Description
Value creation is state of performing activities that increase the value of services or goods to consumers. It is the primary intention of any business entity to help it sell its services and products.
STUDY ON NEW LOGIC OF VALUE CREATION
Abstract The understanding of value is often described in terms of an industrial view in which value creation is linear, additive process. The emerging view takes a different approach to value creation: it's interactive, relationshipsbased and synchronic. But either of these views capture fully the value creating importance of elements present especially in converging industries: coopetition, networks and external relationships. This thesis has been conducted by gathering primary data from telecommunication industry companies in the form of interviews. The studied companies are engaged in numerous different kinds of external relationships which are viewed strategically important. For the purpose of describing some of the complexity involved, the value network framework has been developed.
Keyword value creation, value chain, external relationships, convergence, telecommunication, value network, coopetition
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1.
BACKGROUND __________________________________________________ 9
1.1. 1.2. INDUSTRIAL VIEW OF VALUE CREATION __________________________ 11 EMERGING VIEW OF VALUE CREATION ___________________________ 12
2.
PROBLEM _____________________________________________________ 14
2.1. 2.2. 2.3. 2.4. 2.5. 2.6. VALUE NETWORK_________________________________________________ 14 PURPOSE _________________________________________________________ 16 PROBLEM QUESTIONS ____________________________________________ 16 DEMARCATIONS __________________________________________________ 17 TARGET AUDIENCE _______________________________________________ 18 THESIS LAYOUT __________________________________________________ 18
3.
METHOD ______________________________________________________ 20
3.1. 3.2. ULTIMATE PRESUMPTIONS _______________________________________ 20 PARADIGM _______________________________________________________ 20
3.2.1. POSITIVISM ___________________________________________________________21 3.2.2. HERMENEUTICS ______________________________________________________22 3.2.3. MY PARADIGM ________________________________________________________22
3.3.
METHODOLOGICAL APPROACHES ________________________________ 22
3.3.1. ANALYTICAL APPROACH______________________________________________23 3.3.2. THE ACTORS APPROACH ______________________________________________23 3.3.3. THE SYSTEM APPROACH ______________________________________________24 3.3.4. CHOICE OF APPROACH________________________________________________25 3.3.5. INDUCTIVE VS. DEDUCTIVE APPROACH ________________________________25 3.3.6. QUALITATIVE VS. QUANTITATIVE APPROACH__________________________26
3.4.
WORKING PARADIGM_____________________________________________ 27
3.4.1. CREATE A PRE-UNDERSTANDING ______________________________________28 3.4.2. METHOD FOR COLLECTION OF DATA __________________________________28 3.4.3. SAMPLING ____________________________________________________________28 3.4.4. DESIGN OF INTERVIEW GUIDE _________________________________________29 3.4.5. INTERVIEW PROCESS _________________________________________________29 3.4.6. ORGANIZINING INTERVIEW MATERIAL ________________________________29 3.4.7. ANALYSIS AND CONCLUSION __________________________________________30
3.5.
VALIDITY OF RESEARCH __________________________________________ 30
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3.6.
CRITIC OF METHOD_______________________________________________ 31
4.
TELECOMMUNICATION INDUSTRY______________________________ 34
4.1. 4.2. 4.3. 4.4. 4.5. 4.6. INDUSTRY TRENDS________________________________________________ 34 FUTURE __________________________________________________________ 36 MOBILE COMMERCE______________________________________________ 37 TELECOMMUNICATION VALUE CHAIN ____________________________ 38 SONERA __________________________________________________________ 39 NOKIA ____________________________________________________________ 40
5.
THEORETICAL DISCUSSION ____________________________________ 41
5.1. WHAT IS VALUE? _________________________________________________ 41
5.1.1. ECONIMIC VALUE _____________________________________________________42
5.2.
VALUE CHAIN_____________________________________________________ 44
5.2.1. VALUE SYSTEM _______________________________________________________46 5.2.2. COMPETITIVE SCOPE _________________________________________________47 5.2.3. PRIMARY CRITIQUE TO VALUE CHAIN _________________________________48
5.3.
EMERGING VIEW OF VALUE CREATION ___________________________ 50
5.3.1. WHAT IS LACKING FROM THE VALUE CONSTELLATION? _______________53
5.4. 5.5. 5.6.
THE BUSINESS ECOSYSTEM _______________________________________ 53 VIRTUAL VALUE CHAIN ___________________________________________ 54 NETWORK ________________________________________________________ 57
5.6.1. WHAT IS A NETWORK? ________________________________________________57 5.6.2. STRATEGIC IMPLICATIONS OF NETWORKS ____________________________58 5.6.3. NETWORK EFFECTS ___________________________________________________60
5.7.
INDUSTRIAL NETWORKS __________________________________________ 61
5.7.1. NETWORKS AS RELATIONSHIPS _______________________________________62 5.7.2. NETWORKS AS STRUCTURES __________________________________________62 5.7.3. NETWORKS AS POSITION ______________________________________________63 5.7.4. NETWORKS AS PROCESSES ____________________________________________63
5.8.
NETWORK RELATIONSHIPS _______________________________________ 63
5.8.1. NETWORKS AND VALUE CREATION ____________________________________65 5.8.2. THE ROAD AHEAD - VALUE NETWORK_________________________________67
5.9.
VALUE NETWORK -FRAMEWORK _________________________________ 68
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5.9.1. WHAT FACTORS ARE DRIVING THE DEVELOPMENT? ___________________68 5.9.2. CONVERGENCE _______________________________________________________69 5.9.3. COOPETITION_________________________________________________________70 5.9.4. COEVOLVING _________________________________________________________71 5.9.5. FUTURE SHARE _______________________________________________________72 5.9.6. SUMMARY OF VALUE NETWORK -FRAMEWORK _______________________74
6.
EMPIRICAL FINDINGS _________________________________________ 75
6.1. 6.2. 6.3. 6.4. INDUSTRIAL VIEW OF VALUE CREATION __________________________ 75 EMERGING VIEW OF VALUE CREATION ___________________________ 77 VALUE NETWORK_________________________________________________ 83 CASE SYNCML ____________________________________________________ 85
6.4.1. MOTIVES FOR SYNCML________________________________________________85
7.
ANALYSIS _____________________________________________________ 88
7.1. INDUSTRIAL VIEW ________________________________________________ 88
7.1.1. VALUE CHAIN_________________________________________________________89
7.2. 7.3.
EMERGING VIEW OF VALUE CREATION ___________________________ 89 VALUE NETWORK_________________________________________________ 92
7.3.1. COOPETITION_________________________________________________________93 7.3.2. FUTURE SHARE _______________________________________________________93
8.
CONCLUSIONS _________________________________________________ 95
8.1. 8.2. FUTURE RESEARCH _______________________________________________ 98 FINAL WORD______________________________________________________ 98
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List of Figures:
FIGURE 1: US WORKFORCE DISTRIBUTION IN AGRARIAN, INDUSTRIAL, AND INFORMATION ECONOMIES (NOLAN & CROSON, 1995) FIGURE 2: ANALYTICAL APPROACH (ARBNOR & BJERKE, 1997) FIGURE 3: THE ACTORS APPROACH (ARBNOR & BJERKE, 1997) FIGURE 4: THE SYSTEM APPROACH (ARBNOR & BJERKE, 1997) FIGURE 5: THE DIFFERENT PARTS OF THE WORKING PARADIGM (ARBNOR AND BJERKE, 1994) FIGURE 6: INTERVIEW MATERIAL PRESENTATION FORM FIGURE 7: THE TREND IN TELECOMMUNICATION (SOURCE: GARTNER GROUP) FIGURE 8: MOBILE INDUSTRYVALUE CHAIN (SOURCE: ANDERSEN CONSULTING MARKET REPORT, 1999). FIGURE 9: THE VALUE CHAIN (PORTER, 1985) FIGURE 10: THE VALUE SYSTEM (PORTER, 1985) FIGURE 11: THE VALUE MATRIX (RAYPORT & SVIOKLA, 1995) FIGURE 12: BASIC STRUCTURE OF NETWORK MODEL (HAKANSSON & JOHANSON, 1994) 61 FIGURE 13: VALUE CREATION MODEL (CAMPBELL, 1997) FIGURE 14: THE VALUE NETWORK -FRAMEWORK (OWN PRODUCTION) FIGURE 15: SOME KEY PLAYERS WHO ARE CREATING THE NEW INDUSTRY (SOURCE: NOKIA 1999 YEAR-END RESULTS PRESENTATION) FIGURE 16: NOKIA'S VIEW ABOUT THEIR VALUE CHAIN (SOURCE: NOKIA 1999 YEAR-END RESULTS PRESENTATION) 111 111 65 68 39 45 46 55 27 30 36 11 23 24 25
List of Tables:
TABLE 1: INDUSTRIAL AND CO-PRODUCTIVE VIEWS (RAMIREZ, 1999) TABLE 2: CONVENTIONAL WISDOM VS. NEW PERSPECTIVE ON ALLIANCES (DOZ & HAMEL, 1998) 67 52
List of Appendix:
APPENDIX I: REFERENCES APPENDIX II: SECONDARY SOURCES OF MATERIAL APPENDIX III: LIST OF PEOPLE INTERVIEWED APPENDIX IV: INTERVIEW QUESTIONS, NOKIA APPENDIX V: INTERVIEW QUESTIONS, SONERA APPENDIX VI: LIST OF SOME OF NOKIA'S PUBLIC CO-OPERATIONS APPENDIX VII: ILLUSTRATIONS OF NOKIA'S VIEW ABOUT FUTURE
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1. BACKGROUND
The understanding of value is often as outdated as the old assembly line that is resembles and so is the view of strategy that goes with it. There are three major drivers shaping the competitive landscape: new technology, global competition and convergence all of which are opening up qualitatively new ways of creating value. New technology allows novel activity configurations. The breakdown of physical constraints has allowed for dispersion of activities around the world. Convergence opens up possibilities to expand to new markets and create new products and services. These drivers become strategically manifested as new business ideas, new businesses and perhaps even as new industries
Previously, industry structures were more stable, making it easier to identify competitors, substitutes and potential new-comers. This clarity helped companies in their process of trying to create a sustainable competitive advantage. In many industries there existed -and still do existlarge entry barriers such as high initial investment costs, regulatory issues and economies of scale.
Today convergence is transforming industry structures and making them less defined. Companies compete not only with other companies in the same industry but also with companies in other industries that produce substitute products and services (Chan Kim & Mauborgne, 1999). One implication of this is that sustaining a competitive advantage is getting more difficult if not impossible. Many of the traditional sources of competitive advantage such as economies of scale, product differentiation, capital investments, and switching costs have lost importance as barriers to competition (Chakravarthy, 1997). However, not every industry is going
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through radical changes. Convergence takes place especially in media, telecommunication, information technology and consumer electronics, which are called as converging industries. In these industries, many companies are forced to clarify their strategic objectives in order to better meet the new competitive situation. One alternative has been to form new kind of external relationships by means of partnerships, joint ventures, alliances etc.
No changes are made overnight. Existing industrial wisdom may hinder the transformation of companies. The term industrial wisdom refers to dominating opinions shared by companies and actors about the rules of the game and the freedom of action within the structural confines of a sector (Hellgren & Melin, 1993). Such shared beliefs are often more significant a barrier in changing the industry rules than the underlying economic, technological, political and social factors themselves. This means that industry incumbents can become the victims of their own experience (Hamel & Prahalad, 1994). Therefore, industry rule breaking starts with mental framebreaking (de Wit & Meyer, 1998). Increasingly, people, organizations and companies need to unlearn - a process where tradition and size are often liabilities.
It is in place to remain critical to some of the predicted changes. The magnitude of change for companies depends on the context. While some industries may continue to remain more stable the industries where primary goods or services include information are involved in big changes. As the new competitive forces gain momentum, pressure on existing industries will grow more intense. Within five years, downward cost and price pressure will mean that no corner of the economy will be untouched
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(Sahlman, 1999).
One of the drivers transforming existing structures is the shift from manufacturing to information society. Increasingly, tangible products are losing their relative importance whereas intangible goods such as information and entertainment are getting more important. The emergence of mobile services is a good example. The below picture illustrates the change taking place from agriculture society to manufacturing society and then to information society in the US and the situation is likely similar in Europe as well. This transition together with the major drivers are affectingthe way value is created.
Agriculture 4 % Agriculture 50 % Manufacturing 40 %
Agriculture 2 % Manufacturing 5 %
1845 Agrarian economy
1945 Industrial Economy
2045 Information Economy
Figure 1: US Workforce Distribution in Agrarian, Industrial, and Information economies (Nolan & Croson, 1995)
1.1. INDUSTRIAL VIEW OF VALUE CREATION
Not only has the competitive landscape evolved but so has also the view of strategy that goes with it. The roots of the industrial view of value creating
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are in the industrial revolution. In this view, organizing activities was seen mainly as an additive process from input to output in a chain, which was then consumed by the customer. Industrial view is often manifested in terms of a value chain model. It does not treat other economic actors as a source of value, and the firm and activities are units of analysis. In addition, customers are not treated as a source of value. They are considered more as targets that destroyed the value created by the firm. Competitive advantage is derived from successful activity configuration within the firm. The industrial view has received a lot critique. It has been said that it is insufficient for analysis in the interconnected informationbased society. An alternative view has emerged which has a different approach to value creation.
1.2. EMERGING VIEW OF VALUE CREATION
The emerging view of value creation, which is also called co-producing, is synchronic and interactive. The proponents of this view argues that the key to value creation lies often in understanding the significance ofrelationships. The old tools imply a simple, linear link from one value system1 to another, and they completely ignore the role of customer, complementary organizations and allies. In the emerging view, some of the managed values cannot be measured or monetized. Relationships between firms are based often on collaborative learning, which cannot be captured in numerical terms. New technology especially allows and demands intelligent and more sophisticated ways of creating value such as linking together companies with their suppliers and the customer. The emerging view is best described in terms of value constellation, which is model
1
For definition see 5.2.1 12
developed by Normann & Ramirez. This will be discussed in more detailed manner in 5.3.
One of the most significant changes taking place is the one concerned with external relationships between different economic actors. Relying on external relationships enables more agile and flexible structures, and allows companies to seek competitive advantage outside their own borders. Companies engage in numerous partnerships or alliances whose strategic importance also varies considerably. However, the trend seems apparent at least in converging industries: the amount of different forms of external relationships will increase and, therefore, the need to manage them increases. Today's world of business is becoming so interrelated that many actors are involved in co-production without consciously realizing that they are working together (Normann & Ramirez, 1994). Relationships are thus getting more complex, multi-directional and simultaneous compared to those in the industrial business world as described by the value chain (ibid).
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2. PROBLEM
The industrial, linear model of value creation breaks down when applied to the scenario where boundaries between customers, allies, partners and industries begin to blur. New forms of competitive advantage are gained increasingly through external relationships within a network. The industrial view and value chain do not address the importance of these value-adding activities. In the emerging value creating model, the relationships are intimately linked and constantly evolving. However, the impact and importance of these relationships to value creation is not well known. As the amount of relationships increase, it becomes more and more difficult to form a comprehensive picture of their impact. According to Stabell & Fjeldstad (1998) modern society is characterized by a complex set of actual and potential relationships between actors, people and organizations. Many of the current theoretical frameworks have their roots in the industrial economy. They cannot be used effectively for describing network of relationships in converging industries.
2.1. VALUE NETWORK
So far the discussion has concentrated on describing the transformation from industrial view to emerging view. However, there are aspects that are not captured by either of the so far discussed models. The industrial view takes the firm as an unit of analysis the emerging view is mainly focused on the buyer / seller relationship within an industry. Still, neither of these views address the importance of competitors as a source of value. One form of co-producing of value between competitors takes place in converging industries where the creation of technical standards can be
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crucial. Standards are often created together with the main competitors in order to get as broad an acceptance as possible for the standard. The simultaneous competition and cooperation is often referred as
"coopetition2". The wider the standard is applied the bigger the utility to every actor involved. One example of standard creation between competing companies is SyncML (see 6.4).
Standard creation is only one example of a new form of relationship. Similar unconventional relationships are emerging. One reason is new technology and especially Internet. Aldrich (1998) expressed the impact of digital economy in following way:
"The digital economy is changing how we think about the traditional corporate value chain, and it's redefining relationships between manufacturers, suppliers, distributors, and consumers. The value chain is in fact a value network, in which companies engage in multiple two way relationships to bring increasingly complex products and services to market"
Little empirical evidence exist of the value network framework. This is partly because the area itself is still developing but also because it is hard to evaluate the impact of network relationships. Likewise, it can be difficult to define which actors form the network and where should the boundaries be set. If the boundaries are expanded too wide, the network concept loses vitality. However, too narrow definition can leave out some
2
The inventor of this expression is Ray Noorda (Novell Corp.), who used it to describe
relationships in the information technology business (Brandenburger and Nalebuff, 1995). 15
important parts. A action by one entity in the system or network can influence another entity. This has broad implications. It is no longer enough to think of a firm as a member of a closed system that is not subject to uncontrollable outside shocks. Networks can be highly abstract: in reality firms often do not realize that they are part of a network. Regardless of the problematic involved with the value network and network relationships, it provides some fascinating topics of research.
2.2. PURPOSE
The purpose of this thesis is to describe how the general value creation process has changed, and particularly how companies are co-producing and co-creating value together with competitors in the telecommunication industry.
2.3. PROBLEM QUESTIONS
How has the general value creation process changed? How do the chosen companies co-produce and co-create value? What factors are driving this development?
For this purpose I have chosen to focus on the telecommunication industry, which I believe is a prime example of an converging industry and which holds a central position at the heart of mobile communication and the Internet, two perhaps most rapidly growing business areas at the moment. The Nordic countries -especially Finland and Sweden- are well presented in this industry. Therefore, it is well justified that I should focus on some of the Nordic companies, which are Nokia Oyj and Sonera Oyj.
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2.4. DEMARCATIONS
The problem with describing systems or networks is that they include many different economic actors that are interconnected. First, this makes it difficult to draw the boundaries of the system, in terms of what to include / exclude. Secondly, conducting an empirical research of a whole system requires a lot of resources in terms of time, money and most importantly, access to different actors. This thesis does not focus on some specific system or network. Instead, systems are approached as illustrations of how aggregation of external relationships can be considered as a network(s).
External relationships between different economic actors hold a central role in this thesis. The term "external relationship" is used to denote several different forms of co-operation. However, this thesis will not focus on the differences between external relationships, for example what differentiates an alliance from a partnership. The comparison between various forms of external relationships is definitely intriguing but out of scope of this thesis.
Discussion about external relationships is often associated with the talk about suppliers and outsourcing of activities. The primary focus of this thesis is not in supplier relationships or outsourcing although in some cases they can be included. Outsourcing means that firms farm out some of their activities to be handled by the market instead. As important as it is, outsourcing is only reorganizing current activities and does not expand the firm's field of operations.
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This thesis will not focus on the economical aspects of external relationships and networks in terms of presenting financial data. There is one major reason for this: financial data regarding joint projects is strictly confidential. However, the importance of external relationships in economic sence is underlined.
The purpose of this thesis is not to provide a comprehensive picture of telecommunication industry because I think that the findings are not industry related. Instead, one could find similar examples from other converging industries as well. Despite similarities, it is wise not to generalize the results; it is the task of others to further research whether there is emerging a paradigm shift in value creation.
2.5. TARGET AUDIENCE
It is possible that a thesis has several target audiences. This thesis has two main target audiences. First are the academic researchers who are interested in companies' general value creation process and how it has changed. The other audience are managers, especially those who want a description of changes in the value creation process and the implications it has.
2.6. THESIS LAYOUT
The diagram below illustrates the thesis layout. After background and problem discussion will be described methodological issues to provide the reader with an understanding of the chosen scientific approach. Later, the focus will turn to telecommunication industry in order to shortly illustrate
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its main elements and trends that are useful in the later analysis. Theoretical discussion will outline the theories. The empirical findings will then illustrate the views of the respondents, which are followed by analysis of findings. Finally, I will conclude the research and propose areas of future research.
1.Background 3.Method
2.Problem
4.Telcom -Industry 5.Theoretical Discussion Value Chain Value Constellation Value Network
•Industrial view
•Emerging view
6.Empirical Findings 7.Analysis 8.Conclusions
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3. METHOD
This chapter begins with a description of the scientific approach with the aim to enable the reader to understand the chosen scientific approach. Further, I describe the concepts and techniques that have constituted the work with this thesis.
3.1. ULTIMATE PRESUMPTIONS
Every person has some kinds of ultimate presumptions. According to Bourdieu everybody has a "habitus". The conception of habitus refers to the basic stock of knowledge that people carry around in their heads as a result of living in a particular culture or subculture (Layder, 1994). Like habitus, presumptions can be rigid, having an effect on everything a person does, in terms of for example studying, perception of problems, and their solving. What do these ultimate presumptions consist of? A common collective term for such conceptions is paradigm. Thus, the conceptions affect the paradigm the individual adheres to, which in turn affect the method approach. In that sense, the paradigm works as an interface between the fundamental conceptions and the method approach.
3.2. PARADIGM
There is a definite and decisive difference between creators of knowledge who want to explain and those who want to understand. Two general paradigms are positivism and hermeneutics, and these are widely accepted among researchers. The researchers who deny the existence of a
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fundamental difference between the natural and the social sciences are traditionally called positivists. Creators of knowledge who make a distinction between the methods of the classical natural sciences and those of the social sciences are called hermeneuticists (Arbnor & Bjerke, 1997).
3.2.1. POSITIVISM Positivism is closely connected to natural science where measurability, validation and quantitative methods are meant to give a general representation of reality. A simplification is striven for to find the general in the specific. In order to reach the knowledge goal it is necessary to look away from the plenitude of the reality. This is done with abstractions in the shape of logical models, representative cases and pure cause-result causalities. This approach can be compared with the map that resembles the terrain of reality in a simplified form. The positivistic scientist makes a strict demarcation between facts and values. The mission for science is to bring out facts, as they are, and not values how something should be. Emotions are seen as subjective, private, and thoughtless - and they should not affect research.
To make it possible for other scientists to come to the same conclusion mutual rules for research and model descriptions are important. The formation of these rules are important too, for example in ensuring that the research objects get representatively sampled. In addition to the requirement that knowledge should correspond to what is, it should also correspond to what will be, that is, the future. This means a demand for a capability to make a valid prediction (Andersson, 1979).
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3.2.2. HERMENEUTICS Whereas the positivists try to simplify reality with a representation, the hermeneutists go to other direction and try to penetrate the abstract reality and make it more concrete. Hermeneutics problematize reality in order to understand; an understanding of the parts gives an understanding of the whole. They use terms as meaning and intentions in their scientific statements. The hermeneutists claim that social science cannot be treated in the same way as natural science. Since the truths of natural science are a result of culture, they are seen as relative, hence, the hermeneutics do not have the universal validity as a goal. Descriptions of methods are rare in the research by hermeneutists because the belief that biases are present in all levels of research. Should these rules exist, it would turn the interpretive action into positivism (Andersson, 1979).
3.2.3. MY PARADIGM I believe that due to the general societal shift towards the information age and the rapid development of new innovations and technology,
establishing general laws like those the positivists prefer is not so useful. Therefore, more emphasis has been laid upon trying to create anunderstanding and describing important issues that have not previously achieved much attention - at least to my knowledge. I cannot say that I am positivist; instead, I feel that I am closer to hermeneutists paradigm.
3.3. METHODOLOGICAL APPROACHES
There are three main methodological approaches operating in business research: the analytical approach, the systems approach and the actors
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approach. Descriptions of these approaches are based on a text by Arbnor & Bjerke (1997). Additionally, the relation between theory and empirical findings can be approached either deductively or inductively. Business research can also be divided to quantitative and qualitative approaches.
3.3.1. ANALYTICAL APPROACH The analytical approach has its origins in classic analytical philosophy and therefore has deeply rooted traditions in Western thinking. It assumes that reality has a summative or additive character, that is, the whole is the sum of its parts. For example, the industrial view could be categorized as a representative of analytical approach: value is added stepwise in a linear process. Knowledge created using analytical approach is characterized as being independent of the observer. This means that knowledge advances by means of formal logic that is represented by specific judgments that are independent of individual subjective experience. These judgments consist of assumptions that can be verified or falsified.
Judgment A +2
6
Judgment B +2
=
the whole
Judgment C
+2
Figure 2: Analytical Approach (Arbnor & Bjerke, 1997)
3.3.2. THE ACTORS APPROACH The actors approach is not interested in explanations; rather, it is interested in understanding social wholes. This is accomplished through pictures of reality held by individual actors. The actors approach is directed at
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reproducing the meaning(s) that various actors associate with their acts and the surrounding context. Reality is therefore taken as a social constitution that is intentionally created by processes at different levels of meaning structures. Wholes and parts are continuously reinterpreted.
Meaning
Meaning
Meaning structure: the whole
Meaning
Figure 3: The Actors Approach (Arbnor & Bjerke, 1997)
3.3.3. THE SYSTEM APPROACH The assumptions behind the system approach, different from the underlying the analytical approach, is that reality is arranged in such a way that the whole differs from the sum of its parts. This means that not only the parts but also their relations are essential, as the latter will lead to plus or minus effects (synergy). Knowledge developed through the systems approach depends on systems. The behavior of individuals, as part of the system, follows systems principles; that is, individuals are explained in terms of system characteristics. Consequently, the system approach explains or understands parts through the characteristics of the whole (of which they are part).
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System component A
+2
System component B
+2
=
+7 the whole
System component C
+2
Figure 4: The System Approach (Arbnor & Bjerke, 1997)
3.3.4. CHOICE OF APPROACH For the purpose of my thesis, I consider the system approach to be most appropriate. This approach incorporates relationships between different parts as meaningful components of the system. In similar fashion, network and the relationships within cannot be evaluated in purely analytical terms; synergy and intangible elements between system actors are essential for the value creation description. From this follows, that the total sum differs from the sum of parts. Importantly, the total sum can also be less than the sum of its parts. a
3.3.5. INDUCTIVE VS. DEDUCTIVE APPROACH For any researcher it is essential to distinguish between inductive and deductive approach. These two methods have different relation to theory and empirical findings. Inductive approach is common in social sciences where many of the studies are qualitative in nature. Inductive study has been defined in several ways but a simple definition is that first the
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researcher acquires empirical findings or observation which then is used to build theoretical frameworks or to conceptualize the object studied.
Deductive approach is the opposite of inductive: researcher starts from existing theory and uses empirical findings as a tool to verify his or her hypothesis. This approach is more common in quantitative studies where it is easier to define hypothesis and then try verify it.
This thesis has taken a deductive approach. Starting point has been the industrial view of value creation, which is best described in terms of the value chain model. The industrial view has then been elaborated to include theories regarding the emerging view. The theories and shift in value creation process have then been illustrated with the help of empirical findings.
3.3.6. QUALITATIVE VS. QUANTITATIVE APPROACH Qualitative research produces findings that are not accomplished by help of statistical procedures or other means of quantification. It can refer to research about persons' lives or culture, but also to organizational functioning, social movements, or interactional relationships (Strauss &Corbin, 1990). Qualitative methods can be used to uncover and understand what lies behind any phenomenon about which little is yet known (ibid). Qualitative methods can give details of phenomena that are difficult to convey with quantitative methods such as impact of relationships to value creation. Qualitative method is relevant for economic studies. This because many important phenomena cannot be covered by quantitative method giving a legitimization for other perspectives. To exemplify, studies related to individuals - leadership, routines, cultures and behavior - are hard to
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catch by numeric methods and therefore qualitative approach is needed to cover areas that are left in the shadow of numeric values. In similar fashion, the quantitative methods are not ideal for studying systems where the whole differs from the sum of its parts. Complex networks represent a real-life example of systems that cannot be covered fully by using quantitative methods. Therefore, it falls natural to me to choose the qualitative method.
Interesting question is whether it is possible to combine qualitative and quantitative methods, and enjoy the rewards of both numbers and words (Glesne & Peshkin, 1992). The combination of both approaches would be ideal in this thesis also. The impact of external relationships should be measured in both soft and hard ways. However, combining both approaches is out of scope of this thesis due to lack of access to financial data.
