Value Network Dynamics in 3G-4G Wireless Communications: a...

© C. Fine & M. Pagani, 2007

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

to Strategic Value Assessment

Charles H. FineMassachusetts Institute of Technology

Sloan School of [email protected]

Margherita PaganiBocconi University (Italy)

[email protected]

CFP - May 31, 2007


Objectives

Purpose of the study is to develop a dynamic model to capture the dynamic forces that influence the structure of the 3G wireless communications value network and analyze:

The multiple dynamic driving forces that influence the 3G wireless communications value network structureChange patterns in the supply chain structure The interdependence among the components of the value network structure


Customer dynamics

Business Innovation dynamics

Step 1 - Strategic Value Assessment Model Framework

Competitive dynamics

Netwok capacity

Price competition

Service innovation

The design and development of the industry supply chain embedded in a complex value network

Technology innovation dynamics


Encourages entry of serviceproviders

Reducesserviceprices

Partiallyreducescosts of access network

EncouragesTotal Service

take-up

Total expectedbenefit to a new

adopter

AdoptionMarket penetration

Value per userdue to network

effects

Improves serviceattractiveness

Encouragesterminal adoption

Componentstandards

Outsourcing

Increaseterminal volumes

Terminal modularity

Lowerterminal prices

Low chip costs

User’s perceivedvalue of adopting

Technologicalbenefits

Terminal scales

Perceived ease of usePerceived usefulnessPriceEnjoyment

Competitionbenefits

Global standard development

Cost of spectrum to carriers

Successful liberalization

Network benefits

Market Saturation

Willingness topay

Step 2 - The system thinking approachFor each key change drivers we formulate and test multiple loops represented in causal loop diagram


Step 3 - Inductive System Diagram

We build a simplified model of value chain dynamics applying the Inductive System Diagram methodology (Burchill and Fine, 1997) which combines aspects of Grounded Theory methods (Glaser and Strauss, 1967; Glaser, 1978; Strauss, 1987) and System Dynamics (Goodman, 1974; Randers, 1980)


Research Methodology: Stages of analysisSTAGE OBJECTIVE

Conceptualization Develop hypotheses

Formulation Discuss the emerging loops

Testing Discuss empirical evidence to supporteach loop through data gathering tests

Problem Articulation The Value network framework

Policy formulationSimplified model of value chain dynamicsapplying Inductive System Diagrammethodology

Evaluation 15 workshops attended by 190 participants in Europe


The working model

System thinking approach

Research overview

Strategic Value Assessment Model Framework

Customer dynamics


Technology Innovation dynamics


3G CommunicationValue Network

ScenariosScenario 5

Scenario4

Scenario 3

Scenario 2

Scenario 1

Scenarios

Simplified Model of Value Chain Dynamics


Research Methodology: Stages of analysis

Conceptualization

Formulation

Testing

STAGE OBJECTIVE

Develop hypotheses

Discuss the emerging loops

Discuss empirical evidence to supporteach loop through data gathering tests


Policy formulationSimplified model of value chain dynamicsapplying Inductive System Diagrammethodology

Evaluation 3G Communications value network scenarios


3-D Concurrent Engineering

PRODUCT PROCESS

VALUE CHAIN

PerformanceSpecifications

Time, Space, Availability

Technology, &Process Planning

We build on the “three-dimensional concurrent engineering”framework (Fine, 1998), adding value chain engineering to augment the traditional two-dimensional concurrent engineering of products and processes (Nevins & Whitney, 1989; Ulrich & Eppinger, 1994; Fleischer & Liker, 1997).


Voice and/or data

consumer

Voice and/or data

consumer

DeviceManufacturers

DeviceManufacturers

Portals and Access

Providers

Portals and Access

Providers

ApplicationDeveloper

ApplicationDeveloper

Content ProviderContent Provider

Wireless network operator

Wireless network operator

Mobile PhonesPDAsSmart PhonesSIM PadsControls LANs

NetworkNetwork

NetworkequipmentNetwork

equipment

Sw. gamesmessaging

Voice,browsing, WAP

Third parties contentThird parties content

Softwareapplication developer

Softwareapplication developer

Hardware application developer

Hardware application developer

Photo cameraMP3 player, DVDGame consoles

Non-CircuitComponent

Manufacturers

Non-CircuitComponent

Manufacturers

Circuit BoardComponent

Manufacturers

Circuit BoardComponent

Manufacturers

PSTN/Internet component manufacturers

PSTN/Internet component manufacturers

Cell switching component manufacturers

Cell switching component manufacturers

Base Station component manufacturers

Base Station component manufacturers

Content AggregatorContent

Aggregator

Wireless infrastructure

operator

Wireless infrastructure

operator

Wireless service provider

Wireless service provider

Device value chain

InfrastructureValue chain

ApplicationValue chain

ContentValue chain

Network value chain

Platform infrastructure service

Service provisioning Billing Support

User contentUser content

Wireless Value Network Structure



Conceptualization

STAGE OBJECTIVE

Develop hypotheses




Policy formulationA simplified model of value chain dynamicsapplying Inductive System Diagrammethodology


Formulation

Testing


Customer dynamics




Roadmap Components: Dynamic Analyses

What are the driving forces behind user adoption?


