(c) Veikko Seppänen, Winter 20031 Understanding strategic changes in software businesses:...

(c) Veikko Seppänen, Winter 2003 1

Understanding strategic changes in software businesses: application development, system integration or customer service provisioning?

Veikko SeppänenUniversity of [email protected]


ICT industries are emerging: 1

Source: Baldauf, L., Lovejoy, M., Karesto, J., Paija, L. 2001. Global Networking in Wireless Teletechnology Business. Tekes Technology Review 114/2001.

?


ICT industries are emerging: 2

Information content & publishing technology

Software technology

Electronics technology

CONTENT

INFORMATION TECHNOLOGY

TELECOMMUNICATIONS

Electrotechnology

Enabling technologies

Application tools

Application tools

ICT

OTHER APPLICATIONS FROM

ELECTRIC AND ELECTRONICALTECHNOLOGIES

TELECOMMUNICATIONAPPLICATIONS

INFORMATION TECHNOLOGY APPLICATIONS

DIGITAL COMMUNICATIONAPPLICATIONS


And so are other industries, too

Factory-level solutions

(COTS software, enterprise applications)

Core automation business(OEMs, SIs)

e-learning /CRM solutions

OEM suppliers

Field devices

Specialdevices

IT and software industries

Automation industry

Software etc.industries

IT and serviceindustries

Electronics industry

“Wintel industries”

”Hard” industries

”Core” industry

”Soft” industries ”Media” industries


But how – from what to what?

• Technologies to functionalities

• Vertical products to horizontal platforms

• Closed specifications to open standards

• Isolated services to interoperability

• Product development to system integration

• Software products to software-as-service

• Purchasing of licenses to pay-if-you-wish


1. Technologies vs. functionalities

• Technologies are changing to functionalities– Technologies + applications vs. functionalities– Technology diffusion simplified:

• One technique + implementing technology• One technology + first few applications• One technology + many applications• Many technologies + many applications• Functional needs markets emerge

• What software-enabled functions to serve?


Technical diffusion simplified

Early market Mainstream market (no market)

C h a s m

Tornado

Bowling Alley

Main Street

End of Life

Source: www.chasmgroup.com; Figure by: Atte Kinnula

1000 ideas

100 projects

50 no-go’s

1 leading solution

10 profitablebusinesses


And what to watch

Source: www.chasmgroup.com; Figure by: Atte Kinnula

Early MarketChasm &Bowling Alley Tornado Main StreetEconomic buyer(*)

Application sellsVertical Markets

Product leadership+Customer Intimacy

Event-Driven(External/Internal)

Power• Ringleader of the niche attack

Key Disciplines• Business knowledge• Application engineering• Recruiting• Revenues within target

Visionary buyerTechnology sellsSales Focus

Product leadership

Event-Driven(External)

Power• Technology providers• Integrators

Key Disciplines• Technology knowledge• Project management• Resource management• Closed sales

Infrastructure buyer (*)

Product sellsHorizontal Markets

Product leadership+Operational Excellence(NOT Customer Intimacy)

Process-Driven(Internal)

Power• Club of gorillas

Key Disciplines• Systems engineering• Sales management• New-hire orientation• Cash flow

End-UserCustomization sellsSecondary Markets

Operational Excellence+Customer Intimacy(NOT Product Leadership)

Process-Driven(External)

Power• Distribution channel

Key Disciplines• Convenience engineering• Marketing communications• Staff development• Margin management

(*) at least when selling non-consumer products


2. Vertical vs. horizontal

• Vertical products incorporate everything– Technologies + functionalities + applications– Difficult to cover the entire value chain

• Horizontal platforms – successive layers– Technology platforms fit on top of each other– Product lines cover intended applications– Service architectures package functionalities

• What software/system platforms to build?


Control of diversification?