3.4. WORKING PARADIGM
The working paradigm can consist of several steps as shown in figure below.
Create a pre- Choice of method Sampling Desing of Conducting Organizing Analysis understanding for collecting data interview guide interviews interview and material conclusios
Figure 5: The Different Parts of the Working Paradigm (Arbnor and Bjerke, 1994)
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3.4.1. CREATE A PRE-UNDERSTANDING There are several steps in the working paradigm that are performed during the research process. First, the creating of a pre-understanding. As mentioned previously, I have had some pre-understanding that the telecommunication industry would provide a good basis for the purpose of this thesis. Additionally, I have gathered industry specific material from different sources that have further increased my understanding of it. I have also had a pre-understanding about the theoretical views especially about the criticism pointed toward the industrial view. This pre-understanding has been one of the reasons why this subject has been chosen in the first place.
3.4.2. METHOD FOR COLLECTION OF DATA For the purpose of collecting data, a qualitative approach was chosen. Face-to-face interviews were used with an addition of one telephone interview. Additionally, two background interviews were conducted via email. These constitute the primary source of data. Secondary sources have also been used including books, industry and consulting reports, articles, press releases, companies presentations and online information.
3.4.3. SAMPLING The chosen companies are mostly Finnish due to practical reasons. However, I believe that these companies, as front runners of their industry, are suited for the research. This is one of the most important reasons why they have been chosen. Another reason is that I have had preunderstanding that these companies are representatives - at least to some
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extend - of the new value creation view. 3.4.4. DESIGN OF INTERVIEW GUIDE A form with questions has been used to assure consistency between interviews. Specific questions were used to gather information regarding SyncML. Most questions were formulated in a way that rendered open answers and left room for elaborating questions.
3.4.5. INTERVIEW PROCESS There are numerous possible hazards when conducting interviews. One of them is the possibility that the respondent for some reason does not tell the exact truth or leaves some important aspects unmentioned. Another is the possibility that the persons interviewed for some reason are not objective and thus give information that is not true. Likewise, it is possible the interpretation of response is subjective: one hears what one wants.
Interviews were conducted at the workplace of the respondents excluding of course the telephone interview. Questions were asked in Finnish and then translated into English. No audio recordings were used. These are possible sources of errors. In the interviews conversational tactics were used, inviting further exemplification and substantiation of a theme.
3.4.6. ORGANIZINING INTERVIEW MATERIAL The notes and transcripts were not used in the exact wording, instead they were rephrased to be more concise. Some questions have been left out because they did not provide any essential value. Interview material has been organized around the three main themes: industrial view, emerging
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view and value network. Additionally, the SyncML initiative is illustrated as a separate case. The main findings from the interviews were summoned up in chapter 6, "empirical findings", in this thesis. The figure 6 illustrates how the material from interviews is presented in the empirical findings chapter.
Interviewers questions marked in bold text
Clarifications added to material marked in parenthesis
What about the role of partners in value creation [process]? The role of partners is crucial for us (...) crucial would I say
The answer of interviewed marked without bold
Material shortened after consideration
Figure 6: Interview Material Presentation Form
3.4.7. ANALYSIS AND CONCLUSION The empirical findings were analyzed using theories and models in chapter 5, "theoretical discussion". Different viewpoints regarding value creation process were brought to attention. Additionally, key findings were compared to existing theories.
3.5. VALIDITY OF RESEARCH
Researchers are always confronted with the problem of their own cognitive maps and how they affect on their work. It would be foolish to believe that own experiences, opinions and desires do not have any effect to the study.
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What one observes is itself a matter of interpretation - that is, it is a matter of correlating external behaviors to the already present system of meanings and assumptions. Thus experience is never pure but is always a construction, and it is not foundational for a true knowledge of how things are in themselves (Polkinghorne in Kvale, 1989).
There are two main kinds of validity: internal and external. Internal validity is the basic minimum without which any experiment is uninterpretable: Did, in fact, the experimental procedure make a difference in this specific experimental instance? External validity poses the question of generalizability: To what populations, settings, treatment variables, and measurement variables can this effect be generalized. Theoretical sensitivity is the ability to recognize what is important in data and when giving it meaning. It helps to formulate theory that is faithful to the reality of the phenomena under study (Glaser, 1978). The possibility to generalize increases with the use of multiple cases, as done in this thesis. One important aspect is that this thesis has a strong theoretical foundation; that is, many arguments build on existing theories. Therefore, they have already been empirically tested in previous studies.
3.6. CRITIC OF METHOD
The system view requires the researcher to study all parts of the system. By failing to study one factor the results as a whole can be false. The reason for this is the inter-linkage and synergies that cause the sum differ from the value of the parts. By removing one component, the relations and some of the synergies might be removed (Arbnor and Bjerke, 1994). Since I have been force to get primary data only from some parts of the system, the
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results cannot be generalized to the whole system. The other parts might have different opinions about the joint relationships, which reduces the value of the findings. On the other hand, the purpose has not been to gather the opinions of all system actors. Instead, the purpose has been to describe the changes in the general value creation process. For this purpose, interviews are perhaps not the only possible source of data.
Deciding the proper size of sample can be difficult especially in qualitative studies. For example, how many interviews should be conducted within one company in order to be sure that additional ones would not give any more information? I believe that there is no clear answer to that but due to the fact that all the respondents were working with some kind of business development issues make the findings more reliable. Additional top management interview comments from different secondary sources has been used, which further increases the reliability. I believe that with a longer and more material collected there is a kind of "marginal effect" on the contribution that it brings.
This thesis has focused on
two companies within telecommunication
industry. Other industry actors are excluded. Therefore, the findings cannot said to represent the whole industry but undoubtedly the two most central groups if measured in economic terms, that is Terminal manufacturer (Nokia) and Operator (Sonera).
One further more general research related problem is that as the systems get more and more wider and complex, researchers' position gets also more difficult. Capturing all the necessary elements was not possible due to lack of time, money and other resources. Therefore, some kind of
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compromises are needed in order to be able study areas that are complicated and abstract. Whether this affects the credibility is left to the reader to decide.
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4.TELECOMMUNICATION INDUSTRY
The purpose is not to provide an in-depth analysis of the industry but to give an overall picture of it which will help the reader to understand the empirical findings and bring light to their business logic. Further, the future trends and likely developments will be discussed.
Since the invention of the telephone in 1877, the demand for telecommunication services has steadily ballooned. During the recent years especially the demand for mobile phones has increased rapidly. According to recent studies, the total number of mobile phone users worldwide is over 300 million, double the number of Internet users. It is estimated that in 2005 there will be about one billion mobile phone subscribers, and that a substantial portion of the phones sold that year will have multimedia capabilities. The eventual value of the wireless market alone is expected to reach over $36 billion by the year 20003. With the integration of mobile phones and Internet, the demand for new services is likely to increase heavily. An indication of this is the success of i-mode phones in Japan where the demand has been surprisingly high.
4.1. INDUSTRY TRENDS
The high growth rate and changing technology implies that the telecommunication industry has to go through a whole lot of changes. Deregulation, wireless applications and global competition are all drivers
3
http://www.nokia.com/corporate/wap/files/whitepaper.pdf 34
that have shaped the industry and will continue to do so in the future as well. Telecommunication industry is also a part of other converging industries, namely media, Information Technology and consumer electronics. It is possible that other industries will be added to this list as well. For example, Recently banks have expressed wanting to get their share of the pie especially in mobile transactions. New media, such as broadcast and Internet technologies and services, have become a key development area for telecommunications players wishing to expand beyond their traditional sector restraints. Telecommunication and service providers are aiming at providing added value, such as content, advertising and transactions, as well as developing new revenue streams for continued growth. As tariffs and margins for basic bit carriage decrease, players are realizing they have to move up the supply chain to achieve growth and profits. Many are actively repositioning themselves as information companies rather than telecommunication operators4.
Content is beginning to play an important role in the packaging and pricing of telecommunications services - portal services are a good example of this. The results are partnerships, joint ventures and increasingly complex business models, with new players, such as media and broadcast companies, large corporate users, software companies and content providers also vying to enter this market.5
4
5
http://www.ovum.comhttp://www.ovum.com 35
4.2. FUTURE The future outlook for the industry is bright, however, not every company will survive. The consolidation process will likely continue. The recent merger between Vodafone and Mannesmann will not be the last. In Scandinavia, consolidations have been fewer. The failed merger between Swedish Telia and Norwegian Telenor left the field open to other solutions. It is estimated that after the consolidation phase, each European country market will have a maximum of three full-service, national operators and a number of niche operators. The full-service operators will have a comprehensive portfolio of all basic products, including mobile and Internet access. Because of increasing global reach of most enterprises, each operator must be part of a global alliance to survive beyond the explosion and consolidation phases.6
Figure 7: The Trend in Telecommunication (Source: Gartner Group) Novel partnerships and alliances have already emerged. AOL, for example,
6
Neil, D. Which European Carriers Will Be Left? The Rule of Three Will Apply, 36
Gartner Group Report
announced earlier this year that it had formed links with Nokia and Ericsson, the world's largest and third-largest handset manufacturer respectively. Other alliances are also formed almost daily. For a list of Nokia's recent joint projects please see appendix VI.
4.3. MOBILE COMMERCE
The real hot potato in the telecommunication industry is Wireless Application Protocol (WAP). It is currently one among many technologies that enable Internet access through mobile phones and other mobile devices. In Europe, WAP is the leading technology but, for example in Japan i-mode is the current technology platform. WAP provides an open universal standard for bringing Internet content and advanced value added services to mobile phones and other wireless devices. WAP enables corporations to be part of the wireless future. However, WAP is only a temporary technology standard. In approximately year 2002 the Third generation technology called UMTS (Universal Mobile
Telecommunications System) will allow images, sounds and text to be transmitted simultaneously by phone7. Currently, national authorities are granting licenses for third generation networks, and Finland was the first country in Europe to do so. Spain was also among first countries to grant licenses, for example to Xfera consortium where Sonera is a member.
7
http://www.sonera.fi/investor_en/news/indepth/3.html 37
4.4. TELECOMMUNICATION VALUE CHAIN
As already mentioned, telecommunication industry consist of several key strategic groups. The following industry value chain is widely accepted in the telecommunication industry and it based on a study from Ovum Corporation. It is also similar to the one drawn by a Nokia representative. The key players in this chain are8:
• Network providers/operators
Runs the mobile network, for example Internet Service Provider or GSM network operator Sonera. Provides and gives the end-user access to mobile value added services, but can also be a provider of the service itself.
• Service Providers/Retailers
Provides a mobile service to the end-users, for example bank or travel agency.
• Content Providers
Provides content to the end-user through a service provider, for example games, newspaper.
• Hardware/Terminal Manufacturers
Produce the terminals and other hardware needed to distribute and access the mobile services, for example terminal manufacturer Nokia.
8
Andersen Consulting, Swedish Market Survey, October - November, Wireless
Application Protocol
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• End-users
The subscriber/user of the provided service.
The same actors can also be identified from the figure 7.
Figure 8: Mobile IndustryValue Chain (Source: Andersen Consulting Market Report, 1999).
For the purpose of this thesis, the two main companies studied are shortly introduced in order to provide an overall understanding of their lines of businesses and their respective size.
4.5. SONERA
Sonera is the leading Finnish telecommunication operator company with subsidiaries or joint ventures with other operators in 14 countries. Sonera
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claims to be an international pioneer in the rapidly growing mobile, data and media communications sectors. The company provides both international and domestic services, and is one of the leading suppliers of telecommunications technology. In 1998 Sonera's revenues totalled EUR 1,623 million, and operating profit EUR 289 million. Sonera employs 9,000 people9.
4.6. NOKIA
Nokia is a global company whose key growth areas are wireless and wireline telecommunications. A pioneer in mobile telephony, Nokia is the world's leading mobile phone supplier as well as one of the top suppliers of mobile and fixed telecom networks and services. Nokia also creates solutions and products for fixed and wireless datacommunications. Multimedia terminals and computer monitors round out Nokia's expertise in communications technology. Nokia's net sales in 1999 were 19772 EUR and the company employs more than 56,000 people worldwide10.
The following chapter, "theoretical discussion", will introduce the key theories and research related to the thesis.
9
htpp://www.sonera.fihttp://www.nokia.com/inbrief/facts/index.html 40
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5. THEORETICAL DISCUSSION
This chapter will introduce the reader to the most relevant theories related to the research. The discussion starts with a more philosophical discussion of the definition of value. Thereafter, the focus will turn into comparing the views regarding value creation and models that describe it.
5.1. WHAT IS VALUE?
The notion of value has had a long, complex history. Etymologically, value originally denoted both what people had done and become, and the actions they could perform; and how they traded goods with each others (Ramirez, 1999). Aristotle divided what modern economists simply call value into two categories: use value and exchange value (Fleetwood, 1997). Aristotle was also concerned about the fairness of exchange. He questioned whether a society that pursues exchange value is one that is fair. He argued that should exchange not to be based upon some principle of justice, then it will not "hold the city together" (Fleetwood, 1997). If use value is seeked, some human agency must employ the knowledge of what is needed, then, subsequently, deploy society's productive capacities to meet these needs. Products will be made with one and only one end: to meet their intended purpose. If, however, exchange value is pursued, productive capacities are not deployed to meet predetermined needs, but rather to satisfy a different end: the expansion of value (Meikle, 1991). The expansion of value is what most economist consider value in modern times. Adam Smith took up in his value learn the fact that goods are not equally valuable. The classic value-paradox describes why something so
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useful as water can be so inexpensive as something so useless as diamonds can be so expensive (Sandelin et al., 1995).
5.1.1. ECONIMIC VALUE Since the 18th century, debate has been going on about the relationship between the economic and ethical aspects of value (Ramirez, 1999). The ultimate goal, if not the very nature, of economic activity is to create value. Value is produced by humans acting with each others and using the resources that are at hand. Previous activities are made available for further action to this effect (Normann & Ramirez, 1994). Economic value can be the value which the user is willing to pay for a product or it can be something that is derived from the operations, collaboration or cooperation. Value can be measured economically in many terms. In management literature there exist several kinds of value expression such as company value, economic value, economic profit, economic value added and shareholder value. The latest trend has been focusing on shareholder value and economic value added. According to Porter (1985) the value is in competitive terms- the amount buyers are willing to pay for what a firm provides for them. Value is measured by total profit, which is a reflection of the price a firm's product commands exceeding the cost involved in creating the product. Noteworthy is that according to Porter value is the sum of activities. According to de Wit & Meyer (1998) corporations are instruments, whose purpose it is to create economic value on behalf of those who invest risktaking capital in the enterprise.
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Regardless of the definition of value, a more interesting aspect is the process of value creation and how it has evolved. This discussion will start from the industrial view. 5.1.1 INDUSTRIAL VIEW OF VALUE CREATION The roots of industrial view can be illustrated with the help of input / output -analysis from economics, which analyzes the interrelationships between an industry's output and the inputs needed to produce that output (McConnell & Brue, 1993). Firms seek profits by producing and selling products. The materials and services of factors production, called factor services, that are used in the production process are called inputs, and the goods and services that result from the production are called outputs. One way of looking at the production process is to regard the inputs as being combined to produce the outputs. Another equally possible way is to regard the inputs as being used up, or sacrificed, to gain the outputs (Lipsey & Courant, 1996). Sacrificing inputs to gain outputs is very typical thinking in the industrial view.
Industrial view is said to resemble an assembly line that symbolizes the mass-production model. This model was based on productivity gains obtained by economies of scale in a mechanized process of production of a standardized product. The process was controlled by a large market with specific organizational form: the large corporation structured on the principles of vertical integration, and institutionalized division of labor (Castells, 1998). While assembly actually represented less than 10 percent of industrial labor, something about assembly lines galvanized how value creation occurred in industry, and captured the imagination of management thinking (Ramirez, 1999). The industrial manufacturing value creation is characterized by (Hirschorn,1984):
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1 economies of scale 2 large, physically and temporally concentrated production facilities 3 long production runs 4 mass markets 5 task specialization 6 standardization
5.2. VALUE CHAIN
It is hardly surprising that industrial value production was conceptualized in terms of the value chain. With the chain concept, value creation is not only sequential and linear, but also implies that value is added (Ramirez, 1999). The value chain is a model that builds on the input / output analysis where value is added during different stages. According to Porter (1985) competitive advantage cannot be understood by looking at a firm as a whole. It stems from many activities a firm performs in designing, producing, marketing, delivering and supporting its product.
Examining all the activities a firm performs and how they interact is necessary for analyzing the sources of competitive advantage. The value chain disaggregates a firm into its strategically relevant activities in order to understand the cost drivers and the existing and potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors. It is noticeable that Porter acknowledges only two possible competitive advantages: cost leadership and differentiation. This has been criticized. Baden-Fuller & Stopford argued in De Wit & Meyer (1998) that
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generic strategies are a fallacy. The best companies strive to combine both differentiation and cost leadership and it is not enough to achieve leadership only in one area. Value chain describes a series of value-adding primary activities connecting a company's supply side (raw material, inbound logistics and production processes) with its demand side (outbound logistics, marketing and sales). Support activities provide infrastructure that allow the primary activities to take place on an ongoing basis. Support activities are procurement, technology development, human resource management and firm infrastructure. Activities in a firm's value chain are connected through what is called linkages. The way one activity is performed affects the cost or effectiveness of other activities.
Support Activities
FirmInfrastructure Human Resource Management Technology Development Procurement
Inbound Operations Ougistund and Sales Service Logistics tbo Marketing Lo ics
Mar
Margin
Upstream value activities
Downstream value activities
Primary Activities
Figure 9: The Value Chain (Porter, 1985)
The value chain displays total value, and consists of value activities and a margin. Value activities are the physically and technologically distinct activities a firm performs. These are the building blocks by which a firm
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creates a product valuable to its buyers. Margin is the difference between total value and the collective cost of performing the value activities.
Primary activities are directly involved in creating and bringing value to the customer, whereas support activities enable and improve the performance of the primary activities. Every value activity employs purchased inputs, human resources, and some form of technology to perform its function. Each value activity also uses and creates information, such as buyer data and product failure statistics. The 'support' label underlines that support activities only affect the value delivered to customers to the extent that they affect the performance of primary activities. How each activity is performed will determine its contribution to buyer needs and hence differentiation. Comparing the value chains of competitors exposes differences that determine competitive advantage.
5.2.1. VALUE SYSTEM
Supplier value chains Firm value chain Channel value chains Buyer value chains
Figure 10: The Value System (Porter, 1985)
A firm's value chain is embedded in a larger aggregation of activities that is called the value system. It is worth noting that the term value chain is often used when in fact one is talking about the value system or industry value chain. It is important to distinguish these different terms. Suppliers have inputs used in a firm's chain. Suppliers not only deliver a product but can also influence a firm's performance in many subsequent ways. In addition, many products pass through the value chains or channels on their
46
way to the buyer. Gaining and sustaining a competitive advantage depends on understanding not only a firm's value chain but also how the firm fits in the overall value system.
The value chains of firms in an industry differ, reflecting their histories, strategies, and success of implementation. One important difference is that a firm's value chain may differ in competitive scope from that of its competitors, representing a potential source of competitive advantage. Serving only a particular industry segment may allow a firm to tailor its value chain to that segment and thus resulting in lower costs or differentiation in serving that segment compared to competitors.
5.2.2. COMPETITIVE SCOPE Competitive scope of a firm can have a powerful effect on competitive advantage, because it shapes the configuration and economics of the value chain. There are four dimensions of scope that affect the value chain:
Segment scope. The product varieties produced and buyers served.
Vertical scope. The extent to which activities are performed in-house instead of by independent firms.
Geographic scope. The range of regions, countries, or groups of countries in which a firm competes with a coordinated strategy.
Industry scope. The range of related industries in which the firm competes with a coordinated strategy.
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A firm's competitive scope shapes the configuration of the value chain, and how the activities are shared among units. Broad scope can allow a firm to exploit the benefits of performing activities internally. It may also allow the firm to exploit interrelationships between the value chain that serve different segments, geographic areas or related industries. Narrow scope can allow the tailoring of the chain to serve a particular target segment, geographic area or industry to achieve lower cost or to serve the target in a unique way. Narrow scope in integration may also improve competitive advantage through the firm's purchasing activities that independent firms usally perform better or more cheaply.
Value chain has received a lot critique. Particularly the emergence of new technology has put into question the usefulness of the model. Next I will go trhough some of the viewpoints of how value chains have changed. After that will be discussed the emerging view of value creation.
5.2.3. PRIMARY CRITIQUE TO VALUE CHAIN Stabell & Fjeldstad (1998) have supervised an in-depth application of the value chain model in more than two dozen firms from variety of industries. They have arrived to a conclusion that the value chain appears to be suited to describing and understanding a traditional manufacturing company but the typology and underlying value creation logic are less suitable to the analysis of activities in a number of industries such as service. Furthermore, it is not only difficult to assign and analyze activities in terms of the five primary activities, but the resulting chain often obscures rather than illuminates the essence of value creation. Stabell & Fjeldstad take an
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insurance company as an example. What is received, what is produced and what is shipped in an insurance company? Instead of considering value chain as the only generic value configuration they suggest two other configurations: value shop and value network. The value shop models firms where value is created by mobilizing resources and activities to resolve a particular customer problem (e.g. professional service firms), and the value network models firms that create value by facilitating a network relationship between their customers using a mediating technology (e.g. telephone and transportation companies).
Chakravarthy (1997) saw Porter's framework as useful only if the competitive forces represented by competitors, suppliers, buyers, and substitutes are relatively stable and independent. In this situation, a company can find an appropriate strategy for each industry configuration and erect the necessary barriers for protecting this strategy. Ashkena (1995) criticized value chain in his discussion about the boundaryless organization as not taking into consideration the web of alliances companies have with competitors, partners and suppliers etc. Ashkena argues that in a successful value chain, all members collaborate in both strategic and operational business planning. The goal is not only to achieve better product development and production planning, but also common or coordinated administration and operational procedures such as customer service, purchasing etc. Possible barriers to the integration of activities within members are legal and regulatory tradition, competitive confusion, lack of trust and complexity. For the purpose of this thesis, the most relevant critique to value chain thinking comes from Normann & Ramirez (1994). Their view will be discussed next.
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5.3. EMERGING VIEW OF VALUE CREATION
An alternative view of value creation has been available for some 300 years. According to Ramirez (1999) de Boisguilbert was the first to identify value co-production and proposed an economic model based on interdependence. This took place in 1707! Today, technological breakthroughs are allowing managers and researchers now to take advantage of the options offered by the alternative view of value creation (Ramirez, 1999). Normann & Ramirez's book about value constellation has been influential to the interactive value creation. Their view of the division of work clearly differs from industrial view models, which have taken the value chain as their referent. Normann & Ramirez (1994) sees the value offering instead as a boundary where actors come together to co- produce value, where economic actors come together in "value constellations". From value constellation perspective, value is co-produced by actors who interface with each other. This opens up many opportunities for defining relationships between actors and reassigning activities. If one looks single relationships in a co-productive system, the customer is not only passive buyer of the offering or a target, but also participates in many other ways in consuming it. Furthermore, as actors participate in ways that vary from one offering to the next, and from one customer / supplier relationship to the next, it is not possible to take given characteristics for granted: coproducers constantly reassess each other, and reallocate tasks according to their new views of the comparative advantage they perceived each other to have. Actors are no longer just buying an item, adding item to it, and selling it to the next link of the chain. Instead of adding value one after the other, the partners in the production of an offering create value together through inventing new relationships. This framework has broader
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implications to businesses as well. Ramirez (1999) argued that the organizational structures and managerial arrangements must be changed also to meet new requirements:
"Value co-produced by two or more actors, with and for each others, with and for yet other actors, invites us to rethink organizational structures and managerial arrangements for value creation inherited from the industrial era."
As an illustration of the co-producing view Normann & Ramirez used IKEA as one of the examples. According to them, one of the IKEA's strengths has been the ability to understand where the firm fits in its own customers' value creation universe, and in turn to fit itself in an intelligent way into its suppliers' and partners' value creation system.
In a value co-production view, the economic actors hold different roles in relation not only to different counterparts (one is one's suppliers' customer; one's customers' supplier), but also in relation to a single counterpart. According to Ramirez (1999) economic actors have hold simultaneously several roles:
"One economic actor 'A' may simultaneously be (i) a supplier to another economic actor 'B', (ii) as well as a customer of 'B', (iii) as well as a competitor of 'B', (iv) as well as a partner with 'B' to coproduce value with and for the a third economic actor 'C', and (v) possibly a competitor with 'B's partners, if 'A's own alliance with others competes with 'B's."
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This somewhat chaotic aggregation of relationships can said to hold some truth in the converging industries. Table 1 summarizes the differences between the industrial view and co-productive view:
Industrial view Value creation is sequential, best described in value chains
Co-productive view Value creation is synchronic, interactive, best described in value constellation
All managed values can be measured in monetary terms Value is added
Some managed values cannot be measured or monetized Values are co-invented, combined and reconciled
Customers destroy value Consumption not a factor of production Economic actors analyzed holding one primary role at a time
Customer (co-)create values Consumers managed as factors of production (assets) Economic actors analyzed as holding several different roles simultaneously
Firm and activity are units of analysis
Interactions (offerings) are units of analysis
Table 1: Industrial and Co-productive Views (Ramirez, 1999)
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5.3.1. WHAT IS LACKING FROM THE VALUE CONSTELLATION? Normann and Ramirez's theory regarding the value creation is mostly focused with the buyer / seller relationship. They do not discuss the possibility of competitors co-producing value. Likewise, value
constellation is pretty concentrated on one industry and with vertical relationships. It ignores the impact of aggregations of firms to value creation. One way of describing an aggregation of relationships is the business ecosystem analysis.
5.4. THE BUSINESS ECOSYSTEM
The term business ecosystem was first introduced by James Moore. He defined the ecosystem as being made up of customers, market intermediaries, suppliers, and of oneself. Gossain & Kandiah (1998) extended and refined Moore's original concept to recognize the importance of creating value for customers through information, goods and services, and the use of the internet and other enabling technologies. The basis of the new business ecosystem is similar to an integrated value chain. It builds upon value chain concepts but the term value chain does not completely describe the new business ecosystem for three major reasons:
The term value chain does not adequately capture the relationships between a company, its customers, its suppliers and its partners. The relationships are more than an efficient information flow and sharing of data. In the new business ecosystem, partners do not merely add value at each stage of a chain, they work together, in other words co-produce- to create new value for the customer through an integrated, seamless offering that extends each of their capabilities.
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The relationships between organizations, partners, and customers are intimately linked and constantly evolving. The traditional economic analysis model breaks down when applied to this scenario where conventional boundaries between customers, suppliers, partners, information, goods and services begin to blur. The ecosystem provides a more fluid relationship between these entities and has a significant impact on the economies supporting the ecosystems.
The value chain does not take into consideration the importance of brand. The new business ecosystem, on the other hand, extends the relationship to competitors, complementors and other business partners to deliver services through a single brand.
Constellations are particularly important when discussing virtual value creation. A model that addresses value creation in virtual reality will be discussed next.
5.5. VIRTUAL VALUE CHAIN
Rayport & Sviokla (1995) developed a model for a virtual value chain (VVC). They identified a VVC that runs parallel with the physical value chain. The authors identify value-adding steps that are virtual and performed through and with information. Creating value in any stage of the VVC involves a sequence of five activities: gathering, organizing, selecting, synthesizing and distributing information. In effect, these valueadding steps, in conjunction with the virtual value chain, make up a value matrix that allows companies to identify customers' desires effectively and
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fulfill them more efficiently.
