Value Network Dynamics in 3G-4G Wireless Communications: a Systems Thinking approach to Strategic Value Assessment

Transcription

1 Value Network Dynamics in 3G-4G Wireless Communications: a Systems Thinking approach to Strategic Value Assessment Charles H. Fine Massachusetts Institute of Technology Sloan School of Management charley@mit.edu Margherita Pagani Bocconi University (Italy) margherita.pagani@unibocconi.it CFP - May 31, 2007

2 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 structure Change patterns in the supply chain structure The interdependence among the components of the value network structure

3 Step 1 - Strategic Value Assessment Model Framework The design and development of the industry supply chain embedded in a complex value network Customer Competitive Netwok capacity Price competition Service innovation Technology innovation Business Innovation

4 Step 2 - The system thinking approach For each key change drivers we formulate and test multiple loops represented in causal loop diagram Willingness to pay Market Saturation Market penetration Network benefits Adoption User s perceived value of adopting Perceived ease of use Perceived usefulness Price Enjoyment Value per user due to network effects Improves service attractiveness Successful liberalization Total expected benefit to a new adopter Encourages entry of service providers Reduces service prices Competition benefits Partially reduces costs of access network carriers Cost of spectrum to Encourages Total Service take-up Low chip costs Encourages terminal adoption Lower terminal prices Terminal modularity Global standard development Terminal scales Technological benefits Component standards Increase terminal volumes Outsourci ng

5 Step 3 - Inductive System Diagram We build a simplified model of value chain 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)

6 Research Methodology: Stages of analysis STAGE Problem Articulation OBJECTIVE The Value network framework Conceptualization Develop hypotheses Formulation Discuss the emerging loops Testing Policy formulation Evaluation Discuss empirical evidence to support each loop through data gathering tests Simplified model of value chain applying Inductive System Diagram methodology 15 workshops attended by 190 participants in Europe

7 The Research working overview model Strategic Value Assessment Model Framework Scenario 1 Scenario 2 Customer Competitive Technology Innovation Business Innovation Simplified Model of Value Chain Dynamics Scenario 5 3G Communication Value Network Scenarios Scenario 4 Scenarios Scenario 3 System thinking approach

8 Research Methodology: Stages of analysis STAGE Problem Articulation OBJECTIVE The Value network framework Conceptualization Develop hypotheses Formulation Discuss the emerging loops Testing Policy formulation Evaluation Discuss empirical evidence to support each loop through data gathering tests Simplified model of value chain applying Inductive System Diagram methodology 3G Communications value network scenarios

9 3-D Concurrent Engineering 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). PRODUCT Performance Specifications PROCESS Technology, & Process Planning Time, Space, Availability VALUE CHAIN

10 Wireless Value Network Structure Mobile Phones PDAs Smart Phones SIM Pads Controls LANs Platform infrastructure service Service provisioning Billing Support PSTN/Internet PSTN/Internet component component manufacturers manufacturers Cell Cell switching switching component component manufacturers manufacturers Base Base Station Station component component manufacturers manufacturers Sw. games messaging Voice,browsing, WAP Photo camera MP3 player, DVD Game consoles Non-Circuit Component Manufacturers Circuit Board Component Manufacturers Wireless Wireless infrastructure infrastructure operator operator Wireless Wireless service service provider provider Network Network Network Network equipment equipment Software Software application application developer developer Hardware Hardware application application developer developer Device Device Manufacturers Manufacturers Wireless Wireless network network operator operator Portals Portals and and Access Access Providers Providers Application Application Developer Developer Content Content Provider Provider Content Content Aggregator Aggregator Network value chain Infrastructure Value chain Application Value chain Device value chain Content Value chain Third Third parties parties content content Voice Voice and/or and/or data data consumer consumer User User content content

11 Research Methodology: Stages of analysis STAGE Problem Articulation OBJECTIVE The Value network framework Conceptualization Develop hypotheses Formulation Discuss the emerging loops Testing Policy formulation Evaluation Discuss empirical evidence to support each loop through data gathering tests A simplified model of value chain applying Inductive System Diagram methodology 3G Communications value network scenarios

12 Roadmap Components: Dynamic Analyses Customer What are the driving forces behind user adoption? Competitive Technology innovation Business Innovation

13 Data collection and analysis 2 preliminary pilot study in Italy and US 24 focus groups in 6 markets (Brazil, Germany, Italy, Singapore, UK, US) Quantitative marketing research on a sample of Italian mobile users (over 18). Sampling error (at 50%) of 3.1% (with a probability level of 95%)

14 Adoption model of multimedia mobile services Input device Output device Software facilities Bandwidth Perceived Ease of Use (PEU) Knowledge Perceived innovation Attitude toward using Behavioral Intention to Use Service offerings Degree of mobility Compatibility Perceived Usefulness (PU) Enjoyment Interactivity Fun Price

15 Propositions Network externalities and market saturation loops The Market Saturation Loop - Willingness to pay By marginal adopter Value/User due To network effects User Population R1 Network Externalities Loop Customer Adoption Social Externalities Total expected Benefit to New adopters B1 Market Saturation Loop The Network Externalities Loop

16 Roadmap Components: Dynamic Analyses Customer Competitive Netwok capacity Price competition Service innovation Technology innovation Business Innovation

17 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.