Messerschmitt, D.G., Szyperski, C. 2001. Industrial and Economic Properties of Software: Technology,

Processes, and Value, University of California at Berkeley Computer Science Division Technical Report

UCB//CSD-01-1130, Jan. 18, 2001. http://divine.eecs.berkeley.edu/~messer//PAPERS/01/Software-econ/


Cf. Open Mobile Alliance

Source: Nokia

http://www.openmobilealliance.org/


3. Closed vs. open specs

• Closed specs aim at vertical markets– Innovators attempt to cover entire solutions– Still a valid approach in niche markets

• Open standards create horizontal markets– Standardization of basic functionalities– Competence over technical implementations– Competence over biggest application segments

• How to ensure open standards for software?


Example – software marketplace


Example – WSI/WWRF


4. Isolation vs. interoperability

• Isolated services based on vertical products– Broken or short value chains result– Product silos developed side by side

• Interconnectivity of products is not enough– Standardization of product interfaces vs.– Interplay of functionalities for e2e services

• Standards for service enablers, architectures

• How to build interoperable services?


Access to interoperability

Mobileterminals

Sensors,Actuators

Embeddedservers

Networkservers

HomeAutomation

LogisticsTelematics …

InfotainmentEntertainment

IndustrialAutomation

Applications

PAN ... LAN ... WAN


5. PD vs. SI

• Product development is still required– Productization ensures readiness for delivery– Products used to partition horizontal markets– Glue products needed to realize interoperability

• What must be integrated to create systems? – Technologies, functions, applications?– How to prevent losing skills related to parts?

• System integrators – ruling companies?


Hardware becomes affordable Advantech card-PC 430 €

PC/104 PCMCIA-adapter 170 €

50W power supply 110 €

MBPC-box (card-PC) 70 €

64MB SO-DIMM memory 30 €

64MB Compact Flash 80 €

BT-Card 230 €

Total 1140 €

Fall 2001:EmbeddedWirelessServer HW


And software becomes free?

http://www.completelyfreesoftware.com/index_all.html


Idealised SI-driven value chain

Messerschmitt, D.G., Szyperski, C. 2001. Industrial and Economic Properties of Software: Technology,

Processes, and Value, University of California at Berkeley Computer Science Division Technical Report

UCB//CSD-01-1130, Jan. 18, 2001. http://divine.eecs.berkeley.edu/~messer//PAPERS/01/Software-econ/


Vs. real-life business webs

Tapscott, D., Ticoll, D., Lowy, A. 2000. Digital economy: harnessing the power of business webs. Harvard Business School Press.

ASPs, ISPs

Integrators

Vendors

End customers


Network management

http://www.3csoftware.com/careersMarket.html


Integrators need to acquire parts


And manage system platforms

http://www.celesta.com/products.html


Also as part of products

Source: www.nokia.com


Vendors need to partner!


But with which channel?

Integration of offering and channel


Business vs. channel simplified

IndustrialEnd

Customer

IndustrialEnd

Customer

SW Company

SW Company

SW companySW company

Customized softwareCustomized software

Packaged softwarePackaged software

SW DevelopmentSW Development

SW ProductSW Product

DistributorDistributor

Systems Integrator

Systems Integrator

IndustrialEnd

Customer

IndustrialEnd

Customer

IndustrialEnd

Customer

IndustrialEnd

Customer

Source: Sallinen 2002


Change of channel use?

14

17

39

46

83

0 10 20 30 40 50 60 70 80 90

Other

OEM Original Equipment

Manufacturing

SI System Integrator

VAR Value Added

Reseller

Direct Sales

% respondents

© CULMINATUM OY, FINPRO, SFK FINANCE OY, TEKES,TIETOTEKNIIKAN LIITTO RY, TIETOVIIKKO/TALENTUM OYJ

”Alone”

”Throughintegrator”

?


6. Software-as-service

• In the nineties sofware packets were sold– Software product industry is still very big– Software use over Internet is still modest

• Cf. the popularity of ASPs over software licenses

• In the future software access is being sold– Access selling leads to service provisioning– Open source service provisioning?