The fundamental difference to original value chain is that the old model treats information as a supporting element of the value adding process, not as a source of value itself. In VVC, the information, which in the physical value chain is merely one part of the supporting infrastructure, becomes an end in itself and one that has commercial value (Czerniawska & Potter, 1998). VVC is nonlinear matrix of potential inputs and outputs that can be accessed and distributed through a wide variety of channels. Managers often use information that they capture on inventory, production, or logistics to help for instance, monitor or control those processes, but they rarely use information itself to create new value for the customer. In many ways information and the mechanisms for delivering it stabilize corporate and industry structures and underlie competitive advantage. But the informational components of value are so deeply embedded in the physical value chain that, in some cases, we are just beginning to acknowledge their separate existence (Evans & Wurster, 1997)
Examples of accessible new markets Gather Organize Select Synthesize Distribute
Physical value chain
Virtual value matrix
Companies create new markets and new relationships with existing markets by applying the five generic value-adding steps of the information world to each activity in the virtual value chain. They create a value matrix.
Figure 11: The Value Matrix (Rayport & Sviokla, 1995)
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The credential of the virtual value chain -model is that it lifts the importance of information as a source of value into the surface. Information is unquestionably a very important element in value creation nowadays. However, the value matrix does not address the effect of networks to value creation. Therefore, the focus will turn next to discussing networks. This discussion will be started by a more general background discussion of networks and their history.
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5.6. NETWORK
Theories regarding networks have gained academic interest for a long period of time. Work which can be recognized as being in the industrial networks tradition has been going on for some fifteen or more years. However, many recent phenomena such as convergence are not well covered in literature. This discussion will start with a definitions of networks.
5.6.1. WHAT IS A NETWORK? According to Axelsson & Easton (1994) a network is a model or metaphor which describes a number, usually a large number, of entities, which are connected. Castells (1998) had rather similar definition. According to him a network is a set of knots. A knot is the point where a curve cuts itself. What then the knot is, in more concrete terms depends on the type of network we are talking about. Network is an open structure with the capability to expand without limits and to integrate new knots as long as they can communicate within the network, that is to say, impose the same communication codes (for example, values and goals). Anderson et al. (1994) had a fairly straight-forward approach to networks. They defined business networks as two or more connected business relationships. This approach to networks is problematic because it would mean that almost every business is part of a network. Components of the network are both autonomous and dependent vis-a-vis the network, and may be the parts of other networks, and therefore of other systems of means aimed at other goals (Castells, 1998).
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5.6.2. STRATEGIC IMPLICATIONS OF NETWORKS Movement towards the network form became apparent in the 1980s, when international competition and rapid technological change forced massive restructuring across U.S. industries and companies (Miles & Snow, 1992). Both the motivations for collaboration and the organizational forms that resulted are quite varied. For example, firms pursue cooperative agreements in order to gain fast access to new technologies or new markets, to benefit from economics of scale in joint research and/or production, to tap into sources of know-how located outside the boundaries of the firm, to share the risks for activities that are beyond the scope or capability of a single organization, and to contract for complementary skills (Powell, 1987).
The strategic implications of network arrangement are important. It allows a firm to specialize in those activities of the value chain that are essential to its competitive advantage, reaping benefits of specialization, focus, and possible size. The other activities are then farmed out to members of the network, that carry them out more efficiently than the hub firm would, since they have specialized in them (Jarillo, 1988). To illustrate, Nokia plans to farm out approximately 70 % of their activities to their partners11. By farming out activities to other members of the network, a firm can lower its costs for those activities it keeps inside, because it can reach economics of scale and develop distinctive competencies (ibid).
Establishing an efficient network implies the ability to lower transactions costs, for it is precisely those costs that lead firms to integrate, shunning away the flexibility offered by a market relationship, together with the
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advantages of specialization, both their own and their suppliers' (Jarillo, 1988). Networks can have a wider context than just farming out activities. Blankenburg-Holm et al. (1999) discussed the business network concept and suggested that the coordination of activities between two partners in a business relationship can also take place within the wider business network context of connected relationships. Each firm is engaged in a set of
business relationships in which it coordinates its activities with those of its partners.
Interesting question is when are networks the best choice of organizing activities? Several situations would certainly fill the criteria but one criteria comes up most often. According to Powell (1987) networks are suitable for circumstances in which there is a need for efficient, reliable information. The most useful information is rarely that which flows down the formal chain of command in an organization, or which is obtained from someone whom one has dealt with in the past and found to be reliable. One trust best information that comes from someone one knows well.
Networks are also particularly useful in businesses which are organized largely around projects. Thus, the actual operating unit becomes the business project, enacted by a network, rather than individual companies or formal groupings of companies. Business projects are implemented in the field of activity, which can be the product lines, organizational tasks, or territorial areas. Appropriate information is critical to companies' performance. (Castells, 1998).
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5.6.3. NETWORK EFFECTS In theory, the value of a network increases every time a new actor is added to it. Classic example is the invention of fax machine. The first fax was worth nothing but each machine that were added increased the value of all fax machines already in use. In similar fashion, the value of the service to customers increases with each new customer added to the network. This phenomenon is called positive externalities and it exist for a variety of products (Stabell & Fjeldstad, 1999). According to Chakravarthy (1997) larger networks have an advantage over small networks because networks with the largest number of consumers always provide more value to consumers than smaller networks do. Therefore, consumers may be willing to pay higher prices to join a large network than they would pay to join a small network. Thus profit per user must continually increase with the number of users. As more and more users flock to it, there is a product or service "lock in". This kind of development is typical in
telecommunication market where many users are locked to one operator. However, network effects can be risky as well. A heavy reliance on connecting to networks can be risky when communications is only a means for achieving larger objectives - not the end itself. Connectivity may matter in decisions about what to produce and how to produce it, but those decisions are in many ways just the beginning of the path to business success (Bernstein, 1998). Large networks can also increase transaction costs and promote chaos. As the amount of members gets too large, managing and organizing activities becomes difficult. Likewise, large customer networks and business relationship networks are not synonyms.
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5.7. INDUSTRIAL NETWORKS
Much of the theoretical literature regarding networks is focused on industrial networks. Therefore, it is reasonable to go through some key elements of industrial networks. Within the European tradition, the industrial network approach has emerged as a separate and viable paradigm in its own right (Easton, 1994). In industrial networks, the entities are actors involved in the economic processes which convert resources to finished goods and services for consumption by end users whether they be individuals or organizations.
Figure 12 from Hakansson & Johanson (1994) describes the very basis of industrial networks. This very simplified model aims to make possible an integrated analysis of stability and development within an industry. The model's basic classes of variables are actors, activities and resources. These variables are related to each other in the overall structure of networks. Actors are defined as those who perform activities and / or control resources. In activities actors use certain resources to change other resources in various ways. Resources are means used by actors when they perform activities. Through these circular definitions a network of actors, a network of activities and a network of resources are related to each other.
Network of actors
Actors
Activities
Resources
Network of activities
Network of resources
Figure 12: Basic Structure of Network Model (Hakansson &
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Johanson, 1994) There are several other ways of approaching networks as well. Easton (1994) approached industrial networks in four different ways: as relationships, structures, position and process.
5.7.1. NETWORKS AS RELATIONSHIPS One approach to networks is to regard them as aggregations of relationships. This provides a rich model of relationships between firms buying from and selling to one another. Interactions, in turn, are said to comprise exchange processes and adaptation processes. The exchange process represent the daily exchanges of a business, of social or informational nature that occur between firms. The adaptation process comprises the processes by means of which firms adjust products, production and routines.
5.7.2. NETWORKS AS STRUCTURES If the firms in an industrial system are interdependent rather than independent then networks will have structure. Interdependence introduces constraints on the actions of individual firms which create structure "in the large". Where there is no interdependence, as is assumed in some economic models, then an industrial system will be unstructured and stochastic in nature. The greater the interdependence the clearer the structure of the network becomes and the more important it is in determining the behavior of individual firms. One way of characterizing the structure of a network is by the division of work among the firms in a network. If a series of transformation activities have to be carried out in order to transform resources into products and services for final
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consumption by customers at any point in the network then individual firms will have the responsibility for those activities. Alternatively, the network might have a large number of firms each carrying out a small proportion of the required conversion activities with a simultaneous increase in exchange activities.
5.7.3. NETWORKS AS POSITION The network as position perspective is partial but powerful. In addition, it has links to other areas of business analysis such as industrial economics and strategy. It represents a different level of analysis since the focus is at least partly upon single firms rather than the network.
5.7.4. NETWORKS AS PROCESSES Where strong inter-organizational relationships exist, a fourth form of coordination emerges: network processes. Coordination is not achieved by some grand master or quasi hierarchy since the firms concerned are too independent and the activities too numerous and diverse to control. Network processes are dominated by the distribution of power and interest structures. Some firms in the network have access to more and better resources than others. This may be a result of historical accident (location, invention, synergy etc.) or may be due to management of the resource base.
5.8. NETWORK RELATIONSHIPS
In a sense, networks are just aggregations of relationships. Thus, it is in place to highlight the importance of relationships in networks. Doz &Hamel (1998) favor strongly relationship building, saying that no company
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can go it alone. For industry giants and ambitious starts-ups alike, strategic partnerships have become central to competitive success in fast-changing global markets. Even if the strategic implications are evident, the role of network relationships for value creation is not well known. BlankenburgHolm et al. (1999) defined value creation effect as engagement in the relationship on the joint profitability of the partner firms. They expected that in the relationship development process the partner firms increase mutual dependence by making mutual commitment with the intention of continuing and developing the relationship. Mutual commitment is defined as willingness on the part of both partners to make short-term sacrifices to realize long-term benefits in the relationship. From the point of view of strategy, the critical issue is not to avoid becoming dependent on the other party, but to build and sustain mutual commitment which enables both partners to engage in value-creating coordination of interdependent activities.
A key idea is that business relationships imply that the two exchange partners coordinate a number of exchange and production activities in a way that increases their interdependence, thereby raising their joint productivity and creating relationship value (Blankenburg-Holm et al., 1999). In order to be competitive, these business relationships must build on mutual trust. A basic hypothesis in social psychology is that the tendency to trust or be suspicious of another person is affected by both the individual's own intentions towards the other person as well as by the individual's perception of the other person (Campbell, 1997).
Commitment to a particular trading partner can leave a firm vulnerable to exploitation. In order for firms to make such a commitment, there must be some mechanism by which the firm can be protected from exploitation.
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One such mechanism is trust (ibid). Trust and mutual dependency result in a more rapid flow of information (Powell, 1987). It is reasonable to expect that a more trustworthy actor is more likely to be a popular exchange partner for other actors in the network (Tsai and Ghoshal, 1998).
5.8.1. NETWORKS AND VALUE CREATION The scope and deepness of relationships vary. Some agreements have less strategic value but other can be vital for the strategy. Campbell (1997) studied European packaging industry and identified four categories of different kinds of relationships between buyers and sellers. Each of these approaches value creation in a different way.
Emphasis on joint value creation Low 2 Low Personal loyalty norms Mutual investment norms High 3
Concerns about degree of firm dependence
1
4
High
Self-centered customer norms
Political control norms
Figure 13: Value Creation Model (Campbell, 1997)
In quadrants 1 and 2, firms have a low emphasis on joint value-creation but the varying importance they attribute to firm autonomy results in quite different partnership norms. In quadrant 1, there is a low emphasis on joint
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value creation and high importance attached to maintaining the firm's autonomy, while firms in quadrant 2 have a lot of emphasis on joint value creation, having a low concern about their firm's dependence on trading partners.
In quadrants 3 and 4 there is a high emphasis on joint value creation in interfirm relationships. In quadrant 3, low importance is attached to preserving firm autonomy. Firms in this quadrant anticipate an on-going relationship with their partner and are thus motivated to develop and refine services, products and methods of interaction that are unique to the relationship. Finally, in quadrant 4, considerable importance is attached to preserving the firm's independence even though there is emphasis on joint value creation.
Relationships cannot be considered as independent of other relationships firms engage in. In addition to simply coordinating their activities, two business relationship partners also coordinate their activities with those of their partners in connected relationships, thereby widening the scope of the coordination to include a set of connected relationships in the business network (Blankenburg-Holm et al., 1999).
The following table summarizes some views of external relationships impact for value creation:
Conventional Wisdom
A New Perspective
Will the Alliance create value? And For Whom? Cost-benefit analysis Value-creation priority
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Complex strategic assessment Value-capture emphasis
Simple complementation Initial structure
Complex co-specialization Evolving process
Will Value Creation Stand the Test of Time? Managing a set of objectives Implementing a simple bargain Making a commitment Achieving longevity Tracking moving targets Striking multiple bargains Creating and maintaining options Contributing to competitiveness
Will the partners reconcile conflicting priorities and concerns? Collaboration Interdependence Trust Collaboration and competition Risk of unbalanced dependence Enlightened mutual interest
How will each partners firm manage its growing web of alliances? Marriage Single relationship Realpolitik, diplomacy Alliance networks
Table 2: Conventional Wisdom vs. New Perspective on Alliances (Doz & Hamel, 1998)
5.8.2. THE ROAD AHEAD - VALUE NETWORK So far many theoretical views regarding networks has been covered. First were given a network definition and the strategic implications were discussed. Thereafter, industrial networks as well as the importance of network relationships were presented. But is there something lacking from this? There are some interesting emerging factors that have not been covered yet such as value creation together with competitors in order to capture a share of future. This framework will be discussed next.
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5.9. VALUE NETWORK -FRAMEWORK
The network discussion has so far focused mostly on the existing network theories, of which many have their roots in the industrial era. The purpose of this section is to present views that are not well-covered either in the industrial view or in the emerging view. For this purpose a framework has been developed. This framework should be considered more as a conceptual framework illustrating some relevant elements. It is reasonable to note that it is most suitable in describing converging industries and cannot, therefore, be generalized directly to other industries. However, it has certainly elements that are present in other industries as well. The figure 15 shows the components of the framework.
Time
Future Share
Goal
Z
Coopetition
X
Coevolving
Y
Strategy Alternatives
Value co-producing & co-creating Convergence New Technology Globalization
MajorDrivers
Figure 14: The Value Network -Framework (Own Production)
5.9.1. WHAT FACTORS ARE DRIVING THE DEVELOPMENT? The starting point of the value network are the major drivers: convergence, new technology and globalization. These are shaping the competitive landscape and companies' operating field (companies marked as X, Y and Z in the framework). For example, it is now technologically possible to
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bring together firms that are separated, for example geographically. New information technology opportunities mean that firms must focus not only on their competitors but also on their collaborators and complementors. Thus, forming alliances, cultivating partners and ensuring compatibility are all critical business decisions (Shapiro & Hal, 1999). Likewise, new technology makes it possible to put more complex information and more intelligence into products, which in turn increases their value (Kelly in Gibson 1997). But the key success factor for companies in the future will be the ability to form value network relationships. Forming external relationships will require cultural, technical and operational changes. Those who manage to do it well are going to rewarded. Companies that are able to form value networks will achieve advantages in cost, service, asset productivity and flexibility (Copacino, 1999).
The new competitive forces affect the value chains even of very competent companies. It is possible that in some industries competitive advantages can be wiped away when new - sometimes somewhat odd- competitors rapidly create new value chains based on new technology which in turn can change the whole situation. Companies should, as a contra-attack, transform their value chain rather than just optimize it. (Downes & Mui, 1999). Perhaps the most powerful of the major drivers is convergence.
5.9.2. CONVERGENCE Convergence refers to a situation where traditional industry boundaries start to disappear. Chakravarthy (1997) has studied converging industries, which he calls for infocom (information and communication). According to him mobility across infocom, even within the same cluster, was difficult
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until recently because of either technological differences or regulatory barriers. Today, it is not unusual for two distinct communication provider companies to compete for same customers. The number of competitive forces that a firm faces has expanded. Coping with the resulting turbulence calls for a new approach to competitive strategy. According to Chakravarthy companies must reconceptualize strategy, share the responsibility for strategy more broadly within the firm, and focus on organizational capabilities as the real source of competitive advantage. Another aspect of Chakravarthy's strategy for coping with the growing turbulence is that companies must rely on changing the rules of the game.
One form of convergence is the emergency of cross-industrialism. It should not be confused with a conglomerate strategy in which the mother company works often more or less as a holding company. Crossindustrialism is a rational initiative aimed of benefiting from other industries that have similar interests, for example in developing technological standards. Cross-industrialism can be described in terms of coopetition.
5.9.3. COOPETITION Brandenburger & Nalebuff (1995) discussed coopetition and how companies should strive for win-win situations. They present examples with the help of game theory but warn that a win-win can eventually lead to a win-lose because of backfires. Gossain & Kandiah (1998) discuss the issue of coopetition in business ecosystems. According to them very few organizations are taking the relationships to the next level, that is, partnering with competitors and complementors in the spirit of coopetition
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in order to increase the pie. They believe that the primary goal is to create value through the increased number and variety of information, services and products. In fact, the more competitors are included, the better the situation. It is easy to see similar situation in telecommunication market: competitors are co-creating markets and then competing for market share in normal fashion.
Somewhat similar viewpoint comes from Chan Kim & Mauborgne (1999) who discussed how an innovation can make competition irrelevant. By redefining the problem an industry focuses on, an innovation shifts the performance criteria that matter to customer. This creates new market space. Market insights are needed to discover existing but hidden demand or to create totally new demand. Standard creation can be used as an example of creating new market space because without a commonly accepted standard, the market would perhaps not exist at all or would be highly fragmented. But innovations do not make competition irrelevant; moreover, it changes or gives new roles to competitors who become partners and co-developers.
5.9.4. COEVOLVING One element of the value network -framework is coevolving. This term is introduced by Eisenhart & Galunic (2000) in describing corporate strategy process for multibusiness companies. Furthermore, the term has similarities to external relationships as well. Coevolving usually takes place between partners instead of competitors as was the case in coopetition. It resembles the external ecosystems that link corporations together in webs of alliances. In coevolving, the result is a shifting web of
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relationships that exploits fresh opportunities for synergies and drops deteriorating ones. The term coevolution originated in biology. It refers to successive changes among two or more ecologically interdependent but unique species which result in their evolutionary trajectories becoming intertwined over time. While these species adapt to their environment, they also adapt to one another. The result is an ecosystem of partially interdependent species that adapt together. This interdependence is often symbiotic (each species helps the other), but it can also be commensalist (one species uses the other). Competitive interdependence can emerge as well: one species may drive out the other, or both species may evolve into distinct, noncompetitive niches. Interdependence can change, too, such as when external factors like climate or geology shift.
Coevolving is a particularly crucial strategic process in new economy corporations, where higher velocity markets drive managers to keep individual businesses small enough to adapt, but where intense competition demands that they maintain economies of scope and rapid cross-business learning. Understanding the essentials, that is frequently reconnecting the relationships among businesses, blur collaboration and competition, manage the number of connections and uncover high-leverage links -are crucial for companies that hope to coevolve.
5.9.5. FUTURE SHARE Coopetition and coevolving are possible strategy alternatives for achieving a share of future. The term future share is developed by Hamel & Prahalad
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(1994) who believed that organizational transformation should start from the view about the future of the industry:
How does the company want its industry to be shaped in five years? What must the company do to ensure that the industry evolves in a way that is maximally advantageous for it? What skills and capabilities must the company begin to build now, if it is to occupy the industry high ground in the future?
Since most companies do not start with a shared view of the future, managers should develop a process for pulling together the collective wisdom within an organization. Hamel & Prahalad's main argument is that competition for the future is competition for future share rather than market share. It is competition to maximize the share of future opportunities a company could potentially access within a broad opportunity arena. The question that must be answered by every company is, that given the company's current skills, or competencies, as the are called, what share of future opportunities are it likely to capture?
Future share requires that company possesses good understanding of the industry development and trends. Industry foresight is based on deep insights into trends in technology, demographics, regulations and lifestyles, which can be harnessed to rewrite industry rules and create new competitive space. While understanding the potential implications of such trends requires creativity and imagination, any vision that is not based on a solid foundation is likely to be fantastical (Hamel & Prahalad, 1994). The focus should not lie solely on firm's own industry. If a company is interested in understanding the future, most of what it needs to learn about
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the future is going to be learned outside of its own industry (Hamel in Gibson 1997).
5.9.6. SUMMARY OF VALUE NETWORK -FRAMEWORK Much of the today's competition is focused on the future. Firms are trying to establish a defensible position in order to capture a good slice of the
future share. The value network -network conceptualizes the major drivers affecting the industry as well as presenting alternative strategies coopetition and coevolving- that help companies capture their share of future. Value is created in this framework with the help of coopetition and coevolving.
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6. EMPIRICAL FINDINGS
In this chapter will be presented the empirical data retrieved during interviews and from other external sources. This section is organized around the three views of value creation: industrial, emerging and network. Additionally, one further illustrative case will be presented, which is SyncML. My comments and synthesis are included to simplify the understanding of the data.
6.1. INDUSTRIAL VIEW OF VALUE CREATION
As discussed earlier in the theoretical part, the industrial view of value creation takes the value chain as referent. To make it more convenient especially to respondents who may not know the industrial view so well I have chosen to use the value chain as an illustrator of the industrial view. The model is based on the classical input / output theory where value creation process is linear and additive. Thus, the questions relate to the value chain and how the respondents see its relevance today as a model for describing their firm's activities. In general, answer from Nokia representatives relate in the first place to Nokia Mobile Phones.
The first question takes up immediately the usefulness of the value chain.
How do you see the usefulness and validity of the value chain as a model describing your company's activities?
"We at Nokia consider value chain as a good model to conceptualize our business. It works also as a thought clearer. But in order to get
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something out of the value chain, it must be kept in fairly simple level and not expanded too much." Ilari Nurmi, Business Development Manager, Nokia Mobile Phones
Another Nokia representative interviewed had a similar view about value chain's usefulness but stressed more its simplicity:
"Value chain is one way and a tool to describe reality. It is most useful when we want to get simple enough view of the total situation." Timo Saraketo, Senior Manager, Nokia Mobile Phones
The opinions of the Sonera representative interviewed was very close to those of Nokia's representatives:
"The value chain can be used to provide a practical, illustrative picture of the situation." Pirjo Kekäläinen-Torvinen, Senior Vice President, Sonera
Furthermore, she remarked the need to look at each business separately:
"You have to look at the each business as a separate value chain. It is not possible to describe the whole corporation as a single value chain. We are a sum of several businesses, activities and services."
While there seems to be a consensus in regarding the value chain as a good, simple illustrator of the current situation, many important value creating aspects are being ignored. For this thesis, perhaps a more interesting aspect is the importance of external relationships to value
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creation and especially how the chosen companies are co-producing and co-creating value. To find this out the focus must be turned to the emerging view.
6.2. EMERGING VIEW OF VALUE CREATION
The emerging view emphasises the importance of interactive relationships to value creation, and instead of talking about linear view, it views value creation as a synchronic and non-additive process. Value is co-produced and co-created. Therefore, it is interesting to study the impact of external relationships. These can refer to different kinds of joint projects, cooperations that firms establish between their suppliers, partners, alliances, competitors, complementors, customers etc. According to one Nokia representative, Nokia is engaged in hundreds of different kinds of external relationships including their main competitors Motorola, Ericsson, and other players from converging industries such as Microsoft, Yahoo!, Amazon.com, Cisco Systems, IBM, Philips etc. (For more detailed list see appendix VI and VII). The situation is rather similar for Sonera. The company is engaged in several joint projects with companies such as Vivendi, Ericsson etc.
In both companies the number of external relationships is much greater if supplier partnerships are included also. Many of the external relationships are projects that focus on research and development, standard creation or bringing new products and services to market. As the amount of joint projects increases it is interesting to find out motives for them and especially how they affect value creation.
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In how many co-operations is your company involved at the moment?
"It is impossible to give an exact estimation of all partnerships and alliances. In addition, many of them are confidential. But the total number is measured in hundreds." Timo Saraketo, Nokia
"It is difficult to estimate the exact number. Cooperation is a very broad definition and it can include a lot of different forms. There are more loose forms and there are very tight forms as well. If we consider partnerships, there are approximately 10 important partnerships. However, we think that a partnership is a very loaded word." Ilari Nurmi, Nokia
Will the amount of external relationship increase in the future?
"The role and amount of external relationships will definitely increase in the future." Ilari Nurmi, Nokia
"The amount of external relationships keeps increasing and our field of operation keeps getting larger." Sonera Pirjo Kekäläinen-Torvinen,
One interesting viewpoint regarding the role of external relationships comes from the CEO of Nokia Jorma Ollila who in a magazine interview12 expressed that despite the current growth rate of 25-30 % Nokia who currently employs 56,000 people, will not have over 100,000 employees in the future.
12
Talouselämä, 14 2000 78
"Our goal is that sales per employee will grow, that is that we could be able to slower the total growth of employees."
How do you choose your partners and allies?
"There are no single most important criteria. It depends on a given situation and is case related. First of all we have to define our vision and goals. We need to answer to the question what do we want next? After we have done that we try to find tools and ways to do it. There are several options available, for example alliances, partnerships. The final step then is decision making." Ilari Nurmi, Nokia
"In the Amazon.com case (see appendix VI) we wanted to be involved with a top player and promote ourselves. One could say that we wanted to create some hype." Ilari Nurmi, Nokia
"All our partners have to be considered as "good corporate citizens." Pirjo Kekäläinen-Torvinen, Sonera
One criteria that comes up in discussions with particularly Nokia representatives is "market making". This term refers to a situation where a company is creating or shaping the future market to its desired direction. However, this cannot be done alone.
"We strongly want to be "market makers ". Many alliances or partnerships build on that concept." Ilari Nurmi, Nokia
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Rather similar viewpoint comes from one Sonera representative who addressed the need to get right partners. "You cannot develop this kind of service (GPS, which is a service that can locate the mobile phone user) as a solo effort. You have to set up networks and service chains between diverse partners, even unlikely ones. It's all about integrating services and creating new value chains" Jari Jaakkola, Sonera's Executive Vice President of Corporate Communications & Investor Relations13
Another interesting aspect is that while the amount of relationships increases, and gains perhaps a more strategic role, measuring the impact of these relationships to value creation gets more important. One way is discussed in the SyncML case (6.4.) but the following questions take up the question in more general terms.
How do the external relationships create value?
"It is likely that external relationships bring clear value that cannot be captured by existing models. But how would one draw these (external relationships) to the model. I do not have an answer to that." Timo Saraketo, Nokia
Another way of creating value is being the first one in the market. This is sometimes referred as "winner takes it all" -phenomenon.
"Time to market is vital. First mover advantages are often very big."
13
in Sonerasound, Sonera Journal April 1/00 80
Ilari Nurmi, Nokia
One interesting point of view regarding the importance of external relationships comes from the Sonera representative. The answer refers to Xfera Movile S.A. of Spain, in which Sonera Corporation is a founding shareholder (15%). This company has been granted a third generation mobile network licence in Spain. The below comment illustrates the importance of relationships even if their effects cannot be considered in purely economic terms.
"In the "beauty contest14" one applicant will not get the license. That is a fact. It was also absolutely necessary to have Spanish partner otherwise we would not have had any change (of getting the license)". Pirjo Kekäläinen-Torvinen, Sonera
The issue of measuring success of joint projects has been problematic. It is obvious that more than economic criteria are needed. But how can one estimate, for example future cash flows of a market that has not been created? This problematic has received academic attention as well. Associate Professor Toby Stuart expressed the problematic in following fashion:
"Pure economic numbers do not give a comprehensive picture of external relationships impact to businesses. Such aspects as organizational learning or knowledge sharing are almost impossible to quantify. The difficulties to measure (effects) has held back the
14
By the expression "beauty contest" is meant in this context, a situation where the
applicants will be chosen by qualitative arguments in contrast to bidding auctions. 81
academic research in this area15" If the academic research has been held back, businesses have not had the luxury of waiting until appropriate models have been built.
How do you evaluate success in external relationships?
"There are no single most important criteria in success evaluation. First we need to see what our objective was in the first place. Then we start to evaluate the results. There are both soft and hard criteria. Often we have to rely on qualitative judgment. Pure numeric or quantitative measures are not useful in every cases and they do not catch all the important elements. Of course, we need to make money in the long run but in the short run profits are not so relevant." Ilari Nurmi, Nokia
The fact that Nokia can afford to make losses in the short run can be also verified by checking the financial numbers of Nokia Ventures Organization, which made a operating loss of 175 EUR Millions in 199916. The objective of Nokia Ventures is to partner with and support entrepreneurs in building successful companies. These companies include many start ups such as pogo.com, hotpaper.com, FusionOne etc.