18 Market attractiveness indicators More or less attractive Competitor Entry Barriers to exit Customer power Nature of Competition Unattractive Low High High Price Attractive High Low Low Non Price Substitution Threats Supplier Power High High Low Low

19 Propositions 3, 4, 5 - Price competition, innovation and investment loops Service & Application Investment & Innovation Loop R2 Network Capacity Network & Technology & Innovation Investment R3 Network Revenue Per user Network investment Loop - Price Competition Loop B2 Network Revenue New Entrant & Incumbent Innovation in Services & Applications Price Competition Service & Application Profits Network Usage Customer Adoption Service & Application Revenues

20 Roadmap Components: Dynamic Analyses Customer Competitive Technology innovation Business Innovation

21 Proposition 6 - Terminal scales economies loop Customer Adoption Terminal Volumes - R4 - Component Standardization & Outsourcing Terminal Scale Economies Loop Terminal Prices - Terminal Costs

22 Roadmap Components: Dynamic Analyses Customer Competitive Technology innovation Business Innovation

23 Proposition 7 The content generation and piracy innovation loops Customer Adoption Content Consumption B3 Piracy Innovations Piracy Innovation Loop - R5 R6 For-profit Content Generation Loop Content Profit Opportunities Free-Content Generation Loop Content Provided

24 Research Methodology: Stages of analysis STAGE Problem Articulation OBJECTIVE The Value network framework Conceptualization Develop hypotheses Formulation Discuss the emerging loops Testing Policy formulation Evaluation Discuss empirical evidence to support each loop through data gathering tests A simplified model of value chain applying Inductive System Diagram methodology 3G Communications value network scenarios

25 Inductive System Diagram Service & Application Investment & Innovation Loop R2 Network & Technology & Innovation Investment R3 Network Capacity Network investment Loop Network Revenue Per user - Price Competition Loop B2 Network Revenue Service & Application Profits New Entrant & Incumbent Innovation in Services & Applications Price Competition Network Usage Customer Adoption Service & Application Content Revenues Consumption B1 Market Saturation Loop R1 B3 Piracy InnovationsPiracy Innovation Loop Terminal Prices Content Provided R5 For-profit Content Generation Loop Content Profit Opportunities R6 User Population Terminal Volumes - Free-Content Generation Loop Willingness to pay By marginal adopter Network Externalities Loop Social Externalities R4 Value/User due To network effects Total expected Benefit to New adopters Component Standardization & Outsourcing Terminal Scale Economies Loop Terminal Costs -

26 Research Methodology: Stages of analysis STAGE Problem Articulation OBJECTIVE The Value network framework Conceptualization Develop hypotheses Formulation Discuss the emerging loops Testing Policy formulation Evaluation Discuss empirical evidence to support each loop through data gathering tests A simplified model of value chain applying Inductive System Diagram methodology 3G Communications value network scenarios

27 Future scenarios Piracy development Appearance of a new dominant force Cycles of entry & bankruptcy 3G Communication Value Network Scenarios Free for all Stable oligopoly Based on 15 workshops attended by 190 participants in Europe

28 Future scenarios Piracy development Appearance of a new dominant force Cycles of entry & bankruptcy 3G Communication Value Network Scenarios Free for all Stable oligopoly

29 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 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.

30 Future scenarios Piracy development Appearance of a new dominant force Cycles of entry & bankruptcy 3G Communication Value Network Scenarios Free for all Stable oligopoly

31 Scenario 2 Stable oligopoly If the Network Investment Loop" is strong and dominated by incumbents 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.

32 Future scenarios Piracy development Appearance of a new dominant force Cycles of entry & bankruptcy 3G Communication Value Network Scenarios Free for all Stable oligopoly

33 Scenario 3 Freeforall If the Service and application investment and innovation Loop" Content generation loop and Free content generation loop are strong 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.

34 Future scenarios Piracy development Appearance of a new dominant force Cycles of entry & bankruptcy 3G Communication Value Network Scenarios Free for all Stable oligopoly

35 Scenario 4 Appearance of a new dominant force Appearance of an innovator entrant becoming a dominant force 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.

36 Future scenarios Piracy development Appearance of a new dominant force Cycles of entry & bankruptcy 3G Communication Value Network Scenarios Free for all Stable oligopoly

37 Scenario 5 Piracy development If the Piracy Innovation Loop is strong 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.