• Sofware access is critical for services


Justification of the service model

http://www.business2.com/articles/web/0,,15025,FF.html


European software markets 2001

source: http://www.cespri.uni-bocconi.it/essy/steinmu3.PDF


7. Licenses vs. usage fees?

• Digital rights management is a challenge– Licenses have ensured usage rights, earnings– Internet has hit hard copyright businesses– Digital content is bound to become very cheap

• New business models are desperately needed!

• Pay-per-use vs. pay-if-you-wish?– Service providers trust on organized markets

• Software must be cheap, but will it be free?


Traditional market segments

ITmarket

Hardware products HardwareMaintenance

Services

Processing Services& Internet services

Software Products& Services

Embedded Software

ProfessionalSoftware services

Enterprise Solutions Packaged massmarket

Software

ITmarket

Hardware products HardwareMaintenance

Services

Processing Services& Internet services

Software Products& Services

Embedded Software

ProfessionalSoftware services

Enterprise Solutions Packaged massmarket

Software

Source: Hoch et al. 2000, Secrets of Software Success


New business triangle?Vendors

System integrators Customer service providers

E.g. softwarecompanies

End customer

E.g. IT and telecomcompanies

Nic

he o

fferi

ngs

System offerings

E.g. operators, ASPs, ISPs

Support offerings

Build?Buy?Take?


Business engine simplified

Sales & marketing

Businessunits

Competencecentres

Revenue Profit Efficiency

Operational management

Strategic development

MARKET PYRAMID

Market watchand creation

BUSINESS MODELS RESOURCES/PRODUCTS/....

Resource acquisitionand development

Business strategiesand development

Customer proposals Customer offeringsCustomer contracts


Missing viewpoint: the buyer!


Vs. software supply typology

KEYCUSTOMER

DEPENDENCE

Low

High

Resource-hiring

Software productionin own

(sub)projects

Independentproductionof software

products/modules

I. A RESOURCE

FIRM

II. A RESOURCE FIRM

with supportingprojects

IV. A SOFTWARE PRODUCT FIRM


III. SOFTWARE

PRODUCTFIRM

V. A SYSTEM HOUSE

SUPPLIERS’ WAY OF OPERATING

KEYCUSTOMER

DEPENDENCE

Low

High

Resource-hiring

Software productionin own

(sub)projects

Independentproductionof software

products/modules

I. A RESOURCE

FIRM

II. A RESOURCE FIRM


IV. A SOFTWARE PRODUCT FIRM


III. SOFTWARE

PRODUCTFIRM

V. A SYSTEM HOUSE

SUPPLIERS’ WAY OF OPERATING

Source: Sallinen 2002


How to help software buyers?

http://www.sei.cmu.edu/arm/acq.home.html


Example 1: teach them?


Example 2: SA - CMM http://www.sei.cmu.edu/arm/SA-CMM.html


Example 3: purchasing process


Summary

• Software business opportunities – Software sells much as part of platforms– Software may still sell as application products – Software sold as services – who will pay?– Systems are being sold by business consortia

• How to develop sellable functionalities?– Who needs software for what: how to help

customers making money by using software?


Literature• Autere, J., Lamberg, I., Tarjanne, A. 1999. Ohjelmistotuotteilla kansainväliseen menestykseen. Toimialan

kehittämistarpeet ja toimenpide-ehdotukset. Tekes, Teknologiakatsaus 74/99. (in Finnish)

• Luomala, J., Heikkinen, J., Virkajärvi, K. Heikkilä, J., Karjalainen, A., Kivimäki, A., Käkölä, T., Uusitalo, O.,

Lähdevaara, H. 2001. Digitaalinen verkostotalous. Tekes Teknologiakatsaus 110/2001.