"We benefit from being such a big player. We don't have to have right every time, that is, we are allowed to make some mistakes but
15
Associate Professor Toby Stuart, Graduate School of Business, University of Chicago,
in a non-public interview.
16
http://www.nokia.com/investor/2000/1Q/index.html 82
we have to be right 98 % of time. Here economies of scale come into picture. But quickness must also be maintained." Ilari Nurmi, Nokia
6.3. VALUE NETWORK
The first value network question relates to network thinking in general and whether one can think that companies are part of a network. It is worth keeping in mind that when discussing a value network the respondents do not refer to the value network -framework (5.9.).
"As the amount of external relationships keep increasing and field of operation gets larger, it is perhaps wrong to describe (business) in terms of a "chain". More likely, it is a network. However, the whole concept of network does not have a lot normative value. It is too wide and a complex theory to be applied in practice." Pirjo KekäläinenTorvinen, Sonera
"Nokia has tried to create pictures of its total value network but the results have been poor and have not served the purpose. It is important that we manage to communicate our goals to as many people as possible. To that purpose value chain has been suitable but it must be kept in a simple abstraction level. As said, we use the value chain as a tool which simplifies qualitatively. We need to make shortcuts and describe the real problem instead. Theoretical views should not override common sense and user friendliness. Sometimes we make a more high level description. We also make lower level descriptions. It must "fit the purpose". However, if the whole company is taken into scrutiny, one could say that we are a part of a value network. For example, there are several business ecosystems that have a core and a lot of application providers around it." Ilari
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Nurmi, Nokia
When asked about the impact of convergence to value network framework, the following comment was received:
"In convergence, everybody brings their strengths to the picture. We call it a union where especially quality and logistic are important. Likewise, agility and ability to implement and create rule for the play are important." Ilari Nurmi, Nokia
One central element of value network is coopetition. This is illustrated most easily with the help of an example. For that purpose, SyncML has been chosen. This initiative is a good example of how companies are "cocreating future" by establishing common standards. It relates also to the future share discussion in the value network -framework. Nokia is involved in many similar standard creation projects such as Bluetooth, Symbian etc. Similarly, Sonera is involved in standard creation projects but those will not be discussed in this thesis.
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6.4. CASE SYNCML
SyncML is a initiative to develop and promote a single, common data synchronization protocol that can be used industry-wide in converging industries. SyncML is being driven by Nokia in cooperation with IBM, Lotus, Motorola, Palm Inc., Psion and Starfish Software. According to one Nokia representative, the initiative has come from them. The SyncML initiative is open to industry partners, such as synchronization software vendors, application developers, device manufactures, service providers. A company can become a supporter of the SyncML initiative free of charge. The SyncML initiative expects to release an open protocol for data synchronization in mid 200017.
6.4.1. MOTIVES FOR SYNCML The popularity of mobile computing and communications devices is rooted in the ability to deliver information to users almost any time and anywhere. The key factor in the popularity of mobile communication is the ability to access and update information on the fly, and then to accurately synchronize that information with compatible applications in the office. It is said that mobile computing has an Achilles heel - data synchronization. Today almost every device uses a different technology for performing data synchronization. All the popular mobile devices - handheld computers, mobile phones, pagers, laptops - synchronize their data with network applications, desktop calendars, and other locations where information is stored. The ability to access and update information on the fly is the key to pervasive nature of mobile computing.
17
SyncML White Paper, Building an Industry-Wide Mobile Data Synchronization 85
Protocol
The SyncML is a fairly typical initiative in converging industries. Similar examples could be found as well, for example Symbian and Bluetooth. From the research point of view, SyncML is interesting because it
illustrates the value creation effect of the relationships between competitors. From the value creation perspective, these kind of joint projects between competitors are important: without a largely accepted standard, the market will not reach the desired scope. The SyncML will be discussed in this thesis only from Nokia's point of view. However, I do not believe that the motives of other members would differ much from Nokia's. Following comments are from Nokia representatives.
What is the importance of creating standards together with partners?
"We strongly want to be "market makers". Many alliances or partnerships build on that concept. We all benefit if we can create a market that grows and that the standards are widely accepted and used. Our role together with competitors is to be able to create standards so that the market can blossom." Ilari Nurmi
"First of all, we identified a need for data synchronization. Thereafter, we made a decision of doing something for it. Then we identified suitable partners and that is how it all got started." Timo Saraketo
"The job (standard creation) must be started well ahead of the end users even realize this." Ilari Nurmi
What is the biggest advantage of joint standard creation?
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"Standard creation's biggest advantage is to avoid the market fragmentation. This allows us to enlarge the business ecosystem". Ilari Nurmi
"Perhaps the biggest advantage of SyncML is that we can avoid a market fragmentation. Of course it also opens up new business opportunities" Timo Saraketo
"Nokia as a well established and strong player has a good position in the future when it comes to building standards and making market. Especially technical coopetition is very important." Ilari Nurmi
"The idea of coopetition builds on the following reasoning: it is everybody's benefit that the standards are open. Firms benefit from this as well as the consumers. After the standard is created, we compete for customers with our strengths and quality." Timo Saraketo
As said earlier, Sonera also believes in creating industry standards. The following comment from Sonera's Executive Vice President KajErik Relander18 does not relate to SyncML but it highlights that their viewpoint is similar to Nokia's.
"if your company establishes the industry standard, whether it be de facto standard or a genuine technological breakthrough, customer will turn out in drove."
18
In Sonerasound, Sonera Journal April 1/00. 87
7. ANALYSIS
This chapter is organized in similar fashion as the previous chapter, that is around the three different views of value creation.
7.1. INDUSTRIAL VIEW
Perhaps the most logical explanation to the diminishing importance of industrial view can be found by looking at the society's total shift from a manufacturing society to an information society. In the manufacturing society, linear mass-production was the basis for organizing activities. In the information society, immaterial or intangible products are becoming more important. This general shift in the society is affecting also the value creation process. There are several other drivers affecting the development as well, such as new technology, globalization and convergence. Thus, change is always a mix of different factors.
It would be unwise to state that the industrial view does not hold much truth anymore. Industrial view's credentials should be recognized, for example in considering the comments from Nokia regarding the importance of economies of scale. Industrial view certainly has elements that are still important but at the same time, it should be considered as incomplete. In other words, industrial view neglects many important aspects of value creation. But before the attention will be turned to those, a discussion of the value chain, which embodies the industrial view, will be derived.
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7.1.1. VALUE CHAIN Not many theories have become so embedded in management vocabulary or literature than the value chain. It is almost impossible to open a business magazine and not to find a CEO stating how they are redesigning their value chain. But as the model has become so widely accepted, so have also the misconceptions about it. As mentioned in the theoretical part, the value chain is often used as a synonym for the industry value chain. These two concepts are not synonyms and should be kept separate.
If theoretical misconceptions are left aside, we can identify a consensus among respondents that the value chain seems to have value as an analytical tool. It's power is simplicity but this is also a weakness. Every person interviewed pointed out that it is no longer possible to describe the entire firm and all its activities with the help of value chain. The general value creation process itself has become more synchronic and complex. However, value chain can used be as a tool to deliver complex issues to a wider audience within the organization. It can provide a simple overall picture, and more importantly a picture that is easy to understand and communicate. In that sense, the model has value. But as stated many times before, value chain and the industrial view neglects many important aspects that create value. These will be discussed next.
7.2. EMERGING VIEW OF VALUE CREATION
Co-producing and co-creating aspects are central in the emerging view. Likewise, the fact that all economic activities cannot be measured in economic numbers is an important notion. Telecommunication industry provides describing examples of how co-producing and co-creating can
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provide real value as seen in the SyncML case. However, as the original emerging view focused mostly on buyer / seller -relationship, some factors are left uncovered. For example, the whole definition of convergence implies a blurring of industry structures. A good example of this is the emergence of Internet and how it is gradually starting to be incorporated into more products such as mobile phones, cars etc. This further blurs industry structures.
However, blurring cannot be done without co-creation and co-production. This means that firms have to seek novel partnerships outside the organizational constraints. Every respondent had a similar view concerning the amount of external relationships increasing in the future and them becoming strategic by nature. Another relevant point of view was that some of the products or services cannot be developed as a solo effort. One reason for this is that the technological development is so rapid that it is impossible to keep all the necessary skills and capabilities in-house. Another major reason for forming relationships is globalization. Together with new technology, globalization means that there is less time to expand markets. A fast alternative is to partner with local players. Another interesting aspect was that relationships often have a strong political side as was seen in the Xfera Case. Shapiro & Hal (1999) expressed this by saying that competition is becoming a mixture of politics and economics.
Perhaps one aspect that has not received enough attention in this thesis is the promotional aspect of different forms of external relationships. The comment from Nokia respondent saying that they wanted to promote themselves by allying with Amazon.com shows that in today's shareholder oriented world companies must also find ways to feed the hunger of capital
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markets by providing promises of bright future and high growth. Partners that are leading in their own field are naturally more attractive and "sexy" than industry laggards.
The studied companies were engaged in several external relationships especially Nokia. From the point of view of value creation measuring these are gray area. The answer from one Nokia representative stating that soft numbers are often used in measuring the results, illustrates well the difficulties of using economic measures to evaluate external relationships. Naturally it is possible to estimate the cost of a project but the revenue side is more troublesome. Some of the projects may never become realized. This viewpoint falls close to the idea of future share (Hamel & Prahalad, 1994). Furthermore, the answer that a big company can afford to have wrong sometimes lifts up the point that many of joint projects are highly risky and perhaps based on a possible stroke of luck - a certain kind of 21st century gold mining. Blankenburg-Holm et al. (1999) discussed the relationships between companies and defined mutual commitment as a willingness on the part of both partners to make short-term sacrifices to realize long-term benefits in the relationship. This was the case for Nokia. This emphasis resembles also Campbell's (1997) mutual investment norm - category in the value creation model. One noticeable point is that the representatives seem to have similar views about the fact that no company can go it alone. As seen in the Xfera Case, Sonera would not have been granted the license without (Spanish) partners at least according to the respondent. The main reason for this was the political character of the process, however, the competitive factors played a role as well.
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7.3. VALUE NETWORK
One of the "hypotheses" in this thesis has been that networks are becoming so complex that describing them with existing models and theories seems impossible. But are they networks in the first place or just loose aggregations of economic actors? In a conceptual level, this is probably the case. But if considered in legal terms, this is not the case.
The value network -framework is by no means a comprehensive picture of reality. Instead, it is an attempt to highlight some of the major drivers and some alternative strategies for companies in the battle for future shares. Other actors could be added to the framework, however, the result would be merely a picture of different stakeholders. Secondly, to understand the logic behind external relationships requires a deeper understanding of their nature, not just seeing the simple picture. On the other hand, simple illustrations can have value as well. There was a consensus among respondents that both Nokia and Sonera are a part of a network but no one could give an illustration of how the network would look like. One possible reason for this is that the companies simply have too many relationships and links between different actors which make it almost impossible to identify them all and see their impact to the overall network. Nokia has tried to create a model for value network but has given up the job due to the difficulties in doing so.
This is interesting from the researchers point of view: if the current theories are not describing the reality, there is a need to build models that will do so. However, since the reality is getting so complex and interrelated, it is difficult to form models that would be powerful enough not leave any important factors uncovered. This leads to a somewhat
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paradoxical situation. Perhaps even more important a factor is that managers and researcher are aware of the complexity and interrelations of today's business world. It is important that managers have a mind-set that sees the new emerging opportunities, which often require creativity and thinking "outside the box". Many potential business opportunities may be lost if the old somewhat rigid models are applied solely. For example, bringing customer into the general value creation process can open up qualitative new ways of making business. Likewise, seeing competitors as partners can be difficult for many, although the results from converging industries illustrate the power of coopetition.
7.3.1. COOPETITION The respondents had all rather similar opinions about the role of coopetion. The biggest advantage was clearly the avoidance of fragmented markets. Therefore, it lies in the interest of all to create technological standards that are applied as widely as possible. This allows the market to blossom. It is in place to remember that coopetition has two faces: one is co-operation and the other is competition. Coopetition does not replace competition; in fact, competition continues as hard as usually after the joint project is over. But coopetition is an initiative to utilize external relationships in a creative way that can create added value to every actor involved. But the eventual value will be realized later on, that is, in the future.
7.3.2. FUTURE SHARE In the value network -framework, companies are seeking to maximize their share of the future. In discussion with Nokia representatives, the term
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"market making" came up in several occasions. As a theoretical concept, it is not well known. The term refers to a situation where a firm is seeking to move or shape the market to desired direction. Creation of technical standards is one good example of this. Market making has some similarities to the theory of future share. The market making in the telecommunication industry is a collaborative process that involves competitors from the same and other industries and cross-industrial partners. SyncML is an example of both market making and coopetition. As seen in one of the Nokia comments many of their alliances or partnerships are build on the market making concept.
Even if SyncML is not promoted as a network, it has similarities to Easton's (1994) definitions of networks (5.7). However, I believe that none of Easton's definitions is suitable for SyncML. I think that a fifth definition would perhaps be more suitable: network as a purpose. In this approach, network is formed to deliver a common purpose or a rational initiative. In the SyncML case, purpose is of course the creation of
common technological standard. Firms gather for the sake of a joint purpose, co-create it and then go each to their own directions. Firms are engaged simultaneously in several similar networks, for example Nokia in SyncML, Symbian and Bluetooth. The fact that the amount of networks and purposes is many, shows on one hand how interrelated companies in fact are, and on the other hand the power of external relationships. Furhtermore, these are major implications for companies. The key to success lies often in understanding the significance of relationships to value creation. Managing numerous simultaneous relationships form other challenges for managers.
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8. CONCLUSIONS
This thesis started with a discussion of three main drivers that are affecting the way value is created. These were new technology, global competition and convergence. At this stage it should be evident that these drivers are real and affect the way business is made. While a possible way of describing the impacts was presented in the value network -framework, the theoretical starting point was the industrial view. This view of value creation has lost a lot of its vitality. In its purest form, industrial view simple is too narrow-minded for today's interconnected world, neglecting many important aspects. The value chain as a kind of manifestation of the industrial view implies a very simple illustration of a firm's activities. Especially new technology and convergence are tearing rigid structures apart and forcing companies to co-operate in various forms. As the transactions costs decrease, the market becomes a more economic alternative for producing activities. Likewise, the interconnected world means that companies actively try to shape their industry (industries) into desired direction. Nokia and their commitment to market making is a describing example of how a proactive approach can be a preferable alternative and also successful.
But no company can shape the landscape by itself; they need help from others. One form of this is coopetition, which has emerged as a way of creating future the in form of developing, for example, open technical standards as seen in the SyncML Case. These co-operations at best will make market bloom and no negative market fragmentation occurs. Every cooperative process involves also political aspects. As stated by the Sonera representative, politics play a very important role. As the stakes get higher, it is likely that politics will become more central.
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When it comes to the emerging view of value creation, perhaps the most important contribution of this thesis is bringing into surface co-creation and co-production between competitors. As discussed previously, Normann & Ramirez were mostly concerned about the buyer / seller - relationship. Thus, this thesis hopes to add new components to their theory. This was partly done with the help of value network -framework.
I believe that network is a proper term to describe the situation where the studied companies are at the moment. The idea of being part of a network was also verified by the respondents but a lot uncertainty remained about what should be included in network and what is the normative value of such an illustration. The value network that has been developed tries to illustrate how the major drivers are forcing companies to take some strategic action in order to get their share of the future.
The value network -framework is double barreled from the researcher point of view. If more and more complexity is added to a model, the lesser is its powerfulness. In similar fashion, as networks grow to include more actors, it is very difficult to form a good overall picture of them. Simply stating, just a list of actors who are part of the network has very little normative value. It may give a picture of a some kind of the system, but for management purpose is not sufficient. I believe there are two possible solutions to this dilemma. One solution is to realize that a company is part of a very complex network that consists of several different kinds of actors, but for the purpose of strategy planning the existing models such as value chain will be used. It is important then to be aware that the model is a simplification of reality, not a truthful representation of it. This viewpoint is similar to those received from interviews with Nokia and
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Sonera representatives. The other solution is of course to build a model which can capture the complexity of value networks. The framework presented does this only partially.
There are two key aspects stemming from this thesis that should be taken into account by managers. First, the importance of external relationships to value creation. Whether called for constellation or network, managers should understand what potentiality lies outside their own organizational constraints. There is enough empirical evidence supporting the fact that external relationships are providing real value, and, importantly their role will increase in the future. Value can be generated in various ways. In information society, companies should seek qualitative partners and actively move -as far as it is possible-their industry into the desired direction. As said in the background, industry rule breaking starts with mental framebreaking. Creative and unconventional solutions may prove to be real killer applications in future. The second key aspect is the realization of how interconnected companies in fact are. Reality is far more complex than the industrial view theories imply. Likewise, creating a competitive advantage cannot be done only by configuring one's own internal activities. Firms are so embedded in their environment that perhaps competitive advantages will be derived from making some right decisions concerning:
What should we keep inside, that is what is the soul of the company? With whom and for what purpose should we cooperate? How do we manage to control all relationships we are engaged in?
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8.1. FUTURE RESEARCH
As the amount of interconnections between economic actors grows, managing complexity may eventually become one of future mantras. Researching the effects of complexity or chaos will certainly provide fascinating topics for research. For that purpose will be needed new frameworks that in a better fashion can capture the dynamics and importance of interrelationships. Another intriguing questions is that what is the clue that binds networks together? Is it values, culture or pure economic rationality? How can this be communicated to every actor involved? And how does one avoid unnecessary hierarchy which is one implication of increase in relationships? Finally, the question of competitive advantage in the interrelated world is worth studying: is it brand, network, intelligent capital or perhaps the good old economies of scale, or maybe a some combination?
8.2. FINAL WORD
This thesis started by stating that the understanding of value is often as outdated as the old assembly line that it resembles and so is the view of strategy that goes with it. My most humble wish is that after reading this thesis, the reader would agree that value creation is far more complex an issue than the assembly line illustration assumes it to be.
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Appendix I: References
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Aldrich, D. (1998) The New Value Chain, Informationweek, September 14.
Arbnor, I. & Bjerke, B. (1994). Företagsekonomisk metodlära. 2 edition. Lund, Sweden: Studentlitteratur.
Arbnor, I. & Bjerke, B. (1997) (2 edition) Methodology for Creating Business Knowledge, London: Sage Publications.
Ashkenas, R. (1995) The Boundaryless Organization: Breaking the Chains of Organizational Structure, San Francisco: Jossey-Bass Publishers.
Axelsson, B. & Easton, G. (Ed.) (1994) Industrial Networks: A New View of Reality, London: Routledge.
Baden-Fuller, C. & Stopford, J. in De Wit, B. & Meyer, R. (1998) Strategy: Process, Content, Context, an International Perspective, London: International Thomson Business Press.
Bernstein, P. (1998) Are Networks Driving the New Economy? Harvard Business Review, November-December.
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Blankenburg-Holm, D., Eriksson, K. & Johansson, J. (1999) Creating Value Through Mutual Commitment to Business Network Relationships, Strategic Management Journal, Issue 20.
Brandenburger, A. & Nalebuff, B. (1995) The Right Game: Use Game Theory to Shape Strategy, Harvard Business Review, July-August.
Campbell, A. (1997) Buyer - Supplier Partnerships: Flip Sides of the Same Coin? Journal of Business & Industrial Marketing, Vol. 12 NO. 6.
Cartwright, S. (2000) Untangling the Value Web, The Journal of Business Strategy, January-february.
Castells, M. (1998) The Rise of the Network society , Cambridge, Massachusetts: Blackwell Publishers.
Chakravarthy, B. (1997) A New Strategy Framework for Coping With Turbulence, Sloan Management Review, Winter 1997.
Chan Kim, W. & Mauborgne, R. (1999) Creating New Market Space, Harvard Business Review, January-February.
Copacino, W. (1999) The Emergence of "Value Networks" , Logistics Management and Distribution Report Radnor August.
Czerniawska, F. & Potter, G. (1998) Business in a Virtual World: Exploiting Information for Competitive Advantage: London: MacMillan Business.
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De Wit, B. & Meyer, R. (1998) Strategy: Process, Content, Context, an International Perspective, London: International Thomson Business Press.
Downes, L. (1999) Unleashing the Killer App: Digital Strategies for Market Dominance, Boston, Massachusetts: Harvard Business School Press.
Doz, Y. & Hamel, G. (1998) Alliance Advantage : The Art of Creating Value Through Partnering, Boston, Massachusetts: Harvard Business School Press.
Eisenhart, K. & Galunic, C. (2000) Coevolving: At Last, a Way to Make Synergies Work, Harvard Business Review, January - February.
Evans, P. & Wurster, T. (1997) Strategy and New Economics of Information, Harvard Business Review, September -October.
Fleetwood, S. (1997) Aristotle in the 21st Century, Cambridge Journal of Economics, Vol. 21.
Gibson, R. (Ed.) (1997) Rethinking the future, London: Nicholas Brealey Publishing.
Glesne, C. & Peshkin A. (1992) Becoming Qualitative Researchers, an Introduction, University of Vermont: Longman.
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Gosssain, S. & Kandiah, G. (1998) Reinventing Value: The New Business Ecosystem, Strategy and Leadership, November-December.
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Hamel, G., Doz, Y. & Prahalad, C.K. (1989) Collaborate with your Competitors - and Win, Harvard Business Review, January-February.
Hamel, G. & Prahalad, C.K. (1994) Competing for the Future, Harvard Business Review, July.
Hellgren, B. & Melin, L. (1993) The Role of Strategists' Ways-of-thinking in Strategic Change Processes, Strategic Thinking: Leadership and the Management of Change.
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Kvale, S. (1989) Issues of Validity in Qualitative Research , Lund: Studentlitteratur.
Layder, D. (1994) Understanding Social Theory , London: Sage Publications.
Lipsey, R. & Courant, P. (1996) Economics, 11th edition, New York: Harper Collins College Publishers.
McConnell, C. & Brue, S. (1993) Economics, New York: McGraw Hill.
McKenna, R. (1997) Real Time: Preparing for the Age of Never Satisfied Customer, Boston, Massachusetts: Harvard Business School Press.
Meikle, S. (1991) History of Philosophy: the Metaphysics of Substance in Marx, in Carvey, T. (ed.), The Cambridge Companion to Marx, Cambridge: Cambridge University Press.
Miles, R. & Snow, C. (1992) Causes of Failure in Network Organizations, California Management Review, Summer.
Nolan, R. & Croson, D. (1995) Creative Destruction: A Six-Stage Process for Transforming the Organization , Boston, Business School Press. Massachusetts: Harvard
Normann, R. & Ramirez, R. (1993) From Value Chain to Value Constellation: Designing Interactive Strategy, Harvard Business Review, July-August.
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Normann, R. & Ramirez, R. (1994) Designing Interactive Strategy: From Value Chain to Value Constellation, Chichester: John Wiley & Sons.
Porter, M. (1985) Competitive Advantage: Creating and Sustaining Superior Performance, New York: The Free Press.
Porter, M. (1986) Changing Patterns of International Competition , California Management Review, Winter (28).
Powell, W. in Carroll, G. & Vogel, D. (1987) Organizational approaches to corporate strategy, Cambridge, Massachusetts: Ballinger.
Ramirez, R. (1999) Value Co-production: Intellectual Origins and Implications for Practice and Research, Strategic Management journal, 20.
Rayport, J. & Sviokla, J. (1995) Exploiting the Virtual Value Chain , Harvard Business Review, November-December.
Sandelin, B., Trautwein, H-M. & Wundrak, R. (1995) Det ekonomiska tänkandets historia, WSOY, Finland: SNS Förlag.
Salhman, W. (1999) The New Economy is Stronger than You Think , Harvard Business Review, November-December.
Shapiro, C. & Hal, V. (1999) Information Rules: A Strategic Guide to the Network Economy, Boston, Massachusetts: Harvard Business School Press.
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Stabell, C.B. & Fjeldstad, O.D. (1998) Configuring Value for Competitive Advantage: on Chains, Shops, and Networks, Strategic Management Journal, Vol. 19.
Strauss, A. & Corbin, J. (1990) Basics of Qualitative Research, London: Sage Publications.
Tsai, W. & Ghoshal, S. (1998) Social Capital and Value Creation: The Role of Intrafirm Networks, Academy of Management Journal, August.
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Appendix II: Secondary Sources of Material
Andersen Consulting, Wireless Application Protocol, Swedish Market Survey, October - November 1999 Helsingin Sanomat, 11/5/2000http://www.lifechart.com/about/990811_1.htmlhttp://www.nokia.comhttp://www.nokia.com/corporate/wap/files/whitepaper.pdfhttp://www.nokia.com/investor/2000/1Q/index.htmlhttp://www.ovum.comhttp://www.sonera.fi http:www.sonera.fi/investor_en/news/indepth/3.htmlhttp://www.syncml.org Neil, D. Which European Carriers Will Be Left? The Rule of Three Will Apply, Gartner Group Report, May 1998 Nokia 1999 Year-End Results Presentation Sonerasound, April 2000 SyncML White Paper, Building an Industry-Wide Mobile Data Synchronization Protocol Talouselämä, Internet mullistaa koko Nokian (Internet will transform the whole Nokia) Number 18, 2000
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Appendix III: List of People Interviewed
Ms. Kekäläinen-Torvinen, Pirjo, Senior Vice President, International Business Development, Sonera Ltd, 25/04/2000.
Mr. Nurmi, Ilari, Business Development Manager, Nokia Mobile Phones, Digital Convergence Unit, 17/04/2000.
Mr. Saraketo, Timo, Senior Manager, Strategic Planning, Nokia Mobile Phones, Digital Convergence Unit, 27/04/2000.
Background interviews
Mr. Helt, Geoff, CCI Fellow, Graduate School of Business, University of Texas at Austin.
Mr. Stuart, Toby, Assistant Professor, Graduate School of Business, University of Chicago.
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Appendix IV: Interview Questions, Nokia
In how many co-operations are you (Nokia) engaged in? What are the criteria for selecting partners and projects? What is the most important criteria? What measurements are you using for evaluating the success of joint projects? What is the most important criteria? How do you see the trend going forward: will the amount of external relationships increase? How are you able to manage the growing amount of relationships? How important are external relationships from the strategic and competitive point of view? What is your opinion of so called cross-industrial activities and cooperations?
Question related to value creation: Value chain describes company's key activities and how one can create a competitive advantage with the help of them. How would you characterize your value chain? How relevant is the model today, that is are you moving from a chain towards a network? Can you give an overall description of Nokia's value creation strategy?
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Appendix V: Interview Questions, Sonera
General questions:
In how many co-operations are you (Sonera) engaged in? What are the criteria for selecting partners and projects? What is the most important criteria? How do you see the trend going forward: will the amount of external relationships increase? How are you able to manage the growing amount of relationships?
Question related to value creation:
Value chain describes company's key activities and how one can create a competitive advantage with the help of them. How would you characterize your value chain? How relevant is the model today, that is are you moving from a chain towards a network? Can you give an overall description of Sonera's value creation strategy?
Question related to Xfera:
How would you characterize the other members in Xfera? Going future, what will be the roles of each member? Would you consider Xfera to be a cross-industrial network?