Data collection and analysis

2 preliminary pilot study in Italy and US24 focus groups in 6 markets (Brazil, Germany, Italy,

Singapore, UK, US) Quantitative marketing research on a sample of 1.000

Italian mobile users (over 18). Sampling error (at 50%) of 3.1% (with a probability level of 95%)


Adoption model of multimedia mobile services

PerceivedPerceived EaseEaseof of UseUse (PEU)(PEU)

PerceivedPerceivedUsefulnessUsefulness (PU)(PU)

AttitudeAttitude towardtowardusingusing

Service offeringsDegree of mobilityCompatibility

BehavioralBehavioralIntentionIntention toto UseUse

FunInteractivity

Input deviceOutput deviceSoftware facilitiesBandwidth

Knowledge Perceivedinnovation

Enjoyment

PricePrice


The Market Saturation Loop

CustomerAdoption

UserPopulation

+

SocialExternalities

+

+

Propositions 1- 2 - Network externalities and market saturation loops

The Network Externalities LoopR1

NetworkExternalities

Loop

Willingness to payBy marginal adopter

+

B1

+

-Market

SaturationLoop

Total expectedBenefit to

New adopters

+

Value/User dueTo network effects

+



Customer dynamics




Netwok capacity

Price competition

Service innovation


Market attractiveness indicators: methodology

16 face-to-face interviews with the IT manager of 16 network providers in Europe in order to analyze expected changes in market attractiveness indicators based on the migration to IP-based services. Interviews were conducted applying the protocol

suggested by Vennix (1996) to elicit feedback loops in an interview.


Market attractiveness indicators

Competitor Entry

Barriers to exit

Customer power

Nature of Competition

Substitution Threats

Supplier Power

Low High

LowHigh

High Low

Price Non Price

High Low

LowHigh

More or lessattractive AttractiveUnattractive


NetworkUsage

+

New Entrant& Incumbent

Innovation in Services

& Applications

+

+

Service &Application

Profits

+

Customer Adoption

Service &ApplicationRevenues

+

+NetworkCapacity

+ + PriceCompetition +

NetworkRevenuePer user

-

Service &ApplicationInvestment

& InnovationLoop

R2

+

PriceCompetition

LoopB2

NetworkRevenue

+

Network &Technology& InnovationInvestment

+

Networkinvestment

Loop

R3

Propositions 3, 4, 5 - Price competition, innovation and investment loops


Customer dynamics






Customer Adoption

TerminalVolumes

++ Component

Standardization& Outsourcing

+Terminal

Prices

TerminalCosts

-

-- R4 Terminal

Scale Economies

Loop

Proposition 6 - Terminal scales economies loop


Customer dynamics






Customer Adoption

ContentConsumption

+

ContentProfit

Opportunities

++

R5For-profit Content

GenerationLoopPiracy

Innovations

+

-

B3Piracy

InnovationLoop

R6Free-ContentGeneration

Loop

+

ContentProvided +

Proposition 7 – The content generation and piracyinnovation loops



Conceptualization

Formulation

Testing

STAGE OBJECTIVE

Develop hypotheses




Policy formulationA simplified model of value chaindynamics applying InductiveSystem Diagram methodology



-

ContentConsumption

+

ContentProfit

Opportunities

ContentProvided

+

++

R5For-profit Content

GenerationLoopPiracy

Innovations

+

-

B3

PiracyInnovation

Loop

R6Free-ContentGeneration

Loop

+

+

TerminalVolumes

TerminalPrices

+ -

-+ Component

Standardization& Outsourcing

TerminalCosts

-R4

TerminalScale

EconomiesLoop

Customer Adoption

New Entrant& IncumbentInnovation in Services

& Applications

Network &Technology& InnovationInvestment

NetworkRevenuePer user

NetworkUsage

Service &Application

Profits

+

+

+

+

+

+

+

Service &ApplicationInvestment

& InnovationLoop

Service &ApplicationRevenues

+

NetworkCapacity

+ + PriceCompetition +

-

PriceCompetition

LoopB2

R2

NetworkRevenue

+

+

Networkinvestment

Loop

R3

+

+User

Population

+Value/User due

To network effects

Willingness to payBy marginal adopter

+

Market Saturation

Loop

B1

R1Network

ExternalitiesLoop +

+Total expected

Benefit toNew adopters

SocialExternalities

Inductive System Diagram



Conceptualization

Formulation

Testing

STAGE OBJECTIVE

Develop hypotheses




Policy formulationA simplified model of value chaindynamics applying Inductive System Diagram methodology




ScenariosCycles of entry &

bankruptcy

Stableoligopoly

Free for all

Appearance of a new dominant

force

Piracydevelopment

Future scenarios

Based on 15 workshops attended by 190 participants in Europe