment
Future scenarios
© C. Fine & M. Pagani, 2007
Slowing growth in profits for content providers. If the free content loop is strong however and the free content
attracts many new adopters, network providers might prosper providing service for the customers, while for-profit content providers wither. Legal battles might abound, benefiting the lawyers.
Scenario 5 – Piracy development
If the “Piracy Innovation Loop” is strong