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Appendix VI: List of Some of Nokia's Public Cooperations19
SAP and Nokia team up globally to extend mySAP.com workplace to mobile work force via Wireless Application Protocol (WAP). Nokia and Cap Gemini to co-operate in delivering end-to-end mobile Internet solutions. The SyncML initiative founded to develop the world's first true universal standard for data synchronization. Initiative includes IBM, Lotus, Motorola, Nokia, Palm, Inc., Psion and Starfish Software. Nokia, Motorola and Ericsson in m-commerce alliance ICL & Nokia form a joint venture Nokia and Amazon.com launch a mobile commerce service based on Wireless Application Protocol Nokia demonstrates electronic mobile payment services with Visa and MeritaNordbanken FusionOne, Nokia, AdForce and SF Interactive join forces to explore delivery of targeted advertising to mobile devices Nokia and KPN co-operate to create home of the future Nokia joins hands with SOHU.com and BMCC to offer wireless services in China Bluetooth Special Interest Group to be led by 3Com, Ericsson, Intel, IBM, Lucent, Microsoft, Motorola, Nokia, and Toshiba Leading mobile communications products manufacturers partner with Psion to create major engine of growth for Wireless Information Devices (Symbian)
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www.nokia.com 110
Appendix VII: Illustrations of Nokia's view about future development
Figure 15: Some key players who are creating the new industry (Source: Nokia 1999 Year-End Results Presentation)
Figure 16: Nokia's view about their value chain (Source: Nokia 1999 Year-End Results Presentation)
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doc_605672786.docx
Value creation is state of performing activities that increase the value of services or goods to consumers. It is the primary intention of any business entity to help it sell its services and products.
STUDY ON NEW LOGIC OF VALUE CREATION
Abstract The understanding of value is often described in terms of an industrial view in which value creation is linear, additive process. The emerging view takes a different approach to value creation: it's interactive, relationshipsbased and synchronic. But either of these views capture fully the value creating importance of elements present especially in converging industries: coopetition, networks and external relationships. This thesis has been conducted by gathering primary data from telecommunication industry companies in the form of interviews. The studied companies are engaged in numerous different kinds of external relationships which are viewed strategically important. For the purpose of describing some of the complexity involved, the value network framework has been developed.
Keyword value creation, value chain, external relationships, convergence, telecommunication, value network, coopetition
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4
1.
BACKGROUND __________________________________________________ 9
1.1. 1.2. INDUSTRIAL VIEW OF VALUE CREATION __________________________ 11 EMERGING VIEW OF VALUE CREATION ___________________________ 12
2.
PROBLEM _____________________________________________________ 14
2.1. 2.2. 2.3. 2.4. 2.5. 2.6. VALUE NETWORK_________________________________________________ 14 PURPOSE _________________________________________________________ 16 PROBLEM QUESTIONS ____________________________________________ 16 DEMARCATIONS __________________________________________________ 17 TARGET AUDIENCE _______________________________________________ 18 THESIS LAYOUT __________________________________________________ 18
3.
METHOD ______________________________________________________ 20
3.1. 3.2. ULTIMATE PRESUMPTIONS _______________________________________ 20 PARADIGM _______________________________________________________ 20
3.2.1. POSITIVISM ___________________________________________________________21 3.2.2. HERMENEUTICS ______________________________________________________22 3.2.3. MY PARADIGM ________________________________________________________22
3.3.
METHODOLOGICAL APPROACHES ________________________________ 22
3.3.1. ANALYTICAL APPROACH______________________________________________23 3.3.2. THE ACTORS APPROACH ______________________________________________23 3.3.3. THE SYSTEM APPROACH ______________________________________________24 3.3.4. CHOICE OF APPROACH________________________________________________25 3.3.5. INDUCTIVE VS. DEDUCTIVE APPROACH ________________________________25 3.3.6. QUALITATIVE VS. QUANTITATIVE APPROACH__________________________26
3.4.
WORKING PARADIGM_____________________________________________ 27
3.4.1. CREATE A PRE-UNDERSTANDING ______________________________________28 3.4.2. METHOD FOR COLLECTION OF DATA __________________________________28 3.4.3. SAMPLING ____________________________________________________________28 3.4.4. DESIGN OF INTERVIEW GUIDE _________________________________________29 3.4.5. INTERVIEW PROCESS _________________________________________________29 3.4.6. ORGANIZINING INTERVIEW MATERIAL ________________________________29 3.4.7. ANALYSIS AND CONCLUSION __________________________________________30
3.5.
VALIDITY OF RESEARCH __________________________________________ 30
5
3.6.
CRITIC OF METHOD_______________________________________________ 31
4.
TELECOMMUNICATION INDUSTRY______________________________ 34
4.1. 4.2. 4.3. 4.4. 4.5. 4.6. INDUSTRY TRENDS________________________________________________ 34 FUTURE __________________________________________________________ 36 MOBILE COMMERCE______________________________________________ 37 TELECOMMUNICATION VALUE CHAIN ____________________________ 38 SONERA __________________________________________________________ 39 NOKIA ____________________________________________________________ 40
5.
THEORETICAL DISCUSSION ____________________________________ 41
5.1. WHAT IS VALUE? _________________________________________________ 41
5.1.1. ECONIMIC VALUE _____________________________________________________42
5.2.
VALUE CHAIN_____________________________________________________ 44
5.2.1. VALUE SYSTEM _______________________________________________________46 5.2.2. COMPETITIVE SCOPE _________________________________________________47 5.2.3. PRIMARY CRITIQUE TO VALUE CHAIN _________________________________48
5.3.
EMERGING VIEW OF VALUE CREATION ___________________________ 50
5.3.1. WHAT IS LACKING FROM THE VALUE CONSTELLATION? _______________53
5.4. 5.5. 5.6.
THE BUSINESS ECOSYSTEM _______________________________________ 53 VIRTUAL VALUE CHAIN ___________________________________________ 54 NETWORK ________________________________________________________ 57
5.6.1. WHAT IS A NETWORK? ________________________________________________57 5.6.2. STRATEGIC IMPLICATIONS OF NETWORKS ____________________________58 5.6.3. NETWORK EFFECTS ___________________________________________________60
5.7.
INDUSTRIAL NETWORKS __________________________________________ 61
5.7.1. NETWORKS AS RELATIONSHIPS _______________________________________62 5.7.2. NETWORKS AS STRUCTURES __________________________________________62 5.7.3. NETWORKS AS POSITION ______________________________________________63 5.7.4. NETWORKS AS PROCESSES ____________________________________________63
5.8.
NETWORK RELATIONSHIPS _______________________________________ 63
5.8.1. NETWORKS AND VALUE CREATION ____________________________________65 5.8.2. THE ROAD AHEAD - VALUE NETWORK_________________________________67
5.9.
VALUE NETWORK -FRAMEWORK _________________________________ 68
6
5.9.1. WHAT FACTORS ARE DRIVING THE DEVELOPMENT? ___________________68 5.9.2. CONVERGENCE _______________________________________________________69 5.9.3. COOPETITION_________________________________________________________70 5.9.4. COEVOLVING _________________________________________________________71 5.9.5. FUTURE SHARE _______________________________________________________72 5.9.6. SUMMARY OF VALUE NETWORK -FRAMEWORK _______________________74
6.
EMPIRICAL FINDINGS _________________________________________ 75
6.1. 6.2. 6.3. 6.4. INDUSTRIAL VIEW OF VALUE CREATION __________________________ 75 EMERGING VIEW OF VALUE CREATION ___________________________ 77 VALUE NETWORK_________________________________________________ 83 CASE SYNCML ____________________________________________________ 85
6.4.1. MOTIVES FOR SYNCML________________________________________________85
7.
ANALYSIS _____________________________________________________ 88
7.1. INDUSTRIAL VIEW ________________________________________________ 88
7.1.1. VALUE CHAIN_________________________________________________________89
7.2. 7.3.
EMERGING VIEW OF VALUE CREATION ___________________________ 89 VALUE NETWORK_________________________________________________ 92
7.3.1. COOPETITION_________________________________________________________93 7.3.2. FUTURE SHARE _______________________________________________________93
8.
CONCLUSIONS _________________________________________________ 95
8.1. 8.2. FUTURE RESEARCH _______________________________________________ 98 FINAL WORD______________________________________________________ 98
7
List of Figures:
FIGURE 1: US WORKFORCE DISTRIBUTION IN AGRARIAN, INDUSTRIAL, AND INFORMATION ECONOMIES (NOLAN & CROSON, 1995) FIGURE 2: ANALYTICAL APPROACH (ARBNOR & BJERKE, 1997) FIGURE 3: THE ACTORS APPROACH (ARBNOR & BJERKE, 1997) FIGURE 4: THE SYSTEM APPROACH (ARBNOR & BJERKE, 1997) FIGURE 5: THE DIFFERENT PARTS OF THE WORKING PARADIGM (ARBNOR AND BJERKE, 1994) FIGURE 6: INTERVIEW MATERIAL PRESENTATION FORM FIGURE 7: THE TREND IN TELECOMMUNICATION (SOURCE: GARTNER GROUP) FIGURE 8: MOBILE INDUSTRYVALUE CHAIN (SOURCE: ANDERSEN CONSULTING MARKET REPORT, 1999). FIGURE 9: THE VALUE CHAIN (PORTER, 1985) FIGURE 10: THE VALUE SYSTEM (PORTER, 1985) FIGURE 11: THE VALUE MATRIX (RAYPORT & SVIOKLA, 1995) FIGURE 12: BASIC STRUCTURE OF NETWORK MODEL (HAKANSSON & JOHANSON, 1994) 61 FIGURE 13: VALUE CREATION MODEL (CAMPBELL, 1997) FIGURE 14: THE VALUE NETWORK -FRAMEWORK (OWN PRODUCTION) FIGURE 15: SOME KEY PLAYERS WHO ARE CREATING THE NEW INDUSTRY (SOURCE: NOKIA 1999 YEAR-END RESULTS PRESENTATION) FIGURE 16: NOKIA'S VIEW ABOUT THEIR VALUE CHAIN (SOURCE: NOKIA 1999 YEAR-END RESULTS PRESENTATION) 111 111 65 68 39 45 46 55 27 30 36 11 23 24 25
List of Tables:
TABLE 1: INDUSTRIAL AND CO-PRODUCTIVE VIEWS (RAMIREZ, 1999) TABLE 2: CONVENTIONAL WISDOM VS. NEW PERSPECTIVE ON ALLIANCES (DOZ & HAMEL, 1998) 67 52
List of Appendix:
APPENDIX I: REFERENCES APPENDIX II: SECONDARY SOURCES OF MATERIAL APPENDIX III: LIST OF PEOPLE INTERVIEWED APPENDIX IV: INTERVIEW QUESTIONS, NOKIA APPENDIX V: INTERVIEW QUESTIONS, SONERA APPENDIX VI: LIST OF SOME OF NOKIA'S PUBLIC CO-OPERATIONS APPENDIX VII: ILLUSTRATIONS OF NOKIA'S VIEW ABOUT FUTURE
8
1. BACKGROUND
The understanding of value is often as outdated as the old assembly line that is resembles and so is the view of strategy that goes with it. There are three major drivers shaping the competitive landscape: new technology, global competition and convergence all of which are opening up qualitatively new ways of creating value. New technology allows novel activity configurations. The breakdown of physical constraints has allowed for dispersion of activities around the world. Convergence opens up possibilities to expand to new markets and create new products and services. These drivers become strategically manifested as new business ideas, new businesses and perhaps even as new industries
Previously, industry structures were more stable, making it easier to identify competitors, substitutes and potential new-comers. This clarity helped companies in their process of trying to create a sustainable competitive advantage. In many industries there existed -and still do existlarge entry barriers such as high initial investment costs, regulatory issues and economies of scale.
Today convergence is transforming industry structures and making them less defined. Companies compete not only with other companies in the same industry but also with companies in other industries that produce substitute products and services (Chan Kim & Mauborgne, 1999). One implication of this is that sustaining a competitive advantage is getting more difficult if not impossible. Many of the traditional sources of competitive advantage such as economies of scale, product differentiation, capital investments, and switching costs have lost importance as barriers to competition (Chakravarthy, 1997). However, not every industry is going
9
through radical changes. Convergence takes place especially in media, telecommunication, information technology and consumer electronics, which are called as converging industries. In these industries, many companies are forced to clarify their strategic objectives in order to better meet the new competitive situation. One alternative has been to form new kind of external relationships by means of partnerships, joint ventures, alliances etc.
No changes are made overnight. Existing industrial wisdom may hinder the transformation of companies. The term industrial wisdom refers to dominating opinions shared by companies and actors about the rules of the game and the freedom of action within the structural confines of a sector (Hellgren & Melin, 1993). Such shared beliefs are often more significant a barrier in changing the industry rules than the underlying economic, technological, political and social factors themselves. This means that industry incumbents can become the victims of their own experience (Hamel & Prahalad, 1994). Therefore, industry rule breaking starts with mental framebreaking (de Wit & Meyer, 1998). Increasingly, people, organizations and companies need to unlearn - a process where tradition and size are often liabilities.
It is in place to remain critical to some of the predicted changes. The magnitude of change for companies depends on the context. While some industries may continue to remain more stable the industries where primary goods or services include information are involved in big changes. As the new competitive forces gain momentum, pressure on existing industries will grow more intense. Within five years, downward cost and price pressure will mean that no corner of the economy will be untouched
10
(Sahlman, 1999).
One of the drivers transforming existing structures is the shift from manufacturing to information society. Increasingly, tangible products are losing their relative importance whereas intangible goods such as information and entertainment are getting more important. The emergence of mobile services is a good example. The below picture illustrates the change taking place from agriculture society to manufacturing society and then to information society in the US and the situation is likely similar in Europe as well. This transition together with the major drivers are affectingthe way value is created.
Agriculture 4 % Agriculture 50 % Manufacturing 40 %
Agriculture 2 % Manufacturing 5 %
1845 Agrarian economy
1945 Industrial Economy
2045 Information Economy
Figure 1: US Workforce Distribution in Agrarian, Industrial, and Information economies (Nolan & Croson, 1995)
1.1. INDUSTRIAL VIEW OF VALUE CREATION
Not only has the competitive landscape evolved but so has also the view of strategy that goes with it. The roots of the industrial view of value creating
11
are in the industrial revolution. In this view, organizing activities was seen mainly as an additive process from input to output in a chain, which was then consumed by the customer. Industrial view is often manifested in terms of a value chain model. It does not treat other economic actors as a source of value, and the firm and activities are units of analysis. In addition, customers are not treated as a source of value. They are considered more as targets that destroyed the value created by the firm. Competitive advantage is derived from successful activity configuration within the firm. The industrial view has received a lot critique. It has been said that it is insufficient for analysis in the interconnected informationbased society. An alternative view has emerged which has a different approach to value creation.
1.2. EMERGING VIEW OF VALUE CREATION
The emerging view of value creation, which is also called co-producing, is synchronic and interactive. The proponents of this view argues that the key to value creation lies often in understanding the significance ofrelationships. The old tools imply a simple, linear link from one value system1 to another, and they completely ignore the role of customer, complementary organizations and allies. In the emerging view, some of the managed values cannot be measured or monetized. Relationships between firms are based often on collaborative learning, which cannot be captured in numerical terms. New technology especially allows and demands intelligent and more sophisticated ways of creating value such as linking together companies with their suppliers and the customer. The emerging view is best described in terms of value constellation, which is model
1
For definition see 5.2.1 12
developed by Normann & Ramirez. This will be discussed in more detailed manner in 5.3.
One of the most significant changes taking place is the one concerned with external relationships between different economic actors. Relying on external relationships enables more agile and flexible structures, and allows companies to seek competitive advantage outside their own borders. Companies engage in numerous partnerships or alliances whose strategic importance also varies considerably. However, the trend seems apparent at least in converging industries: the amount of different forms of external relationships will increase and, therefore, the need to manage them increases. Today's world of business is becoming so interrelated that many actors are involved in co-production without consciously realizing that they are working together (Normann & Ramirez, 1994). Relationships are thus getting more complex, multi-directional and simultaneous compared to those in the industrial business world as described by the value chain (ibid).
13
2. PROBLEM
The industrial, linear model of value creation breaks down when applied to the scenario where boundaries between customers, allies, partners and industries begin to blur. New forms of competitive advantage are gained increasingly through external relationships within a network. The industrial view and value chain do not address the importance of these value-adding activities. In the emerging value creating model, the relationships are intimately linked and constantly evolving. However, the impact and importance of these relationships to value creation is not well known. As the amount of relationships increase, it becomes more and more difficult to form a comprehensive picture of their impact. According to Stabell & Fjeldstad (1998) modern society is characterized by a complex set of actual and potential relationships between actors, people and organizations. Many of the current theoretical frameworks have their roots in the industrial economy. They cannot be used effectively for describing network of relationships in converging industries.
2.1. VALUE NETWORK
So far the discussion has concentrated on describing the transformation from industrial view to emerging view. However, there are aspects that are not captured by either of the so far discussed models. The industrial view takes the firm as an unit of analysis the emerging view is mainly focused on the buyer / seller relationship within an industry. Still, neither of these views address the importance of competitors as a source of value. One form of co-producing of value between competitors takes place in converging industries where the creation of technical standards can be
14
crucial. Standards are often created together with the main competitors in order to get as broad an acceptance as possible for the standard. The simultaneous competition and cooperation is often referred as
"coopetition2". The wider the standard is applied the bigger the utility to every actor involved. One example of standard creation between competing companies is SyncML (see 6.4).
Standard creation is only one example of a new form of relationship. Similar unconventional relationships are emerging. One reason is new technology and especially Internet. Aldrich (1998) expressed the impact of digital economy in following way:
"The digital economy is changing how we think about the traditional corporate value chain, and it's redefining relationships between manufacturers, suppliers, distributors, and consumers. The value chain is in fact a value network, in which companies engage in multiple two way relationships to bring increasingly complex products and services to market"
Little empirical evidence exist of the value network framework. This is partly because the area itself is still developing but also because it is hard to evaluate the impact of network relationships. Likewise, it can be difficult to define which actors form the network and where should the boundaries be set. If the boundaries are expanded too wide, the network concept loses vitality. However, too narrow definition can leave out some
2
The inventor of this expression is Ray Noorda (Novell Corp.), who used it to describe
relationships in the information technology business (Brandenburger and Nalebuff, 1995). 15
important parts. A action by one entity in the system or network can influence another entity. This has broad implications. It is no longer enough to think of a firm as a member of a closed system that is not subject to uncontrollable outside shocks. Networks can be highly abstract: in reality firms often do not realize that they are part of a network. Regardless of the problematic involved with the value network and network relationships, it provides some fascinating topics of research.
2.2. PURPOSE
The purpose of this thesis is to describe how the general value creation process has changed, and particularly how companies are co-producing and co-creating value together with competitors in the telecommunication industry.
2.3. PROBLEM QUESTIONS
How has the general value creation process changed? How do the chosen companies co-produce and co-create value? What factors are driving this development?
For this purpose I have chosen to focus on the telecommunication industry, which I believe is a prime example of an converging industry and which holds a central position at the heart of mobile communication and the Internet, two perhaps most rapidly growing business areas at the moment. The Nordic countries -especially Finland and Sweden- are well presented in this industry. Therefore, it is well justified that I should focus on some of the Nordic companies, which are Nokia Oyj and Sonera Oyj.
16
2.4. DEMARCATIONS
The problem with describing systems or networks is that they include many different economic actors that are interconnected. First, this makes it difficult to draw the boundaries of the system, in terms of what to include / exclude. Secondly, conducting an empirical research of a whole system requires a lot of resources in terms of time, money and most importantly, access to different actors. This thesis does not focus on some specific system or network. Instead, systems are approached as illustrations of how aggregation of external relationships can be considered as a network(s).
External relationships between different economic actors hold a central role in this thesis. The term "external relationship" is used to denote several different forms of co-operation. However, this thesis will not focus on the differences between external relationships, for example what differentiates an alliance from a partnership. The comparison between various forms of external relationships is definitely intriguing but out of scope of this thesis.
Discussion about external relationships is often associated with the talk about suppliers and outsourcing of activities. The primary focus of this thesis is not in supplier relationships or outsourcing although in some cases they can be included. Outsourcing means that firms farm out some of their activities to be handled by the market instead. As important as it is, outsourcing is only reorganizing current activities and does not expand the firm's field of operations.
17
This thesis will not focus on the economical aspects of external relationships and networks in terms of presenting financial data. There is one major reason for this: financial data regarding joint projects is strictly confidential. However, the importance of external relationships in economic sence is underlined.
The purpose of this thesis is not to provide a comprehensive picture of telecommunication industry because I think that the findings are not industry related. Instead, one could find similar examples from other converging industries as well. Despite similarities, it is wise not to generalize the results; it is the task of others to further research whether there is emerging a paradigm shift in value creation.
2.5. TARGET AUDIENCE
It is possible that a thesis has several target audiences. This thesis has two main target audiences. First are the academic researchers who are interested in companies' general value creation process and how it has changed. The other audience are managers, especially those who want a description of changes in the value creation process and the implications it has.
2.6. THESIS LAYOUT
The diagram below illustrates the thesis layout. After background and problem discussion will be described methodological issues to provide the reader with an understanding of the chosen scientific approach. Later, the focus will turn to telecommunication industry in order to shortly illustrate
18
its main elements and trends that are useful in the later analysis. Theoretical discussion will outline the theories. The empirical findings will then illustrate the views of the respondents, which are followed by analysis of findings. Finally, I will conclude the research and propose areas of future research.
1.Background 3.Method
2.Problem
4.Telcom -Industry 5.Theoretical Discussion Value Chain Value Constellation Value Network
•Industrial view
•Emerging view
6.Empirical Findings 7.Analysis 8.Conclusions
19
3. METHOD
This chapter begins with a description of the scientific approach with the aim to enable the reader to understand the chosen scientific approach. Further, I describe the concepts and techniques that have constituted the work with this thesis.
3.1. ULTIMATE PRESUMPTIONS
Every person has some kinds of ultimate presumptions. According to Bourdieu everybody has a "habitus". The conception of habitus refers to the basic stock of knowledge that people carry around in their heads as a result of living in a particular culture or subculture (Layder, 1994). Like habitus, presumptions can be rigid, having an effect on everything a person does, in terms of for example studying, perception of problems, and their solving. What do these ultimate presumptions consist of? A common collective term for such conceptions is paradigm. Thus, the conceptions affect the paradigm the individual adheres to, which in turn affect the method approach. In that sense, the paradigm works as an interface between the fundamental conceptions and the method approach.
3.2. PARADIGM
There is a definite and decisive difference between creators of knowledge who want to explain and those who want to understand. Two general paradigms are positivism and hermeneutics, and these are widely accepted among researchers. The researchers who deny the existence of a
20
fundamental difference between the natural and the social sciences are traditionally called positivists. Creators of knowledge who make a distinction between the methods of the classical natural sciences and those of the social sciences are called hermeneuticists (Arbnor & Bjerke, 1997).
3.2.1. POSITIVISM Positivism is closely connected to natural science where measurability, validation and quantitative methods are meant to give a general representation of reality. A simplification is striven for to find the general in the specific. In order to reach the knowledge goal it is necessary to look away from the plenitude of the reality. This is done with abstractions in the shape of logical models, representative cases and pure cause-result causalities. This approach can be compared with the map that resembles the terrain of reality in a simplified form. The positivistic scientist makes a strict demarcation between facts and values. The mission for science is to bring out facts, as they are, and not values how something should be. Emotions are seen as subjective, private, and thoughtless - and they should not affect research.
To make it possible for other scientists to come to the same conclusion mutual rules for research and model descriptions are important. The formation of these rules are important too, for example in ensuring that the research objects get representatively sampled. In addition to the requirement that knowledge should correspond to what is, it should also correspond to what will be, that is, the future. This means a demand for a capability to make a valid prediction (Andersson, 1979).
21
3.2.2. HERMENEUTICS Whereas the positivists try to simplify reality with a representation, the hermeneutists go to other direction and try to penetrate the abstract reality and make it more concrete. Hermeneutics problematize reality in order to understand; an understanding of the parts gives an understanding of the whole. They use terms as meaning and intentions in their scientific statements. The hermeneutists claim that social science cannot be treated in the same way as natural science. Since the truths of natural science are a result of culture, they are seen as relative, hence, the hermeneutics do not have the universal validity as a goal. Descriptions of methods are rare in the research by hermeneutists because the belief that biases are present in all levels of research. Should these rules exist, it would turn the interpretive action into positivism (Andersson, 1979).
3.2.3. MY PARADIGM I believe that due to the general societal shift towards the information age and the rapid development of new innovations and technology,
establishing general laws like those the positivists prefer is not so useful. Therefore, more emphasis has been laid upon trying to create anunderstanding and describing important issues that have not previously achieved much attention - at least to my knowledge. I cannot say that I am positivist; instead, I feel that I am closer to hermeneutists paradigm.
3.3. METHODOLOGICAL APPROACHES
There are three main methodological approaches operating in business research: the analytical approach, the systems approach and the actors
22
approach. Descriptions of these approaches are based on a text by Arbnor & Bjerke (1997). Additionally, the relation between theory and empirical findings can be approached either deductively or inductively. Business research can also be divided to quantitative and qualitative approaches.
3.3.1. ANALYTICAL APPROACH The analytical approach has its origins in classic analytical philosophy and therefore has deeply rooted traditions in Western thinking. It assumes that reality has a summative or additive character, that is, the whole is the sum of its parts. For example, the industrial view could be categorized as a representative of analytical approach: value is added stepwise in a linear process. Knowledge created using analytical approach is characterized as being independent of the observer. This means that knowledge advances by means of formal logic that is represented by specific judgments that are independent of individual subjective experience. These judgments consist of assumptions that can be verified or falsified.
Judgment A +2
6
Judgment B +2
=
the whole
Judgment C
+2
Figure 2: Analytical Approach (Arbnor & Bjerke, 1997)
3.3.2. THE ACTORS APPROACH The actors approach is not interested in explanations; rather, it is interested in understanding social wholes. This is accomplished through pictures of reality held by individual actors. The actors approach is directed at
23
reproducing the meaning(s) that various actors associate with their acts and the surrounding context. Reality is therefore taken as a social constitution that is intentionally created by processes at different levels of meaning structures. Wholes and parts are continuously reinterpreted.
Meaning
Meaning
Meaning structure: the whole
Meaning
Figure 3: The Actors Approach (Arbnor & Bjerke, 1997)
3.3.3. THE SYSTEM APPROACH The assumptions behind the system approach, different from the underlying the analytical approach, is that reality is arranged in such a way that the whole differs from the sum of its parts. This means that not only the parts but also their relations are essential, as the latter will lead to plus or minus effects (synergy). Knowledge developed through the systems approach depends on systems. The behavior of individuals, as part of the system, follows systems principles; that is, individuals are explained in terms of system characteristics. Consequently, the system approach explains or understands parts through the characteristics of the whole (of which they are part).
24
System component A
+2
System component B
+2
=
+7 the whole
System component C
+2
Figure 4: The System Approach (Arbnor & Bjerke, 1997)
3.3.4. CHOICE OF APPROACH For the purpose of my thesis, I consider the system approach to be most appropriate. This approach incorporates relationships between different parts as meaningful components of the system. In similar fashion, network and the relationships within cannot be evaluated in purely analytical terms; synergy and intangible elements between system actors are essential for the value creation description. From this follows, that the total sum differs from the sum of parts. Importantly, the total sum can also be less than the sum of its parts. a
3.3.5. INDUCTIVE VS. DEDUCTIVE APPROACH For any researcher it is essential to distinguish between inductive and deductive approach. These two methods have different relation to theory and empirical findings. Inductive approach is common in social sciences where many of the studies are qualitative in nature. Inductive study has been defined in several ways but a simple definition is that first the
25
researcher acquires empirical findings or observation which then is used to build theoretical frameworks or to conceptualize the object studied.
Deductive approach is the opposite of inductive: researcher starts from existing theory and uses empirical findings as a tool to verify his or her hypothesis. This approach is more common in quantitative studies where it is easier to define hypothesis and then try verify it.
This thesis has taken a deductive approach. Starting point has been the industrial view of value creation, which is best described in terms of the value chain model. The industrial view has then been elaborated to include theories regarding the emerging view. The theories and shift in value creation process have then been illustrated with the help of empirical findings.