• Nukari, J., Forssell, M. 1999. Suomen ohjelmistoteollisuuden kasvun strategia ja haasteet. Tekes, Teknologiakatsaus

67/99. (in Finnish)

• Seppänen, V., Käkölä, T., Pitkänen, O., Sulonen, R., Sääksjärvi, R. 2001. Ohjelmistoalan tutkimustoiminta

Yhdysvalloissa. Tekes Teknologiakatsaus 109/2001. (in Finnish)

• Shapiro, C., Varian, H. 1999. Information rules. A strategic guide to the network economy. Harvard Business School Press. 352 s.

• Tapscott, D., Ticoll, D., Lowy, A. 2000. Digital economy: harnessing the power of business webs. Harvard Business

Scool Press.


Literature• Cusumano, M.A., Selby, R. (Contributor) 1995. Microsoft Secrets: How the World's Most Powerful

Software Company Creates Technology, Shapes Markets, and Manages People.

• Hoch, D.J., Roeding, C.R., Purkert, G., Lindner, S.K., Müller, R. 1999. Secrets of Software Success.

Management Insights from 100 Software Firms around the World. Harvard Business School Press,

Boston. 309 p.

• Jacobsen, K., Paulin, W.L., Vurpillat, V.V., Nukari, J., Peltola, E., Saukkonen, J. (toim.) 2001.

Launching Your Software Business in America A Handbook for Finnish Entrepreneurs. Tekes,

Helsinki. 218 s.

• Rajala, R., Rossi, M., Tuunainen, V.P. 2001. Software Business Models. A Framework for

Analyzing Software Industry. Tekes technology Review 108/2001. Tekes, Helsinki. 76 s.


Literature• Christensen, C.M. 1997. The Innovator’s Dilemma. When New Technologies Cause Great Firms to

Fail. Harvard Business School Press, Boston, MA.

• Messerschmitt, D.G., Szyperski, C. 2001. Industrial and Economic Properties of Software:

Technology, Processes, and Value, University of California at Berkeley Computer Science Division

Technical Report UCB//CSD-01-1130, Jan. 18, 2001, and Microsoft Corporation Technical Report

MSR-TR-2001-11, Jan. 18, 2001. (available at

http://divine.eecs.berkeley.edu/~messer//PAPERS/01/Software-econ/)

• Moore, G. A. 1991. Crossing the Chasm. Marketing and Selling High-Tech Products to Mainstream

Customers. Harper Business.

• Moore, G. 1998. Inside the tornado. Capstone Publishing, Oxford, UK.


Literature• Hamel, G., Prahalad, C.K. 1994. Competing for the future. Harvard Business School Press, London.

• Meyer, M.H., Lehnerd, A.P. 1997. The power of product platforms. Building value and cost leadership. The Free Press, New York.

• Niemelä, E., Kuikka S., Vilkuna, K., Lampola, M., Ahonen, J., Forsell, M., Korhonen, R., Seppänen, V. Ventä, O. 2000. Teolliset komponenttiohjelmistot. Kehittämistarpeet ja toimenpide-ehdotukset”. Tekes, Teknologiakatsaus 89/2000.

• Niemelä, E., Seppänen, V. 2000. Kaupalliset ohjelmistokomponentit avuksi. Tuotelinjasta tehoa

ohjelmistokehitykseen. Prosessori, marraskuu 2000, pp. 93-96.

• Sanderson, S.W., Uzumeri, M. 1997. The innovation imperative. Strategies for managing product models and families. Irwin Professional Publishing, Chicago.

• Seppänen, V., Helander, N., Niemelä, E., Komi-Sirviö, S. 2001. Towards original software component manufacturing. Technical Research Centre of Finland, VTT Research Notes 2095.

• Sääksjärvi, M. 1998. Tuoterunko. Uusi ajattelu ohjelmistotuotteiden strategisessa kehittämisessä. Tekes, teknologiakatsaus 62/98.


Veikko Seppänen, Dr. Econ, Dr. Tech

Professor (part-time) University of [email protected] 040-344 2488www.oulu.fi

VP, Elektrobit SoftwareElektrobit [email protected]

Contact information

mailto:[email protected]

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