3.3.6. QUALITATIVE VS. QUANTITATIVE APPROACH Qualitative research produces findings that are not accomplished by help of statistical procedures or other means of quantification. It can refer to research about persons' lives or culture, but also to organizational functioning, social movements, or interactional relationships (Strauss &Corbin, 1990). Qualitative methods can be used to uncover and understand what lies behind any phenomenon about which little is yet known (ibid). Qualitative methods can give details of phenomena that are difficult to convey with quantitative methods such as impact of relationships to value creation. Qualitative method is relevant for economic studies. This because many important phenomena cannot be covered by quantitative method giving a legitimization for other perspectives. To exemplify, studies related to individuals - leadership, routines, cultures and behavior - are hard to
26
catch by numeric methods and therefore qualitative approach is needed to cover areas that are left in the shadow of numeric values. In similar fashion, the quantitative methods are not ideal for studying systems where the whole differs from the sum of its parts. Complex networks represent a real-life example of systems that cannot be covered fully by using quantitative methods. Therefore, it falls natural to me to choose the qualitative method.
Interesting question is whether it is possible to combine qualitative and quantitative methods, and enjoy the rewards of both numbers and words (Glesne & Peshkin, 1992). The combination of both approaches would be ideal in this thesis also. The impact of external relationships should be measured in both soft and hard ways. However, combining both approaches is out of scope of this thesis due to lack of access to financial data.
3.4. WORKING PARADIGM
The working paradigm can consist of several steps as shown in figure below.
Create a pre- Choice of method Sampling Desing of Conducting Organizing Analysis understanding for collecting data interview guide interviews interview and material conclusios
Figure 5: The Different Parts of the Working Paradigm (Arbnor and Bjerke, 1994)
27
3.4.1. CREATE A PRE-UNDERSTANDING There are several steps in the working paradigm that are performed during the research process. First, the creating of a pre-understanding. As mentioned previously, I have had some pre-understanding that the telecommunication industry would provide a good basis for the purpose of this thesis. Additionally, I have gathered industry specific material from different sources that have further increased my understanding of it. I have also had a pre-understanding about the theoretical views especially about the criticism pointed toward the industrial view. This pre-understanding has been one of the reasons why this subject has been chosen in the first place.
3.4.2. METHOD FOR COLLECTION OF DATA For the purpose of collecting data, a qualitative approach was chosen. Face-to-face interviews were used with an addition of one telephone interview. Additionally, two background interviews were conducted via email. These constitute the primary source of data. Secondary sources have also been used including books, industry and consulting reports, articles, press releases, companies presentations and online information.
3.4.3. SAMPLING The chosen companies are mostly Finnish due to practical reasons. However, I believe that these companies, as front runners of their industry, are suited for the research. This is one of the most important reasons why they have been chosen. Another reason is that I have had preunderstanding that these companies are representatives - at least to some
28
extend - of the new value creation view. 3.4.4. DESIGN OF INTERVIEW GUIDE A form with questions has been used to assure consistency between interviews. Specific questions were used to gather information regarding SyncML. Most questions were formulated in a way that rendered open answers and left room for elaborating questions.
3.4.5. INTERVIEW PROCESS There are numerous possible hazards when conducting interviews. One of them is the possibility that the respondent for some reason does not tell the exact truth or leaves some important aspects unmentioned. Another is the possibility that the persons interviewed for some reason are not objective and thus give information that is not true. Likewise, it is possible the interpretation of response is subjective: one hears what one wants.
Interviews were conducted at the workplace of the respondents excluding of course the telephone interview. Questions were asked in Finnish and then translated into English. No audio recordings were used. These are possible sources of errors. In the interviews conversational tactics were used, inviting further exemplification and substantiation of a theme.
3.4.6. ORGANIZINING INTERVIEW MATERIAL The notes and transcripts were not used in the exact wording, instead they were rephrased to be more concise. Some questions have been left out because they did not provide any essential value. Interview material has been organized around the three main themes: industrial view, emerging
29
view and value network. Additionally, the SyncML initiative is illustrated as a separate case. The main findings from the interviews were summoned up in chapter 6, "empirical findings", in this thesis. The figure 6 illustrates how the material from interviews is presented in the empirical findings chapter.
Interviewers questions marked in bold text
Clarifications added to material marked in parenthesis
What about the role of partners in value creation [process]? The role of partners is crucial for us (...) crucial would I say
The answer of interviewed marked without bold
Material shortened after consideration
Figure 6: Interview Material Presentation Form
3.4.7. ANALYSIS AND CONCLUSION The empirical findings were analyzed using theories and models in chapter 5, "theoretical discussion". Different viewpoints regarding value creation process were brought to attention. Additionally, key findings were compared to existing theories.
3.5. VALIDITY OF RESEARCH
Researchers are always confronted with the problem of their own cognitive maps and how they affect on their work. It would be foolish to believe that own experiences, opinions and desires do not have any effect to the study.
30
What one observes is itself a matter of interpretation - that is, it is a matter of correlating external behaviors to the already present system of meanings and assumptions. Thus experience is never pure but is always a construction, and it is not foundational for a true knowledge of how things are in themselves (Polkinghorne in Kvale, 1989).
There are two main kinds of validity: internal and external. Internal validity is the basic minimum without which any experiment is uninterpretable: Did, in fact, the experimental procedure make a difference in this specific experimental instance? External validity poses the question of generalizability: To what populations, settings, treatment variables, and measurement variables can this effect be generalized. Theoretical sensitivity is the ability to recognize what is important in data and when giving it meaning. It helps to formulate theory that is faithful to the reality of the phenomena under study (Glaser, 1978). The possibility to generalize increases with the use of multiple cases, as done in this thesis. One important aspect is that this thesis has a strong theoretical foundation; that is, many arguments build on existing theories. Therefore, they have already been empirically tested in previous studies.
3.6. CRITIC OF METHOD
The system view requires the researcher to study all parts of the system. By failing to study one factor the results as a whole can be false. The reason for this is the inter-linkage and synergies that cause the sum differ from the value of the parts. By removing one component, the relations and some of the synergies might be removed (Arbnor and Bjerke, 1994). Since I have been force to get primary data only from some parts of the system, the
31
results cannot be generalized to the whole system. The other parts might have different opinions about the joint relationships, which reduces the value of the findings. On the other hand, the purpose has not been to gather the opinions of all system actors. Instead, the purpose has been to describe the changes in the general value creation process. For this purpose, interviews are perhaps not the only possible source of data.
Deciding the proper size of sample can be difficult especially in qualitative studies. For example, how many interviews should be conducted within one company in order to be sure that additional ones would not give any more information? I believe that there is no clear answer to that but due to the fact that all the respondents were working with some kind of business development issues make the findings more reliable. Additional top management interview comments from different secondary sources has been used, which further increases the reliability. I believe that with a longer and more material collected there is a kind of "marginal effect" on the contribution that it brings.
This thesis has focused on
two companies within telecommunication
industry. Other industry actors are excluded. Therefore, the findings cannot said to represent the whole industry but undoubtedly the two most central groups if measured in economic terms, that is Terminal manufacturer (Nokia) and Operator (Sonera).
One further more general research related problem is that as the systems get more and more wider and complex, researchers' position gets also more difficult. Capturing all the necessary elements was not possible due to lack of time, money and other resources. Therefore, some kind of
32
compromises are needed in order to be able study areas that are complicated and abstract. Whether this affects the credibility is left to the reader to decide.
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4.TELECOMMUNICATION INDUSTRY
The purpose is not to provide an in-depth analysis of the industry but to give an overall picture of it which will help the reader to understand the empirical findings and bring light to their business logic. Further, the future trends and likely developments will be discussed.
Since the invention of the telephone in 1877, the demand for telecommunication services has steadily ballooned. During the recent years especially the demand for mobile phones has increased rapidly. According to recent studies, the total number of mobile phone users worldwide is over 300 million, double the number of Internet users. It is estimated that in 2005 there will be about one billion mobile phone subscribers, and that a substantial portion of the phones sold that year will have multimedia capabilities. The eventual value of the wireless market alone is expected to reach over $36 billion by the year 20003. With the integration of mobile phones and Internet, the demand for new services is likely to increase heavily. An indication of this is the success of i-mode phones in Japan where the demand has been surprisingly high.
4.1. INDUSTRY TRENDS
The high growth rate and changing technology implies that the telecommunication industry has to go through a whole lot of changes. Deregulation, wireless applications and global competition are all drivers
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http://www.nokia.com/corporate/wap/files/whitepaper.pdf 34
that have shaped the industry and will continue to do so in the future as well. Telecommunication industry is also a part of other converging industries, namely media, Information Technology and consumer electronics. It is possible that other industries will be added to this list as well. For example, Recently banks have expressed wanting to get their share of the pie especially in mobile transactions. New media, such as broadcast and Internet technologies and services, have become a key development area for telecommunications players wishing to expand beyond their traditional sector restraints. Telecommunication and service providers are aiming at providing added value, such as content, advertising and transactions, as well as developing new revenue streams for continued growth. As tariffs and margins for basic bit carriage decrease, players are realizing they have to move up the supply chain to achieve growth and profits. Many are actively repositioning themselves as information companies rather than telecommunication operators4.
Content is beginning to play an important role in the packaging and pricing of telecommunications services - portal services are a good example of this. The results are partnerships, joint ventures and increasingly complex business models, with new players, such as media and broadcast companies, large corporate users, software companies and content providers also vying to enter this market.5
4
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http://www.ovum.comhttp://www.ovum.com 35
4.2. FUTURE The future outlook for the industry is bright, however, not every company will survive. The consolidation process will likely continue. The recent merger between Vodafone and Mannesmann will not be the last. In Scandinavia, consolidations have been fewer. The failed merger between Swedish Telia and Norwegian Telenor left the field open to other solutions. It is estimated that after the consolidation phase, each European country market will have a maximum of three full-service, national operators and a number of niche operators. The full-service operators will have a comprehensive portfolio of all basic products, including mobile and Internet access. Because of increasing global reach of most enterprises, each operator must be part of a global alliance to survive beyond the explosion and consolidation phases.6
Figure 7: The Trend in Telecommunication (Source: Gartner Group) Novel partnerships and alliances have already emerged. AOL, for example,
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Neil, D. Which European Carriers Will Be Left? The Rule of Three Will Apply, 36
Gartner Group Report
announced earlier this year that it had formed links with Nokia and Ericsson, the world's largest and third-largest handset manufacturer respectively. Other alliances are also formed almost daily. For a list of Nokia's recent joint projects please see appendix VI.
4.3. MOBILE COMMERCE
The real hot potato in the telecommunication industry is Wireless Application Protocol (WAP). It is currently one among many technologies that enable Internet access through mobile phones and other mobile devices. In Europe, WAP is the leading technology but, for example in Japan i-mode is the current technology platform. WAP provides an open universal standard for bringing Internet content and advanced value added services to mobile phones and other wireless devices. WAP enables corporations to be part of the wireless future. However, WAP is only a temporary technology standard. In approximately year 2002 the Third generation technology called UMTS (Universal Mobile
Telecommunications System) will allow images, sounds and text to be transmitted simultaneously by phone7. Currently, national authorities are granting licenses for third generation networks, and Finland was the first country in Europe to do so. Spain was also among first countries to grant licenses, for example to Xfera consortium where Sonera is a member.
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http://www.sonera.fi/investor_en/news/indepth/3.html 37
4.4. TELECOMMUNICATION VALUE CHAIN
As already mentioned, telecommunication industry consist of several key strategic groups. The following industry value chain is widely accepted in the telecommunication industry and it based on a study from Ovum Corporation. It is also similar to the one drawn by a Nokia representative. The key players in this chain are8:
• Network providers/operators
Runs the mobile network, for example Internet Service Provider or GSM network operator Sonera. Provides and gives the end-user access to mobile value added services, but can also be a provider of the service itself.
• Service Providers/Retailers
Provides a mobile service to the end-users, for example bank or travel agency.
• Content Providers
Provides content to the end-user through a service provider, for example games, newspaper.
• Hardware/Terminal Manufacturers
Produce the terminals and other hardware needed to distribute and access the mobile services, for example terminal manufacturer Nokia.
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Andersen Consulting, Swedish Market Survey, October - November, Wireless
Application Protocol
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• End-users
The subscriber/user of the provided service.
The same actors can also be identified from the figure 7.
Figure 8: Mobile IndustryValue Chain (Source: Andersen Consulting Market Report, 1999).
For the purpose of this thesis, the two main companies studied are shortly introduced in order to provide an overall understanding of their lines of businesses and their respective size.
4.5. SONERA
Sonera is the leading Finnish telecommunication operator company with subsidiaries or joint ventures with other operators in 14 countries. Sonera
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claims to be an international pioneer in the rapidly growing mobile, data and media communications sectors. The company provides both international and domestic services, and is one of the leading suppliers of telecommunications technology. In 1998 Sonera's revenues totalled EUR 1,623 million, and operating profit EUR 289 million. Sonera employs 9,000 people9.
4.6. NOKIA
Nokia is a global company whose key growth areas are wireless and wireline telecommunications. A pioneer in mobile telephony, Nokia is the world's leading mobile phone supplier as well as one of the top suppliers of mobile and fixed telecom networks and services. Nokia also creates solutions and products for fixed and wireless datacommunications. Multimedia terminals and computer monitors round out Nokia's expertise in communications technology. Nokia's net sales in 1999 were 19772 EUR and the company employs more than 56,000 people worldwide10.
The following chapter, "theoretical discussion", will introduce the key theories and research related to the thesis.
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htpp://www.sonera.fihttp://www.nokia.com/inbrief/facts/index.html 40
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5. THEORETICAL DISCUSSION
This chapter will introduce the reader to the most relevant theories related to the research. The discussion starts with a more philosophical discussion of the definition of value. Thereafter, the focus will turn into comparing the views regarding value creation and models that describe it.
5.1. WHAT IS VALUE?
The notion of value has had a long, complex history. Etymologically, value originally denoted both what people had done and become, and the actions they could perform; and how they traded goods with each others (Ramirez, 1999). Aristotle divided what modern economists simply call value into two categories: use value and exchange value (Fleetwood, 1997). Aristotle was also concerned about the fairness of exchange. He questioned whether a society that pursues exchange value is one that is fair. He argued that should exchange not to be based upon some principle of justice, then it will not "hold the city together" (Fleetwood, 1997). If use value is seeked, some human agency must employ the knowledge of what is needed, then, subsequently, deploy society's productive capacities to meet these needs. Products will be made with one and only one end: to meet their intended purpose. If, however, exchange value is pursued, productive capacities are not deployed to meet predetermined needs, but rather to satisfy a different end: the expansion of value (Meikle, 1991). The expansion of value is what most economist consider value in modern times. Adam Smith took up in his value learn the fact that goods are not equally valuable. The classic value-paradox describes why something so
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useful as water can be so inexpensive as something so useless as diamonds can be so expensive (Sandelin et al., 1995).
5.1.1. ECONIMIC VALUE Since the 18th century, debate has been going on about the relationship between the economic and ethical aspects of value (Ramirez, 1999). The ultimate goal, if not the very nature, of economic activity is to create value. Value is produced by humans acting with each others and using the resources that are at hand. Previous activities are made available for further action to this effect (Normann & Ramirez, 1994). Economic value can be the value which the user is willing to pay for a product or it can be something that is derived from the operations, collaboration or cooperation. Value can be measured economically in many terms. In management literature there exist several kinds of value expression such as company value, economic value, economic profit, economic value added and shareholder value. The latest trend has been focusing on shareholder value and economic value added. According to Porter (1985) the value is in competitive terms- the amount buyers are willing to pay for what a firm provides for them. Value is measured by total profit, which is a reflection of the price a firm's product commands exceeding the cost involved in creating the product. Noteworthy is that according to Porter value is the sum of activities. According to de Wit & Meyer (1998) corporations are instruments, whose purpose it is to create economic value on behalf of those who invest risktaking capital in the enterprise.
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Regardless of the definition of value, a more interesting aspect is the process of value creation and how it has evolved. This discussion will start from the industrial view. 5.1.1 INDUSTRIAL VIEW OF VALUE CREATION The roots of industrial view can be illustrated with the help of input / output -analysis from economics, which analyzes the interrelationships between an industry's output and the inputs needed to produce that output (McConnell & Brue, 1993). Firms seek profits by producing and selling products. The materials and services of factors production, called factor services, that are used in the production process are called inputs, and the goods and services that result from the production are called outputs. One way of looking at the production process is to regard the inputs as being combined to produce the outputs. Another equally possible way is to regard the inputs as being used up, or sacrificed, to gain the outputs (Lipsey & Courant, 1996). Sacrificing inputs to gain outputs is very typical thinking in the industrial view.
Industrial view is said to resemble an assembly line that symbolizes the mass-production model. This model was based on productivity gains obtained by economies of scale in a mechanized process of production of a standardized product. The process was controlled by a large market with specific organizational form: the large corporation structured on the principles of vertical integration, and institutionalized division of labor (Castells, 1998). While assembly actually represented less than 10 percent of industrial labor, something about assembly lines galvanized how value creation occurred in industry, and captured the imagination of management thinking (Ramirez, 1999). The industrial manufacturing value creation is characterized by (Hirschorn,1984):
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1 economies of scale 2 large, physically and temporally concentrated production facilities 3 long production runs 4 mass markets 5 task specialization 6 standardization
5.2. VALUE CHAIN
It is hardly surprising that industrial value production was conceptualized in terms of the value chain. With the chain concept, value creation is not only sequential and linear, but also implies that value is added (Ramirez, 1999). The value chain is a model that builds on the input / output analysis where value is added during different stages. According to Porter (1985) competitive advantage cannot be understood by looking at a firm as a whole. It stems from many activities a firm performs in designing, producing, marketing, delivering and supporting its product.
Examining all the activities a firm performs and how they interact is necessary for analyzing the sources of competitive advantage. The value chain disaggregates a firm into its strategically relevant activities in order to understand the cost drivers and the existing and potential sources of differentiation. A firm gains competitive advantage by performing these strategically important activities more cheaply or better than its competitors. It is noticeable that Porter acknowledges only two possible competitive advantages: cost leadership and differentiation. This has been criticized. Baden-Fuller & Stopford argued in De Wit & Meyer (1998) that
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generic strategies are a fallacy. The best companies strive to combine both differentiation and cost leadership and it is not enough to achieve leadership only in one area. Value chain describes a series of value-adding primary activities connecting a company's supply side (raw material, inbound logistics and production processes) with its demand side (outbound logistics, marketing and sales). Support activities provide infrastructure that allow the primary activities to take place on an ongoing basis. Support activities are procurement, technology development, human resource management and firm infrastructure. Activities in a firm's value chain are connected through what is called linkages. The way one activity is performed affects the cost or effectiveness of other activities.
Support Activities
FirmInfrastructure Human Resource Management Technology Development Procurement
Inbound Operations Ougistund and Sales Service Logistics tbo Marketing Lo ics
Mar
Margin
Upstream value activities
Downstream value activities
Primary Activities
Figure 9: The Value Chain (Porter, 1985)
The value chain displays total value, and consists of value activities and a margin. Value activities are the physically and technologically distinct activities a firm performs. These are the building blocks by which a firm
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creates a product valuable to its buyers. Margin is the difference between total value and the collective cost of performing the value activities.
Primary activities are directly involved in creating and bringing value to the customer, whereas support activities enable and improve the performance of the primary activities. Every value activity employs purchased inputs, human resources, and some form of technology to perform its function. Each value activity also uses and creates information, such as buyer data and product failure statistics. The 'support' label underlines that support activities only affect the value delivered to customers to the extent that they affect the performance of primary activities. How each activity is performed will determine its contribution to buyer needs and hence differentiation. Comparing the value chains of competitors exposes differences that determine competitive advantage.
5.2.1. VALUE SYSTEM
Supplier value chains Firm value chain Channel value chains Buyer value chains
Figure 10: The Value System (Porter, 1985)
A firm's value chain is embedded in a larger aggregation of activities that is called the value system. It is worth noting that the term value chain is often used when in fact one is talking about the value system or industry value chain. It is important to distinguish these different terms. Suppliers have inputs used in a firm's chain. Suppliers not only deliver a product but can also influence a firm's performance in many subsequent ways. In addition, many products pass through the value chains or channels on their
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way to the buyer. Gaining and sustaining a competitive advantage depends on understanding not only a firm's value chain but also how the firm fits in the overall value system.
The value chains of firms in an industry differ, reflecting their histories, strategies, and success of implementation. One important difference is that a firm's value chain may differ in competitive scope from that of its competitors, representing a potential source of competitive advantage. Serving only a particular industry segment may allow a firm to tailor its value chain to that segment and thus resulting in lower costs or differentiation in serving that segment compared to competitors.
5.2.2. COMPETITIVE SCOPE Competitive scope of a firm can have a powerful effect on competitive advantage, because it shapes the configuration and economics of the value chain. There are four dimensions of scope that affect the value chain:
Segment scope. The product varieties produced and buyers served.
Vertical scope. The extent to which activities are performed in-house instead of by independent firms.
Geographic scope. The range of regions, countries, or groups of countries in which a firm competes with a coordinated strategy.
Industry scope. The range of related industries in which the firm competes with a coordinated strategy.
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A firm's competitive scope shapes the configuration of the value chain, and how the activities are shared among units. Broad scope can allow a firm to exploit the benefits of performing activities internally. It may also allow the firm to exploit interrelationships between the value chain that serve different segments, geographic areas or related industries. Narrow scope can allow the tailoring of the chain to serve a particular target segment, geographic area or industry to achieve lower cost or to serve the target in a unique way. Narrow scope in integration may also improve competitive advantage through the firm's purchasing activities that independent firms usally perform better or more cheaply.
Value chain has received a lot critique. Particularly the emergence of new technology has put into question the usefulness of the model. Next I will go trhough some of the viewpoints of how value chains have changed. After that will be discussed the emerging view of value creation.
5.2.3. PRIMARY CRITIQUE TO VALUE CHAIN Stabell & Fjeldstad (1998) have supervised an in-depth application of the value chain model in more than two dozen firms from variety of industries. They have arrived to a conclusion that the value chain appears to be suited to describing and understanding a traditional manufacturing company but the typology and underlying value creation logic are less suitable to the analysis of activities in a number of industries such as service. Furthermore, it is not only difficult to assign and analyze activities in terms of the five primary activities, but the resulting chain often obscures rather than illuminates the essence of value creation. Stabell & Fjeldstad take an
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insurance company as an example. What is received, what is produced and what is shipped in an insurance company? Instead of considering value chain as the only generic value configuration they suggest two other configurations: value shop and value network. The value shop models firms where value is created by mobilizing resources and activities to resolve a particular customer problem (e.g. professional service firms), and the value network models firms that create value by facilitating a network relationship between their customers using a mediating technology (e.g. telephone and transportation companies).
Chakravarthy (1997) saw Porter's framework as useful only if the competitive forces represented by competitors, suppliers, buyers, and substitutes are relatively stable and independent. In this situation, a company can find an appropriate strategy for each industry configuration and erect the necessary barriers for protecting this strategy. Ashkena (1995) criticized value chain in his discussion about the boundaryless organization as not taking into consideration the web of alliances companies have with competitors, partners and suppliers etc. Ashkena argues that in a successful value chain, all members collaborate in both strategic and operational business planning. The goal is not only to achieve better product development and production planning, but also common or coordinated administration and operational procedures such as customer service, purchasing etc. Possible barriers to the integration of activities within members are legal and regulatory tradition, competitive confusion, lack of trust and complexity. For the purpose of this thesis, the most relevant critique to value chain thinking comes from Normann & Ramirez (1994). Their view will be discussed next.
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5.3. EMERGING VIEW OF VALUE CREATION
An alternative view of value creation has been available for some 300 years. According to Ramirez (1999) de Boisguilbert was the first to identify value co-production and proposed an economic model based on interdependence. This took place in 1707! Today, technological breakthroughs are allowing managers and researchers now to take advantage of the options offered by the alternative view of value creation (Ramirez, 1999). Normann & Ramirez's book about value constellation has been influential to the interactive value creation. Their view of the division of work clearly differs from industrial view models, which have taken the value chain as their referent. Normann & Ramirez (1994) sees the value offering instead as a boundary where actors come together to co- produce value, where economic actors come together in "value constellations". From value constellation perspective, value is co-produced by actors who interface with each other. This opens up many opportunities for defining relationships between actors and reassigning activities. If one looks single relationships in a co-productive system, the customer is not only passive buyer of the offering or a target, but also participates in many other ways in consuming it. Furthermore, as actors participate in ways that vary from one offering to the next, and from one customer / supplier relationship to the next, it is not possible to take given characteristics for granted: coproducers constantly reassess each other, and reallocate tasks according to their new views of the comparative advantage they perceived each other to have. Actors are no longer just buying an item, adding item to it, and selling it to the next link of the chain. Instead of adding value one after the other, the partners in the production of an offering create value together through inventing new relationships. This framework has broader
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implications to businesses as well. Ramirez (1999) argued that the organizational structures and managerial arrangements must be changed also to meet new requirements:
"Value co-produced by two or more actors, with and for each others, with and for yet other actors, invites us to rethink organizational structures and managerial arrangements for value creation inherited from the industrial era."
As an illustration of the co-producing view Normann & Ramirez used IKEA as one of the examples. According to them, one of the IKEA's strengths has been the ability to understand where the firm fits in its own customers' value creation universe, and in turn to fit itself in an intelligent way into its suppliers' and partners' value creation system.
In a value co-production view, the economic actors hold different roles in relation not only to different counterparts (one is one's suppliers' customer; one's customers' supplier), but also in relation to a single counterpart. According to Ramirez (1999) economic actors have hold simultaneously several roles:
"One economic actor 'A' may simultaneously be (i) a supplier to another economic actor 'B', (ii) as well as a customer of 'B', (iii) as well as a competitor of 'B', (iv) as well as a partner with 'B' to coproduce value with and for the a third economic actor 'C', and (v) possibly a competitor with 'B's partners, if 'A's own alliance with others competes with 'B's."
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This somewhat chaotic aggregation of relationships can said to hold some truth in the converging industries. Table 1 summarizes the differences between the industrial view and co-productive view:
Industrial view Value creation is sequential, best described in value chains
Co-productive view Value creation is synchronic, interactive, best described in value constellation
All managed values can be measured in monetary terms Value is added
Some managed values cannot be measured or monetized Values are co-invented, combined and reconciled
Customers destroy value Consumption not a factor of production Economic actors analyzed holding one primary role at a time
Customer (co-)create values Consumers managed as factors of production (assets) Economic actors analyzed as holding several different roles simultaneously
Firm and activity are units of analysis
Interactions (offerings) are units of analysis
Table 1: Industrial and Co-productive Views (Ramirez, 1999)
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5.3.1. WHAT IS LACKING FROM THE VALUE CONSTELLATION? Normann and Ramirez's theory regarding the value creation is mostly focused with the buyer / seller relationship. They do not discuss the possibility of competitors co-producing value. Likewise, value
constellation is pretty concentrated on one industry and with vertical relationships. It ignores the impact of aggregations of firms to value creation. One way of describing an aggregation of relationships is the business ecosystem analysis.
5.4. THE BUSINESS ECOSYSTEM
The term business ecosystem was first introduced by James Moore. He defined the ecosystem as being made up of customers, market intermediaries, suppliers, and of oneself. Gossain & Kandiah (1998) extended and refined Moore's original concept to recognize the importance of creating value for customers through information, goods and services, and the use of the internet and other enabling technologies. The basis of the new business ecosystem is similar to an integrated value chain. It builds upon value chain concepts but the term value chain does not completely describe the new business ecosystem for three major reasons:
The term value chain does not adequately capture the relationships between a company, its customers, its suppliers and its partners. The relationships are more than an efficient information flow and sharing of data. In the new business ecosystem, partners do not merely add value at each stage of a chain, they work together, in other words co-produce- to create new value for the customer through an integrated, seamless offering that extends each of their capabilities.
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The relationships between organizations, partners, and customers are intimately linked and constantly evolving. The traditional economic analysis model breaks down when applied to this scenario where conventional boundaries between customers, suppliers, partners, information, goods and services begin to blur. The ecosystem provides a more fluid relationship between these entities and has a significant impact on the economies supporting the ecosystems.
The value chain does not take into consideration the importance of brand. The new business ecosystem, on the other hand, extends the relationship to competitors, complementors and other business partners to deliver services through a single brand.
Constellations are particularly important when discussing virtual value creation. A model that addresses value creation in virtual reality will be discussed next.
5.5. VIRTUAL VALUE CHAIN
Rayport & Sviokla (1995) developed a model for a virtual value chain (VVC). They identified a VVC that runs parallel with the physical value chain. The authors identify value-adding steps that are virtual and performed through and with information. Creating value in any stage of the VVC involves a sequence of five activities: gathering, organizing, selecting, synthesizing and distributing information. In effect, these valueadding steps, in conjunction with the virtual value chain, make up a value matrix that allows companies to identify customers' desires effectively and
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fulfill them more efficiently.
The fundamental difference to original value chain is that the old model treats information as a supporting element of the value adding process, not as a source of value itself. In VVC, the information, which in the physical value chain is merely one part of the supporting infrastructure, becomes an end in itself and one that has commercial value (Czerniawska & Potter, 1998). VVC is nonlinear matrix of potential inputs and outputs that can be accessed and distributed through a wide variety of channels. Managers often use information that they capture on inventory, production, or logistics to help for instance, monitor or control those processes, but they rarely use information itself to create new value for the customer. In many ways information and the mechanisms for delivering it stabilize corporate and industry structures and underlie competitive advantage. But the informational components of value are so deeply embedded in the physical value chain that, in some cases, we are just beginning to acknowledge their separate existence (Evans & Wurster, 1997)
Examples of accessible new markets Gather Organize Select Synthesize Distribute
Physical value chain
Virtual value matrix
Companies create new markets and new relationships with existing markets by applying the five generic value-adding steps of the information world to each activity in the virtual value chain. They create a value matrix.
Figure 11: The Value Matrix (Rayport & Sviokla, 1995)
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The credential of the virtual value chain -model is that it lifts the importance of information as a source of value into the surface. Information is unquestionably a very important element in value creation nowadays. However, the value matrix does not address the effect of networks to value creation. Therefore, the focus will turn next to discussing networks. This discussion will be started by a more general background discussion of networks and their history.
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5.6. NETWORK
Theories regarding networks have gained academic interest for a long period of time. Work which can be recognized as being in the industrial networks tradition has been going on for some fifteen or more years. However, many recent phenomena such as convergence are not well covered in literature. This discussion will start with a definitions of networks.
5.6.1. WHAT IS A NETWORK? According to Axelsson & Easton (1994) a network is a model or metaphor which describes a number, usually a large number, of entities, which are connected. Castells (1998) had rather similar definition. According to him a network is a set of knots. A knot is the point where a curve cuts itself. What then the knot is, in more concrete terms depends on the type of network we are talking about. Network is an open structure with the capability to expand without limits and to integrate new knots as long as they can communicate within the network, that is to say, impose the same communication codes (for example, values and goals). Anderson et al. (1994) had a fairly straight-forward approach to networks. They defined business networks as two or more connected business relationships. This approach to networks is problematic because it would mean that almost every business is part of a network. Components of the network are both autonomous and dependent vis-a-vis the network, and may be the parts of other networks, and therefore of other systems of means aimed at other goals (Castells, 1998).
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5.6.2. STRATEGIC IMPLICATIONS OF NETWORKS Movement towards the network form became apparent in the 1980s, when international competition and rapid technological change forced massive restructuring across U.S. industries and companies (Miles & Snow, 1992). Both the motivations for collaboration and the organizational forms that resulted are quite varied. For example, firms pursue cooperative agreements in order to gain fast access to new technologies or new markets, to benefit from economics of scale in joint research and/or production, to tap into sources of know-how located outside the boundaries of the firm, to share the risks for activities that are beyond the scope or capability of a single organization, and to contract for complementary skills (Powell, 1987).
The strategic implications of network arrangement are important. It allows a firm to specialize in those activities of the value chain that are essential to its competitive advantage, reaping benefits of specialization, focus, and possible size. The other activities are then farmed out to members of the network, that carry them out more efficiently than the hub firm would, since they have specialized in them (Jarillo, 1988). To illustrate, Nokia plans to farm out approximately 70 % of their activities to their partners11. By farming out activities to other members of the network, a firm can lower its costs for those activities it keeps inside, because it can reach economics of scale and develop distinctive competencies (ibid).
Establishing an efficient network implies the ability to lower transactions costs, for it is precisely those costs that lead firms to integrate, shunning away the flexibility offered by a market relationship, together with the
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advantages of specialization, both their own and their suppliers' (Jarillo, 1988). Networks can have a wider context than just farming out activities. Blankenburg-Holm et al. (1999) discussed the business network concept and suggested that the coordination of activities between two partners in a business relationship can also take place within the wider business network context of connected relationships. Each firm is engaged in a set of
business relationships in which it coordinates its activities with those of its partners.
Interesting question is when are networks the best choice of organizing activities? Several situations would certainly fill the criteria but one criteria comes up most often. According to Powell (1987) networks are suitable for circumstances in which there is a need for efficient, reliable information. The most useful information is rarely that which flows down the formal chain of command in an organization, or which is obtained from someone whom one has dealt with in the past and found to be reliable. One trust best information that comes from someone one knows well.
Networks are also particularly useful in businesses which are organized largely around projects. Thus, the actual operating unit becomes the business project, enacted by a network, rather than individual companies or formal groupings of companies. Business projects are implemented in the field of activity, which can be the product lines, organizational tasks, or territorial areas. Appropriate information is critical to companies' performance. (Castells, 1998).
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5.6.3. NETWORK EFFECTS In theory, the value of a network increases every time a new actor is added to it. Classic example is the invention of fax machine. The first fax was worth nothing but each machine that were added increased the value of all fax machines already in use. In similar fashion, the value of the service to customers increases with each new customer added to the network. This phenomenon is called positive externalities and it exist for a variety of products (Stabell & Fjeldstad, 1999). According to Chakravarthy (1997) larger networks have an advantage over small networks because networks with the largest number of consumers always provide more value to consumers than smaller networks do. Therefore, consumers may be willing to pay higher prices to join a large network than they would pay to join a small network. Thus profit per user must continually increase with the number of users. As more and more users flock to it, there is a product or service "lock in". This kind of development is typical in
telecommunication market where many users are locked to one operator. However, network effects can be risky as well. A heavy reliance on connecting to networks can be risky when communications is only a means for achieving larger objectives - not the end itself. Connectivity may matter in decisions about what to produce and how to produce it, but those decisions are in many ways just the beginning of the path to business success (Bernstein, 1998). Large networks can also increase transaction costs and promote chaos. As the amount of members gets too large, managing and organizing activities becomes difficult. Likewise, large customer networks and business relationship networks are not synonyms.
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5.7. INDUSTRIAL NETWORKS
Much of the theoretical literature regarding networks is focused on industrial networks. Therefore, it is reasonable to go through some key elements of industrial networks. Within the European tradition, the industrial network approach has emerged as a separate and viable paradigm in its own right (Easton, 1994). In industrial networks, the entities are actors involved in the economic processes which convert resources to finished goods and services for consumption by end users whether they be individuals or organizations.
Figure 12 from Hakansson & Johanson (1994) describes the very basis of industrial networks. This very simplified model aims to make possible an integrated analysis of stability and development within an industry. The model's basic classes of variables are actors, activities and resources. These variables are related to each other in the overall structure of networks. Actors are defined as those who perform activities and / or control resources. In activities actors use certain resources to change other resources in various ways. Resources are means used by actors when they perform activities. Through these circular definitions a network of actors, a network of activities and a network of resources are related to each other.
Network of actors
Actors
Activities
Resources
Network of activities
Network of resources
Figure 12: Basic Structure of Network Model (Hakansson &
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Johanson, 1994) There are several other ways of approaching networks as well. Easton (1994) approached industrial networks in four different ways: as relationships, structures, position and process.
5.7.1. NETWORKS AS RELATIONSHIPS One approach to networks is to regard them as aggregations of relationships. This provides a rich model of relationships between firms buying from and selling to one another. Interactions, in turn, are said to comprise exchange processes and adaptation processes. The exchange process represent the daily exchanges of a business, of social or informational nature that occur between firms. The adaptation process comprises the processes by means of which firms adjust products, production and routines.
5.7.2. NETWORKS AS STRUCTURES If the firms in an industrial system are interdependent rather than independent then networks will have structure. Interdependence introduces constraints on the actions of individual firms which create structure "in the large". Where there is no interdependence, as is assumed in some economic models, then an industrial system will be unstructured and stochastic in nature. The greater the interdependence the clearer the structure of the network becomes and the more important it is in determining the behavior of individual firms. One way of characterizing the structure of a network is by the division of work among the firms in a network. If a series of transformation activities have to be carried out in order to transform resources into products and services for final
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consumption by customers at any point in the network then individual firms will have the responsibility for those activities. Alternatively, the network might have a large number of firms each carrying out a small proportion of the required conversion activities with a simultaneous increase in exchange activities.
5.7.3. NETWORKS AS POSITION The network as position perspective is partial but powerful. In addition, it has links to other areas of business analysis such as industrial economics and strategy. It represents a different level of analysis since the focus is at least partly upon single firms rather than the network.
5.7.4. NETWORKS AS PROCESSES Where strong inter-organizational relationships exist, a fourth form of coordination emerges: network processes. Coordination is not achieved by some grand master or quasi hierarchy since the firms concerned are too independent and the activities too numerous and diverse to control. Network processes are dominated by the distribution of power and interest structures. Some firms in the network have access to more and better resources than others. This may be a result of historical accident (location, invention, synergy etc.) or may be due to management of the resource base.
5.8. NETWORK RELATIONSHIPS
In a sense, networks are just aggregations of relationships. Thus, it is in place to highlight the importance of relationships in networks. Doz &Hamel (1998) favor strongly relationship building, saying that no company
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can go it alone. For industry giants and ambitious starts-ups alike, strategic partnerships have become central to competitive success in fast-changing global markets. Even if the strategic implications are evident, the role of network relationships for value creation is not well known. BlankenburgHolm et al. (1999) defined value creation effect as engagement in the relationship on the joint profitability of the partner firms. They expected that in the relationship development process the partner firms increase mutual dependence by making mutual commitment with the intention of continuing and developing the relationship. Mutual commitment is defined as willingness on the part of both partners to make short-term sacrifices to realize long-term benefits in the relationship. From the point of view of strategy, the critical issue is not to avoid becoming dependent on the other party, but to build and sustain mutual commitment which enables both partners to engage in value-creating coordination of interdependent activities.
A key idea is that business relationships imply that the two exchange partners coordinate a number of exchange and production activities in a way that increases their interdependence, thereby raising their joint productivity and creating relationship value (Blankenburg-Holm et al., 1999). In order to be competitive, these business relationships must build on mutual trust. A basic hypothesis in social psychology is that the tendency to trust or be suspicious of another person is affected by both the individual's own intentions towards the other person as well as by the individual's perception of the other person (Campbell, 1997).
Commitment to a particular trading partner can leave a firm vulnerable to exploitation. In order for firms to make such a commitment, there must be some mechanism by which the firm can be protected from exploitation.
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One such mechanism is trust (ibid). Trust and mutual dependency result in a more rapid flow of information (Powell, 1987). It is reasonable to expect that a more trustworthy actor is more likely to be a popular exchange partner for other actors in the network (Tsai and Ghoshal, 1998).
5.8.1. NETWORKS AND VALUE CREATION The scope and deepness of relationships vary. Some agreements have less strategic value but other can be vital for the strategy. Campbell (1997) studied European packaging industry and identified four categories of different kinds of relationships between buyers and sellers. Each of these approaches value creation in a different way.
Emphasis on joint value creation Low 2 Low Personal loyalty norms Mutual investment norms High 3
Concerns about degree of firm dependence
1
4
High
Self-centered customer norms
Political control norms
Figure 13: Value Creation Model (Campbell, 1997)
In quadrants 1 and 2, firms have a low emphasis on joint value-creation but the varying importance they attribute to firm autonomy results in quite different partnership norms. In quadrant 1, there is a low emphasis on joint
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value creation and high importance attached to maintaining the firm's autonomy, while firms in quadrant 2 have a lot of emphasis on joint value creation, having a low concern about their firm's dependence on trading partners.
In quadrants 3 and 4 there is a high emphasis on joint value creation in interfirm relationships. In quadrant 3, low importance is attached to preserving firm autonomy. Firms in this quadrant anticipate an on-going relationship with their partner and are thus motivated to develop and refine services, products and methods of interaction that are unique to the relationship. Finally, in quadrant 4, considerable importance is attached to preserving the firm's independence even though there is emphasis on joint value creation.
Relationships cannot be considered as independent of other relationships firms engage in. In addition to simply coordinating their activities, two business relationship partners also coordinate their activities with those of their partners in connected relationships, thereby widening the scope of the coordination to include a set of connected relationships in the business network (Blankenburg-Holm et al., 1999).
The following table summarizes some views of external relationships impact for value creation:
Conventional Wisdom
A New Perspective
Will the Alliance create value? And For Whom? Cost-benefit analysis Value-creation priority
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Complex strategic assessment Value-capture emphasis
Simple complementation Initial structure
Complex co-specialization Evolving process
Will Value Creation Stand the Test of Time? Managing a set of objectives Implementing a simple bargain Making a commitment Achieving longevity Tracking moving targets Striking multiple bargains Creating and maintaining options Contributing to competitiveness
Will the partners reconcile conflicting priorities and concerns? Collaboration Interdependence Trust Collaboration and competition Risk of unbalanced dependence Enlightened mutual interest
How will each partners firm manage its growing web of alliances? Marriage Single relationship Realpolitik, diplomacy Alliance networks
Table 2: Conventional Wisdom vs. New Perspective on Alliances (Doz & Hamel, 1998)
5.8.2. THE ROAD AHEAD - VALUE NETWORK So far many theoretical views regarding networks has been covered. First were given a network definition and the strategic implications were discussed. Thereafter, industrial networks as well as the importance of network relationships were presented. But is there something lacking from this? There are some interesting emerging factors that have not been covered yet such as value creation together with competitors in order to capture a share of future. This framework will be discussed next.
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5.9. VALUE NETWORK -FRAMEWORK
The network discussion has so far focused mostly on the existing network theories, of which many have their roots in the industrial era. The purpose of this section is to present views that are not well-covered either in the industrial view or in the emerging view. For this purpose a framework has been developed. This framework should be considered more as a conceptual framework illustrating some relevant elements. It is reasonable to note that it is most suitable in describing converging industries and cannot, therefore, be generalized directly to other industries. However, it has certainly elements that are present in other industries as well. The figure 15 shows the components of the framework.
Time
Future Share
Goal
Z
Coopetition
X
Coevolving
Y
Strategy Alternatives
Value co-producing & co-creating Convergence New Technology Globalization
MajorDrivers
Figure 14: The Value Network -Framework (Own Production)
5.9.1. WHAT FACTORS ARE DRIVING THE DEVELOPMENT? The starting point of the value network are the major drivers: convergence, new technology and globalization. These are shaping the competitive landscape and companies' operating field (companies marked as X, Y and Z in the framework). For example, it is now technologically possible to
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bring together firms that are separated, for example geographically. New information technology opportunities mean that firms must focus not only on their competitors but also on their collaborators and complementors. Thus, forming alliances, cultivating partners and ensuring compatibility are all critical business decisions (Shapiro & Hal, 1999). Likewise, new technology makes it possible to put more complex information and more intelligence into products, which in turn increases their value (Kelly in Gibson 1997). But the key success factor for companies in the future will be the ability to form value network relationships. Forming external relationships will require cultural, technical and operational changes. Those who manage to do it well are going to rewarded. Companies that are able to form value networks will achieve advantages in cost, service, asset productivity and flexibility (Copacino, 1999).
The new competitive forces affect the value chains even of very competent companies. It is possible that in some industries competitive advantages can be wiped away when new - sometimes somewhat odd- competitors rapidly create new value chains based on new technology which in turn can change the whole situation. Companies should, as a contra-attack, transform their value chain rather than just optimize it. (Downes & Mui, 1999). Perhaps the most powerful of the major drivers is convergence.
5.9.2. CONVERGENCE Convergence refers to a situation where traditional industry boundaries start to disappear. Chakravarthy (1997) has studied converging industries, which he calls for infocom (information and communication). According to him mobility across infocom, even within the same cluster, was difficult
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until recently because of either technological differences or regulatory barriers. Today, it is not unusual for two distinct communication provider companies to compete for same customers. The number of competitive forces that a firm faces has expanded. Coping with the resulting turbulence calls for a new approach to competitive strategy. According to Chakravarthy companies must reconceptualize strategy, share the responsibility for strategy more broadly within the firm, and focus on organizational capabilities as the real source of competitive advantage. Another aspect of Chakravarthy's strategy for coping with the growing turbulence is that companies must rely on changing the rules of the game.
One form of convergence is the emergency of cross-industrialism. It should not be confused with a conglomerate strategy in which the mother company works often more or less as a holding company. Crossindustrialism is a rational initiative aimed of benefiting from other industries that have similar interests, for example in developing technological standards. Cross-industrialism can be described in terms of coopetition.
5.9.3. COOPETITION Brandenburger & Nalebuff (1995) discussed coopetition and how companies should strive for win-win situations. They present examples with the help of game theory but warn that a win-win can eventually lead to a win-lose because of backfires. Gossain & Kandiah (1998) discuss the issue of coopetition in business ecosystems. According to them very few organizations are taking the relationships to the next level, that is, partnering with competitors and complementors in the spirit of coopetition
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in order to increase the pie. They believe that the primary goal is to create value through the increased number and variety of information, services and products. In fact, the more competitors are included, the better the situation. It is easy to see similar situation in telecommunication market: competitors are co-creating markets and then competing for market share in normal fashion.
Somewhat similar viewpoint comes from Chan Kim & Mauborgne (1999) who discussed how an innovation can make competition irrelevant. By redefining the problem an industry focuses on, an innovation shifts the performance criteria that matter to customer. This creates new market space. Market insights are needed to discover existing but hidden demand or to create totally new demand. Standard creation can be used as an example of creating new market space because without a commonly accepted standard, the market would perhaps not exist at all or would be highly fragmented. But innovations do not make competition irrelevant; moreover, it changes or gives new roles to competitors who become partners and co-developers.
5.9.4. COEVOLVING One element of the value network -framework is coevolving. This term is introduced by Eisenhart & Galunic (2000) in describing corporate strategy process for multibusiness companies. Furthermore, the term has similarities to external relationships as well. Coevolving usually takes place between partners instead of competitors as was the case in coopetition. It resembles the external ecosystems that link corporations together in webs of alliances. In coevolving, the result is a shifting web of
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relationships that exploits fresh opportunities for synergies and drops deteriorating ones. The term coevolution originated in biology. It refers to successive changes among two or more ecologically interdependent but unique species which result in their evolutionary trajectories becoming intertwined over time. While these species adapt to their environment, they also adapt to one another. The result is an ecosystem of partially interdependent species that adapt together. This interdependence is often symbiotic (each species helps the other), but it can also be commensalist (one species uses the other). Competitive interdependence can emerge as well: one species may drive out the other, or both species may evolve into distinct, noncompetitive niches. Interdependence can change, too, such as when external factors like climate or geology shift.
Coevolving is a particularly crucial strategic process in new economy corporations, where higher velocity markets drive managers to keep individual businesses small enough to adapt, but where intense competition demands that they maintain economies of scope and rapid cross-business learning. Understanding the essentials, that is frequently reconnecting the relationships among businesses, blur collaboration and competition, manage the number of connections and uncover high-leverage links -are crucial for companies that hope to coevolve.
5.9.5. FUTURE SHARE Coopetition and coevolving are possible strategy alternatives for achieving a share of future. The term future share is developed by Hamel & Prahalad
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(1994) who believed that organizational transformation should start from the view about the future of the industry:
How does the company want its industry to be shaped in five years? What must the company do to ensure that the industry evolves in a way that is maximally advantageous for it? What skills and capabilities must the company begin to build now, if it is to occupy the industry high ground in the future?
Since most companies do not start with a shared view of the future, managers should develop a process for pulling together the collective wisdom within an organization. Hamel & Prahalad's main argument is that competition for the future is competition for future share rather than market share. It is competition to maximize the share of future opportunities a company could potentially access within a broad opportunity arena. The question that must be answered by every company is, that given the company's current skills, or competencies, as the are called, what share of future opportunities are it likely to capture?
Future share requires that company possesses good understanding of the industry development and trends. Industry foresight is based on deep insights into trends in technology, demographics, regulations and lifestyles, which can be harnessed to rewrite industry rules and create new competitive space. While understanding the potential implications of such trends requires creativity and imagination, any vision that is not based on a solid foundation is likely to be fantastical (Hamel & Prahalad, 1994). The focus should not lie solely on firm's own industry. If a company is interested in understanding the future, most of what it needs to learn about
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the future is going to be learned outside of its own industry (Hamel in Gibson 1997).
5.9.6. SUMMARY OF VALUE NETWORK -FRAMEWORK Much of the today's competition is focused on the future. Firms are trying to establish a defensible position in order to capture a good slice of the
future share. The value network -network conceptualizes the major drivers affecting the industry as well as presenting alternative strategies coopetition and coevolving- that help companies capture their share of future. Value is created in this framework with the help of coopetition and coevolving.
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6. EMPIRICAL FINDINGS
In this chapter will be presented the empirical data retrieved during interviews and from other external sources. This section is organized around the three views of value creation: industrial, emerging and network. Additionally, one further illustrative case will be presented, which is SyncML. My comments and synthesis are included to simplify the understanding of the data.
6.1. INDUSTRIAL VIEW OF VALUE CREATION
As discussed earlier in the theoretical part, the industrial view of value creation takes the value chain as referent. To make it more convenient especially to respondents who may not know the industrial view so well I have chosen to use the value chain as an illustrator of the industrial view. The model is based on the classical input / output theory where value creation process is linear and additive. Thus, the questions relate to the value chain and how the respondents see its relevance today as a model for describing their firm's activities. In general, answer from Nokia representatives relate in the first place to Nokia Mobile Phones.
The first question takes up immediately the usefulness of the value chain.
How do you see the usefulness and validity of the value chain as a model describing your company's activities?
"We at Nokia consider value chain as a good model to conceptualize our business. It works also as a thought clearer. But in order to get
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something out of the value chain, it must be kept in fairly simple level and not expanded too much." Ilari Nurmi, Business Development Manager, Nokia Mobile Phones
Another Nokia representative interviewed had a similar view about value chain's usefulness but stressed more its simplicity:
"Value chain is one way and a tool to describe reality. It is most useful when we want to get simple enough view of the total situation." Timo Saraketo, Senior Manager, Nokia Mobile Phones
The opinions of the Sonera representative interviewed was very close to those of Nokia's representatives:
"The value chain can be used to provide a practical, illustrative picture of the situation." Pirjo Kekäläinen-Torvinen, Senior Vice President, Sonera
Furthermore, she remarked the need to look at each business separately:
"You have to look at the each business as a separate value chain. It is not possible to describe the whole corporation as a single value chain. We are a sum of several businesses, activities and services."
While there seems to be a consensus in regarding the value chain as a good, simple illustrator of the current situation, many important value creating aspects are being ignored. For this thesis, perhaps a more interesting aspect is the importance of external relationships to value
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creation and especially how the chosen companies are co-producing and co-creating value. To find this out the focus must be turned to the emerging view.
6.2. EMERGING VIEW OF VALUE CREATION
The emerging view emphasises the importance of interactive relationships to value creation, and instead of talking about linear view, it views value creation as a synchronic and non-additive process. Value is co-produced and co-created. Therefore, it is interesting to study the impact of external relationships. These can refer to different kinds of joint projects, cooperations that firms establish between their suppliers, partners, alliances, competitors, complementors, customers etc. According to one Nokia representative, Nokia is engaged in hundreds of different kinds of external relationships including their main competitors Motorola, Ericsson, and other players from converging industries such as Microsoft, Yahoo!, Amazon.com, Cisco Systems, IBM, Philips etc. (For more detailed list see appendix VI and VII). The situation is rather similar for Sonera. The company is engaged in several joint projects with companies such as Vivendi, Ericsson etc.
In both companies the number of external relationships is much greater if supplier partnerships are included also. Many of the external relationships are projects that focus on research and development, standard creation or bringing new products and services to market. As the amount of joint projects increases it is interesting to find out motives for them and especially how they affect value creation.
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In how many co-operations is your company involved at the moment?
"It is impossible to give an exact estimation of all partnerships and alliances. In addition, many of them are confidential. But the total number is measured in hundreds." Timo Saraketo, Nokia
"It is difficult to estimate the exact number. Cooperation is a very broad definition and it can include a lot of different forms. There are more loose forms and there are very tight forms as well. If we consider partnerships, there are approximately 10 important partnerships. However, we think that a partnership is a very loaded word." Ilari Nurmi, Nokia
Will the amount of external relationship increase in the future?
"The role and amount of external relationships will definitely increase in the future." Ilari Nurmi, Nokia
"The amount of external relationships keeps increasing and our field of operation keeps getting larger." Sonera Pirjo Kekäläinen-Torvinen,
One interesting viewpoint regarding the role of external relationships comes from the CEO of Nokia Jorma Ollila who in a magazine interview12 expressed that despite the current growth rate of 25-30 % Nokia who currently employs 56,000 people, will not have over 100,000 employees in the future.
12
Talouselämä, 14 2000 78
"Our goal is that sales per employee will grow, that is that we could be able to slower the total growth of employees."
How do you choose your partners and allies?
"There are no single most important criteria. It depends on a given situation and is case related. First of all we have to define our vision and goals. We need to answer to the question what do we want next? After we have done that we try to find tools and ways to do it. There are several options available, for example alliances, partnerships. The final step then is decision making." Ilari Nurmi, Nokia
"In the Amazon.com case (see appendix VI) we wanted to be involved with a top player and promote ourselves. One could say that we wanted to create some hype." Ilari Nurmi, Nokia
"All our partners have to be considered as "good corporate citizens." Pirjo Kekäläinen-Torvinen, Sonera
One criteria that comes up in discussions with particularly Nokia representatives is "market making". This term refers to a situation where a company is creating or shaping the future market to its desired direction. However, this cannot be done alone.
"We strongly want to be "market makers ". Many alliances or partnerships build on that concept." Ilari Nurmi, Nokia
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Rather similar viewpoint comes from one Sonera representative who addressed the need to get right partners. "You cannot develop this kind of service (GPS, which is a service that can locate the mobile phone user) as a solo effort. You have to set up networks and service chains between diverse partners, even unlikely ones. It's all about integrating services and creating new value chains" Jari Jaakkola, Sonera's Executive Vice President of Corporate Communications & Investor Relations13
Another interesting aspect is that while the amount of relationships increases, and gains perhaps a more strategic role, measuring the impact of these relationships to value creation gets more important. One way is discussed in the SyncML case (6.4.) but the following questions take up the question in more general terms.
How do the external relationships create value?
"It is likely that external relationships bring clear value that cannot be captured by existing models. But how would one draw these (external relationships) to the model. I do not have an answer to that." Timo Saraketo, Nokia
Another way of creating value is being the first one in the market. This is sometimes referred as "winner takes it all" -phenomenon.
"Time to market is vital. First mover advantages are often very big."
13
in Sonerasound, Sonera Journal April 1/00 80
Ilari Nurmi, Nokia
One interesting point of view regarding the importance of external relationships comes from the Sonera representative. The answer refers to Xfera Movile S.A. of Spain, in which Sonera Corporation is a founding shareholder (15%). This company has been granted a third generation mobile network licence in Spain. The below comment illustrates the importance of relationships even if their effects cannot be considered in purely economic terms.
"In the "beauty contest14" one applicant will not get the license. That is a fact. It was also absolutely necessary to have Spanish partner otherwise we would not have had any change (of getting the license)". Pirjo Kekäläinen-Torvinen, Sonera
The issue of measuring success of joint projects has been problematic. It is obvious that more than economic criteria are needed. But how can one estimate, for example future cash flows of a market that has not been created? This problematic has received academic attention as well. Associate Professor Toby Stuart expressed the problematic in following fashion:
"Pure economic numbers do not give a comprehensive picture of external relationships impact to businesses. Such aspects as organizational learning or knowledge sharing are almost impossible to quantify. The difficulties to measure (effects) has held back the
14
By the expression "beauty contest" is meant in this context, a situation where the
applicants will be chosen by qualitative arguments in contrast to bidding auctions. 81
academic research in this area15" If the academic research has been held back, businesses have not had the luxury of waiting until appropriate models have been built.
How do you evaluate success in external relationships?
"There are no single most important criteria in success evaluation. First we need to see what our objective was in the first place. Then we start to evaluate the results. There are both soft and hard criteria. Often we have to rely on qualitative judgment. Pure numeric or quantitative measures are not useful in every cases and they do not catch all the important elements. Of course, we need to make money in the long run but in the short run profits are not so relevant." Ilari Nurmi, Nokia
The fact that Nokia can afford to make losses in the short run can be also verified by checking the financial numbers of Nokia Ventures Organization, which made a operating loss of 175 EUR Millions in 199916. The objective of Nokia Ventures is to partner with and support entrepreneurs in building successful companies. These companies include many start ups such as pogo.com, hotpaper.com, FusionOne etc.
"We benefit from being such a big player. We don't have to have right every time, that is, we are allowed to make some mistakes but
15
Associate Professor Toby Stuart, Graduate School of Business, University of Chicago,
in a non-public interview.
16
http://www.nokia.com/investor/2000/1Q/index.html 82
we have to be right 98 % of time. Here economies of scale come into picture. But quickness must also be maintained." Ilari Nurmi, Nokia
6.3. VALUE NETWORK
The first value network question relates to network thinking in general and whether one can think that companies are part of a network. It is worth keeping in mind that when discussing a value network the respondents do not refer to the value network -framework (5.9.).
"As the amount of external relationships keep increasing and field of operation gets larger, it is perhaps wrong to describe (business) in terms of a "chain". More likely, it is a network. However, the whole concept of network does not have a lot normative value. It is too wide and a complex theory to be applied in practice." Pirjo KekäläinenTorvinen, Sonera
"Nokia has tried to create pictures of its total value network but the results have been poor and have not served the purpose. It is important that we manage to communicate our goals to as many people as possible. To that purpose value chain has been suitable but it must be kept in a simple abstraction level. As said, we use the value chain as a tool which simplifies qualitatively. We need to make shortcuts and describe the real problem instead. Theoretical views should not override common sense and user friendliness. Sometimes we make a more high level description. We also make lower level descriptions. It must "fit the purpose". However, if the whole company is taken into scrutiny, one could say that we are a part of a value network. For example, there are several business ecosystems that have a core and a lot of application providers around it." Ilari
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Nurmi, Nokia
When asked about the impact of convergence to value network framework, the following comment was received:
"In convergence, everybody brings their strengths to the picture. We call it a union where especially quality and logistic are important. Likewise, agility and ability to implement and create rule for the play are important." Ilari Nurmi, Nokia
One central element of value network is coopetition. This is illustrated most easily with the help of an example. For that purpose, SyncML has been chosen. This initiative is a good example of how companies are "cocreating future" by establishing common standards. It relates also to the future share discussion in the value network -framework. Nokia is involved in many similar standard creation projects such as Bluetooth, Symbian etc. Similarly, Sonera is involved in standard creation projects but those will not be discussed in this thesis.
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6.4. CASE SYNCML
SyncML is a initiative to develop and promote a single, common data synchronization protocol that can be used industry-wide in converging industries. SyncML is being driven by Nokia in cooperation with IBM, Lotus, Motorola, Palm Inc., Psion and Starfish Software. According to one Nokia representative, the initiative has come from them. The SyncML initiative is open to industry partners, such as synchronization software vendors, application developers, device manufactures, service providers. A company can become a supporter of the SyncML initiative free of charge. The SyncML initiative expects to release an open protocol for data synchronization in mid 200017.
6.4.1. MOTIVES FOR SYNCML The popularity of mobile computing and communications devices is rooted in the ability to deliver information to users almost any time and anywhere. The key factor in the popularity of mobile communication is the ability to access and update information on the fly, and then to accurately synchronize that information with compatible applications in the office. It is said that mobile computing has an Achilles heel - data synchronization. Today almost every device uses a different technology for performing data synchronization. All the popular mobile devices - handheld computers, mobile phones, pagers, laptops - synchronize their data with network applications, desktop calendars, and other locations where information is stored. The ability to access and update information on the fly is the key to pervasive nature of mobile computing.
17
SyncML White Paper, Building an Industry-Wide Mobile Data Synchronization 85
Protocol
The SyncML is a fairly typical initiative in converging industries. Similar examples could be found as well, for example Symbian and Bluetooth. From the research point of view, SyncML is interesting because it
illustrates the value creation effect of the relationships between competitors. From the value creation perspective, these kind of joint projects between competitors are important: without a largely accepted standard, the market will not reach the desired scope. The SyncML will be discussed in this thesis only from Nokia's point of view. However, I do not believe that the motives of other members would differ much from Nokia's. Following comments are from Nokia representatives.
What is the importance of creating standards together with partners?
"We strongly want to be "market makers". Many alliances or partnerships build on that concept. We all benefit if we can create a market that grows and that the standards are widely accepted and used. Our role together with competitors is to be able to create standards so that the market can blossom." Ilari Nurmi
"First of all, we identified a need for data synchronization. Thereafter, we made a decision of doing something for it. Then we identified suitable partners and that is how it all got started." Timo Saraketo
"The job (standard creation) must be started well ahead of the end users even realize this." Ilari Nurmi
What is the biggest advantage of joint standard creation?
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"Standard creation's biggest advantage is to avoid the market fragmentation. This allows us to enlarge the business ecosystem". Ilari Nurmi
"Perhaps the biggest advantage of SyncML is that we can avoid a market fragmentation. Of course it also opens up new business opportunities" Timo Saraketo
"Nokia as a well established and strong player has a good position in the future when it comes to building standards and making market. Especially technical coopetition is very important." Ilari Nurmi
"The idea of coopetition builds on the following reasoning: it is everybody's benefit that the standards are open. Firms benefit from this as well as the consumers. After the standard is created, we compete for customers with our strengths and quality." Timo Saraketo
As said earlier, Sonera also believes in creating industry standards. The following comment from Sonera's Executive Vice President KajErik Relander18 does not relate to SyncML but it highlights that their viewpoint is similar to Nokia's.
"if your company establishes the industry standard, whether it be de facto standard or a genuine technological breakthrough, customer will turn out in drove."
18
In Sonerasound, Sonera Journal April 1/00. 87
7. ANALYSIS
This chapter is organized in similar fashion as the previous chapter, that is around the three different views of value creation.
7.1. INDUSTRIAL VIEW
Perhaps the most logical explanation to the diminishing importance of industrial view can be found by looking at the society's total shift from a manufacturing society to an information society. In the manufacturing society, linear mass-production was the basis for organizing activities. In the information society, immaterial or intangible products are becoming more important. This general shift in the society is affecting also the value creation process. There are several other drivers affecting the development as well, such as new technology, globalization and convergence. Thus, change is always a mix of different factors.
It would be unwise to state that the industrial view does not hold much truth anymore. Industrial view's credentials should be recognized, for example in considering the comments from Nokia regarding the importance of economies of scale. Industrial view certainly has elements that are still important but at the same time, it should be considered as incomplete. In other words, industrial view neglects many important aspects of value creation. But before the attention will be turned to those, a discussion of the value chain, which embodies the industrial view, will be derived.
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7.1.1. VALUE CHAIN Not many theories have become so embedded in management vocabulary or literature than the value chain. It is almost impossible to open a business magazine and not to find a CEO stating how they are redesigning their value chain. But as the model has become so widely accepted, so have also the misconceptions about it. As mentioned in the theoretical part, the value chain is often used as a synonym for the industry value chain. These two concepts are not synonyms and should be kept separate.
If theoretical misconceptions are left aside, we can identify a consensus among respondents that the value chain seems to have value as an analytical tool. It's power is simplicity but this is also a weakness. Every person interviewed pointed out that it is no longer possible to describe the entire firm and all its activities with the help of value chain. The general value creation process itself has become more synchronic and complex. However, value chain can used be as a tool to deliver complex issues to a wider audience within the organization. It can provide a simple overall picture, and more importantly a picture that is easy to understand and communicate. In that sense, the model has value. But as stated many times before, value chain and the industrial view neglects many important aspects that create value. These will be discussed next.
7.2. EMERGING VIEW OF VALUE CREATION
Co-producing and co-creating aspects are central in the emerging view. Likewise, the fact that all economic activities cannot be measured in economic numbers is an important notion. Telecommunication industry provides describing examples of how co-producing and co-creating can
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provide real value as seen in the SyncML case. However, as the original emerging view focused mostly on buyer / seller -relationship, some factors are left uncovered. For example, the whole definition of convergence implies a blurring of industry structures. A good example of this is the emergence of Internet and how it is gradually starting to be incorporated into more products such as mobile phones, cars etc. This further blurs industry structures.
However, blurring cannot be done without co-creation and co-production. This means that firms have to seek novel partnerships outside the organizational constraints. Every respondent had a similar view concerning the amount of external relationships increasing in the future and them becoming strategic by nature. Another relevant point of view was that some of the products or services cannot be developed as a solo effort. One reason for this is that the technological development is so rapid that it is impossible to keep all the necessary skills and capabilities in-house. Another major reason for forming relationships is globalization. Together with new technology, globalization means that there is less time to expand markets. A fast alternative is to partner with local players. Another interesting aspect was that relationships often have a strong political side as was seen in the Xfera Case. Shapiro & Hal (1999) expressed this by saying that competition is becoming a mixture of politics and economics.
Perhaps one aspect that has not received enough attention in this thesis is the promotional aspect of different forms of external relationships. The comment from Nokia respondent saying that they wanted to promote themselves by allying with Amazon.com shows that in today's shareholder oriented world companies must also find ways to feed the hunger of capital
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markets by providing promises of bright future and high growth. Partners that are leading in their own field are naturally more attractive and "sexy" than industry laggards.
The studied companies were engaged in several external relationships especially Nokia. From the point of view of value creation measuring these are gray area. The answer from one Nokia representative stating that soft numbers are often used in measuring the results, illustrates well the difficulties of using economic measures to evaluate external relationships. Naturally it is possible to estimate the cost of a project but the revenue side is more troublesome. Some of the projects may never become realized. This viewpoint falls close to the idea of future share (Hamel & Prahalad, 1994). Furthermore, the answer that a big company can afford to have wrong sometimes lifts up the point that many of joint projects are highly risky and perhaps based on a possible stroke of luck - a certain kind of 21st century gold mining. Blankenburg-Holm et al. (1999) discussed the relationships between companies and defined mutual commitment as a willingness on the part of both partners to make short-term sacrifices to realize long-term benefits in the relationship. This was the case for Nokia. This emphasis resembles also Campbell's (1997) mutual investment norm - category in the value creation model. One noticeable point is that the representatives seem to have similar views about the fact that no company can go it alone. As seen in the Xfera Case, Sonera would not have been granted the license without (Spanish) partners at least according to the respondent. The main reason for this was the political character of the process, however, the competitive factors played a role as well.
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7.3. VALUE NETWORK
One of the "hypotheses" in this thesis has been that networks are becoming so complex that describing them with existing models and theories seems impossible. But are they networks in the first place or just loose aggregations of economic actors? In a conceptual level, this is probably the case. But if considered in legal terms, this is not the case.
The value network -framework is by no means a comprehensive picture of reality. Instead, it is an attempt to highlight some of the major drivers and some alternative strategies for companies in the battle for future shares. Other actors could be added to the framework, however, the result would be merely a picture of different stakeholders. Secondly, to understand the logic behind external relationships requires a deeper understanding of their nature, not just seeing the simple picture. On the other hand, simple illustrations can have value as well. There was a consensus among respondents that both Nokia and Sonera are a part of a network but no one could give an illustration of how the network would look like. One possible reason for this is that the companies simply have too many relationships and links between different actors which make it almost impossible to identify them all and see their impact to the overall network. Nokia has tried to create a model for value network but has given up the job due to the difficulties in doing so.
This is interesting from the researchers point of view: if the current theories are not describing the reality, there is a need to build models that will do so. However, since the reality is getting so complex and interrelated, it is difficult to form models that would be powerful enough not leave any important factors uncovered. This leads to a somewhat
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paradoxical situation. Perhaps even more important a factor is that managers and researcher are aware of the complexity and interrelations of today's business world. It is important that managers have a mind-set that sees the new emerging opportunities, which often require creativity and thinking "outside the box". Many potential business opportunities may be lost if the old somewhat rigid models are applied solely. For example, bringing customer into the general value creation process can open up qualitative new ways of making business. Likewise, seeing competitors as partners can be difficult for many, although the results from converging industries illustrate the power of coopetition.
7.3.1. COOPETITION The respondents had all rather similar opinions about the role of coopetion. The biggest advantage was clearly the avoidance of fragmented markets. Therefore, it lies in the interest of all to create technological standards that are applied as widely as possible. This allows the market to blossom. It is in place to remember that coopetition has two faces: one is co-operation and the other is competition. Coopetition does not replace competition; in fact, competition continues as hard as usually after the joint project is over. But coopetition is an initiative to utilize external relationships in a creative way that can create added value to every actor involved. But the eventual value will be realized later on, that is, in the future.
7.3.2. FUTURE SHARE In the value network -framework, companies are seeking to maximize their share of the future. In discussion with Nokia representatives, the term
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"market making" came up in several occasions. As a theoretical concept, it is not well known. The term refers to a situation where a firm is seeking to move or shape the market to desired direction. Creation of technical standards is one good example of this. Market making has some similarities to the theory of future share. The market making in the telecommunication industry is a collaborative process that involves competitors from the same and other industries and cross-industrial partners. SyncML is an example of both market making and coopetition. As seen in one of the Nokia comments many of their alliances or partnerships are build on the market making concept.
Even if SyncML is not promoted as a network, it has similarities to Easton's (1994) definitions of networks (5.7). However, I believe that none of Easton's definitions is suitable for SyncML. I think that a fifth definition would perhaps be more suitable: network as a purpose. In this approach, network is formed to deliver a common purpose or a rational initiative. In the SyncML case, purpose is of course the creation of
common technological standard. Firms gather for the sake of a joint purpose, co-create it and then go each to their own directions. Firms are engaged simultaneously in several similar networks, for example Nokia in SyncML, Symbian and Bluetooth. The fact that the amount of networks and purposes is many, shows on one hand how interrelated companies in fact are, and on the other hand the power of external relationships. Furhtermore, these are major implications for companies. The key to success lies often in understanding the significance of relationships to value creation. Managing numerous simultaneous relationships form other challenges for managers.
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8. CONCLUSIONS
This thesis started with a discussion of three main drivers that are affecting the way value is created. These were new technology, global competition and convergence. At this stage it should be evident that these drivers are real and affect the way business is made. While a possible way of describing the impacts was presented in the value network -framework, the theoretical starting point was the industrial view. This view of value creation has lost a lot of its vitality. In its purest form, industrial view simple is too narrow-minded for today's interconnected world, neglecting many important aspects. The value chain as a kind of manifestation of the industrial view implies a very simple illustration of a firm's activities. Especially new technology and convergence are tearing rigid structures apart and forcing companies to co-operate in various forms. As the transactions costs decrease, the market becomes a more economic alternative for producing activities. Likewise, the interconnected world means that companies actively try to shape their industry (industries) into desired direction. Nokia and their commitment to market making is a describing example of how a proactive approach can be a preferable alternative and also successful.
But no company can shape the landscape by itself; they need help from others. One form of this is coopetition, which has emerged as a way of creating future the in form of developing, for example, open technical standards as seen in the SyncML Case. These co-operations at best will make market bloom and no negative market fragmentation occurs. Every cooperative process involves also political aspects. As stated by the Sonera representative, politics play a very important role. As the stakes get higher, it is likely that politics will become more central.
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When it comes to the emerging view of value creation, perhaps the most important contribution of this thesis is bringing into surface co-creation and co-production between competitors. As discussed previously, Normann & Ramirez were mostly concerned about the buyer / seller - relationship. Thus, this thesis hopes to add new components to their theory. This was partly done with the help of value network -framework.
I believe that network is a proper term to describe the situation where the studied companies are at the moment. The idea of being part of a network was also verified by the respondents but a lot uncertainty remained about what should be included in network and what is the normative value of such an illustration. The value network that has been developed tries to illustrate how the major drivers are forcing companies to take some strategic action in order to get their share of the future.
The value network -framework is double barreled from the researcher point of view. If more and more complexity is added to a model, the lesser is its powerfulness. In similar fashion, as networks grow to include more actors, it is very difficult to form a good overall picture of them. Simply stating, just a list of actors who are part of the network has very little normative value. It may give a picture of a some kind of the system, but for management purpose is not sufficient. I believe there are two possible solutions to this dilemma. One solution is to realize that a company is part of a very complex network that consists of several different kinds of actors, but for the purpose of strategy planning the existing models such as value chain will be used. It is important then to be aware that the model is a simplification of reality, not a truthful representation of it. This viewpoint is similar to those received from interviews with Nokia and
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Sonera representatives. The other solution is of course to build a model which can capture the complexity of value networks. The framework presented does this only partially.
There are two key aspects stemming from this thesis that should be taken into account by managers. First, the importance of external relationships to value creation. Whether called for constellation or network, managers should understand what potentiality lies outside their own organizational constraints. There is enough empirical evidence supporting the fact that external relationships are providing real value, and, importantly their role will increase in the future. Value can be generated in various ways. In information society, companies should seek qualitative partners and actively move -as far as it is possible-their industry into the desired direction. As said in the background, industry rule breaking starts with mental framebreaking. Creative and unconventional solutions may prove to be real killer applications in future. The second key aspect is the realization of how interconnected companies in fact are. Reality is far more complex than the industrial view theories imply. Likewise, creating a competitive advantage cannot be done only by configuring one's own internal activities. Firms are so embedded in their environment that perhaps competitive advantages will be derived from making some right decisions concerning:
What should we keep inside, that is what is the soul of the company? With whom and for what purpose should we cooperate? How do we manage to control all relationships we are engaged in?
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8.1. FUTURE RESEARCH
As the amount of interconnections between economic actors grows, managing complexity may eventually become one of future mantras. Researching the effects of complexity or chaos will certainly provide fascinating topics for research. For that purpose will be needed new frameworks that in a better fashion can capture the dynamics and importance of interrelationships. Another intriguing questions is that what is the clue that binds networks together? Is it values, culture or pure economic rationality? How can this be communicated to every actor involved? And how does one avoid unnecessary hierarchy which is one implication of increase in relationships? Finally, the question of competitive advantage in the interrelated world is worth studying: is it brand, network, intelligent capital or perhaps the good old economies of scale, or maybe a some combination?
8.2. FINAL WORD
This thesis started by stating that the understanding of value is often as outdated as the old assembly line that it resembles and so is the view of strategy that goes with it. My most humble wish is that after reading this thesis, the reader would agree that value creation is far more complex an issue than the assembly line illustration assumes it to be.
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Appendix I: References
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Aldrich, D. (1998) The New Value Chain, Informationweek, September 14.
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Arbnor, I. & Bjerke, B. (1997) (2 edition) Methodology for Creating Business Knowledge, London: Sage Publications.
Ashkenas, R. (1995) The Boundaryless Organization: Breaking the Chains of Organizational Structure, San Francisco: Jossey-Bass Publishers.
Axelsson, B. & Easton, G. (Ed.) (1994) Industrial Networks: A New View of Reality, London: Routledge.
Baden-Fuller, C. & Stopford, J. in De Wit, B. & Meyer, R. (1998) Strategy: Process, Content, Context, an International Perspective, London: International Thomson Business Press.
Bernstein, P. (1998) Are Networks Driving the New Economy? Harvard Business Review, November-December.
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Blankenburg-Holm, D., Eriksson, K. & Johansson, J. (1999) Creating Value Through Mutual Commitment to Business Network Relationships, Strategic Management Journal, Issue 20.
Brandenburger, A. & Nalebuff, B. (1995) The Right Game: Use Game Theory to Shape Strategy, Harvard Business Review, July-August.
Campbell, A. (1997) Buyer - Supplier Partnerships: Flip Sides of the Same Coin? Journal of Business & Industrial Marketing, Vol. 12 NO. 6.
Cartwright, S. (2000) Untangling the Value Web, The Journal of Business Strategy, January-february.
Castells, M. (1998) The Rise of the Network society , Cambridge, Massachusetts: Blackwell Publishers.
Chakravarthy, B. (1997) A New Strategy Framework for Coping With Turbulence, Sloan Management Review, Winter 1997.
Chan Kim, W. & Mauborgne, R. (1999) Creating New Market Space, Harvard Business Review, January-February.
Copacino, W. (1999) The Emergence of "Value Networks" , Logistics Management and Distribution Report Radnor August.
Czerniawska, F. & Potter, G. (1998) Business in a Virtual World: Exploiting Information for Competitive Advantage: London: MacMillan Business.
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De Wit, B. & Meyer, R. (1998) Strategy: Process, Content, Context, an International Perspective, London: International Thomson Business Press.
Downes, L. (1999) Unleashing the Killer App: Digital Strategies for Market Dominance, Boston, Massachusetts: Harvard Business School Press.
Doz, Y. & Hamel, G. (1998) Alliance Advantage : The Art of Creating Value Through Partnering, Boston, Massachusetts: Harvard Business School Press.
Eisenhart, K. & Galunic, C. (2000) Coevolving: At Last, a Way to Make Synergies Work, Harvard Business Review, January - February.
Evans, P. & Wurster, T. (1997) Strategy and New Economics of Information, Harvard Business Review, September -October.
Fleetwood, S. (1997) Aristotle in the 21st Century, Cambridge Journal of Economics, Vol. 21.
Gibson, R. (Ed.) (1997) Rethinking the future, London: Nicholas Brealey Publishing.
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Gosssain, S. & Kandiah, G. (1998) Reinventing Value: The New Business Ecosystem, Strategy and Leadership, November-December.
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Kvale, S. (1989) Issues of Validity in Qualitative Research , Lund: Studentlitteratur.
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Lipsey, R. & Courant, P. (1996) Economics, 11th edition, New York: Harper Collins College Publishers.
McConnell, C. & Brue, S. (1993) Economics, New York: McGraw Hill.
McKenna, R. (1997) Real Time: Preparing for the Age of Never Satisfied Customer, Boston, Massachusetts: Harvard Business School Press.
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Nolan, R. & Croson, D. (1995) Creative Destruction: A Six-Stage Process for Transforming the Organization , Boston, Business School Press. Massachusetts: Harvard
Normann, R. & Ramirez, R. (1993) From Value Chain to Value Constellation: Designing Interactive Strategy, Harvard Business Review, July-August.
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Normann, R. & Ramirez, R. (1994) Designing Interactive Strategy: From Value Chain to Value Constellation, Chichester: John Wiley & Sons.
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Ramirez, R. (1999) Value Co-production: Intellectual Origins and Implications for Practice and Research, Strategic Management journal, 20.
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Shapiro, C. & Hal, V. (1999) Information Rules: A Strategic Guide to the Network Economy, Boston, Massachusetts: Harvard Business School Press.
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Stabell, C.B. & Fjeldstad, O.D. (1998) Configuring Value for Competitive Advantage: on Chains, Shops, and Networks, Strategic Management Journal, Vol. 19.
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Appendix II: Secondary Sources of Material
Andersen Consulting, Wireless Application Protocol, Swedish Market Survey, October - November 1999 Helsingin Sanomat, 11/5/2000http://www.lifechart.com/about/990811_1.htmlhttp://www.nokia.comhttp://www.nokia.com/corporate/wap/files/whitepaper.pdfhttp://www.nokia.com/investor/2000/1Q/index.htmlhttp://www.ovum.comhttp://www.sonera.fi http:www.sonera.fi/investor_en/news/indepth/3.htmlhttp://www.syncml.org Neil, D. Which European Carriers Will Be Left? The Rule of Three Will Apply, Gartner Group Report, May 1998 Nokia 1999 Year-End Results Presentation Sonerasound, April 2000 SyncML White Paper, Building an Industry-Wide Mobile Data Synchronization Protocol Talouselämä, Internet mullistaa koko Nokian (Internet will transform the whole Nokia) Number 18, 2000
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Appendix III: List of People Interviewed
Ms. Kekäläinen-Torvinen, Pirjo, Senior Vice President, International Business Development, Sonera Ltd, 25/04/2000.
Mr. Nurmi, Ilari, Business Development Manager, Nokia Mobile Phones, Digital Convergence Unit, 17/04/2000.
Mr. Saraketo, Timo, Senior Manager, Strategic Planning, Nokia Mobile Phones, Digital Convergence Unit, 27/04/2000.
Background interviews
Mr. Helt, Geoff, CCI Fellow, Graduate School of Business, University of Texas at Austin.
Mr. Stuart, Toby, Assistant Professor, Graduate School of Business, University of Chicago.
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Appendix IV: Interview Questions, Nokia
In how many co-operations are you (Nokia) engaged in? What are the criteria for selecting partners and projects? What is the most important criteria? What measurements are you using for evaluating the success of joint projects? What is the most important criteria? How do you see the trend going forward: will the amount of external relationships increase? How are you able to manage the growing amount of relationships? How important are external relationships from the strategic and competitive point of view? What is your opinion of so called cross-industrial activities and cooperations?
Question related to value creation: Value chain describes company's key activities and how one can create a competitive advantage with the help of them. How would you characterize your value chain? How relevant is the model today, that is are you moving from a chain towards a network? Can you give an overall description of Nokia's value creation strategy?
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Appendix V: Interview Questions, Sonera
General questions:
In how many co-operations are you (Sonera) engaged in? What are the criteria for selecting partners and projects? What is the most important criteria? How do you see the trend going forward: will the amount of external relationships increase? How are you able to manage the growing amount of relationships?
Question related to value creation:
Value chain describes company's key activities and how one can create a competitive advantage with the help of them. How would you characterize your value chain? How relevant is the model today, that is are you moving from a chain towards a network? Can you give an overall description of Sonera's value creation strategy?
Question related to Xfera:
How would you characterize the other members in Xfera? Going future, what will be the roles of each member? Would you consider Xfera to be a cross-industrial network?
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Appendix VI: List of Some of Nokia's Public Cooperations19
SAP and Nokia team up globally to extend mySAP.com workplace to mobile work force via Wireless Application Protocol (WAP). Nokia and Cap Gemini to co-operate in delivering end-to-end mobile Internet solutions. The SyncML initiative founded to develop the world's first true universal standard for data synchronization. Initiative includes IBM, Lotus, Motorola, Nokia, Palm, Inc., Psion and Starfish Software. Nokia, Motorola and Ericsson in m-commerce alliance ICL & Nokia form a joint venture Nokia and Amazon.com launch a mobile commerce service based on Wireless Application Protocol Nokia demonstrates electronic mobile payment services with Visa and MeritaNordbanken FusionOne, Nokia, AdForce and SF Interactive join forces to explore delivery of targeted advertising to mobile devices Nokia and KPN co-operate to create home of the future Nokia joins hands with SOHU.com and BMCC to offer wireless services in China Bluetooth Special Interest Group to be led by 3Com, Ericsson, Intel, IBM, Lucent, Microsoft, Motorola, Nokia, and Toshiba Leading mobile communications products manufacturers partner with Psion to create major engine of growth for Wireless Information Devices (Symbian)
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Appendix VII: Illustrations of Nokia's view about future development
Figure 15: Some key players who are creating the new industry (Source: Nokia 1999 Year-End Results Presentation)
Figure 16: Nokia's view about their value chain (Source: Nokia 1999 Year-End Results Presentation)
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