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«Dynamic Business Models for Industrial Product-Service Systems Mario Bosslau Thesis Supervisor: Professor Dr.-Ing. Horst Meier Chair of Production ...»

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The 30th International Conference of the System Dynamics Society

13th PhD Colloquium 2012 St.Gallen, Switzerland

Dynamic Business Models

for Industrial Product-Service Systems

Mario Bosslau

Thesis Supervisor: Professor Dr.-Ing. Horst Meier

Chair of Production Systems, Ruhr-University Bochum

Universitätsstraße 150, 44807 Bochum, Germany

 +49 (234) 32 29284,  +49 (234) 32 09284

 bosslau@lps.ruhr-uni-bochum.de

Abstract

Due to market dynamics and globalization, as well as to shorter product life cycles, the difficulty of attaining lasting competitive advantages is currently increasing. New technologies and new customer demands, deregulation and internationalization of the markets, as well as other economic challenges permanently influence industry’s business models. To withstand this competitive pressure, industrial companies increasingly attempt to react with integrated product-service packages in the form of Industrial Product-Service Systems (IPS²). In contrast to current product-oriented solutions, IPS² involve the integrated development of products and services, thereby guaranteeing high customer value. As a consequence, IPS² business models characteristically deliver value in a longterm customer relationship. To date, comprehensive research on the design and engineering of IPS² business models has not been conducted, which has resulted in a lack of modeling and simulation methods that depict their dynamic behavior over the entire IPS² life cycle. In order to fill this research gap, this paper focuses on the definition of IPS²specific business models, the identification of their partial models as well as an integrated business model design and engineering approach with System Dynamics.

Keywords Industrial Product-Service Systems, dynamic business models, integrated solutions, customer value, B2B-relationship The 30th International Conference of the System Dynamics Society 13th PhD Colloquium 2012 St.Gallen, Switzerland

1. Introduction Industrial Product-Service Systems (IPS²) produce a lasting competitive advantage by generating long-term customer loyalty in globalized markets. They represent a sustainable success factor in a market environment where achieving competitive advantages just through products is becoming a constant challenge for companies [1]. However, it is usually difficult for product-oriented companies to exploit the potentials of services [2].

This results in an unstructured offer of services, which leads to a ‘service jungle’ [3]. The product is still the main focus. To overcome these problems, the traditional understanding of products and services has to change and managers have to conceive the dimensions of customers’ problems and providers’ solutions. In terms of integrated solutions, IPS² are characterized by the integrated and mutually dependent planning, development, and delivery of products and services over the entire IPS² life cycle (Fig. 1) [4, 5, 6].

–  –  –

This integrated consideration of products and services adds complexity to the delivery phase (implementation, operation, and closure), due to the long-term relationship with the customer. To successfully offer these complex solutions, framework conditions for business models have to be defined. It is important to know who owns which part of the product, whose personnel executes which tasks, or who bears what risk. Consequently, adapted business models that take into account the special characteristics of IPS² are The 30th International Conference of the System Dynamics Society 13th PhD Colloquium 2012 St.Gallen, Switzerland necessary. The fulfillment of customer value over the entire life cycle is a central aspect of IPS². They must adapt dynamically to changing customer requirements. Due to the associated uncertainty and the feedback character in the IPS² life cycle (Fig. 1), long-term contracts remain incomplete [8]. Dealing with uncertainty, in terms of high complexity, dynamism and a strong complexity, is therefore one of the key challenges for a more detailed analysis of IPS²-specific business models.

2. Conceptual background To date, no generalized categorization of business models exists. There is also no uniform definition of the business model concept and its constituent components [9, 10]. The terms business strategy, economy model, business concept, and revenue model are usually used as synonyms for the term business model [10]. Therefore, it is important to create a consistent framework as a basis for further research. Some authors deal with specific business models, e.g. operating models [11], or performance contracting [12, 13]. There are various publications in the e-business sector which describe how advantageous these business models are or how business models are developed [14, 15, 16, 17].

Furthermore, there are reports in the literature in which business models of specific cases are analyzed, in order to identify success or failure factors, e.g. Xerox, IKEA, or Dell [18, 10]. However, none of these reports provide a coherent reference framework or a clear definition. The most frequently cited definition of a business model comes from TIMMERS.

It defines a business model as "an architecture for the product, service and information flows, including a description of the various business actors and their roles, and a description of the potential benefits for the various business actors, and a description of the sources of revenues" [19]. Similar definitions have been compiled by WEILL, VIALE [20], JOHNSON, CHRISTENSEN and KARGERMANN [21] and WIRTZ [22] who define business models as the architecture or a simplified description of a company, where the representation of business processes and actors, or the work, material, and information flows and revenue streams are accentuated. WIRTZ also describes a business model as the image of the enterprise's production and performance system.





A business model describes, in simplified and aggregated form, which resources flow into the enterprise and how these are transformed by the performance creation processes into marketable information, products, and/or services [22]. According to KNYPHAUSEN-AUFSEß and MEINHARDT, business models simply describe the strategy of a for-profit company to inform potential investors about the success prospects and usefulness of their involvement [23]. Business models are also considered as a unit of analysis for the development of strategies to facilitate the mapping of complex value-creation architectures beyond the supplier and buyer relationships [24]. STÄHLER also defines a business model as a business concept that is applied in practice. The central issue of the business model is which The 30th International Conference of the System Dynamics Society 13th PhD Colloquium 2012 St.Gallen, Switzerland revenues the company generates from which sources. SPATH describes collaborative business models of various partners, which collectively offer extensive complex system services [25]. RENTMEISTER and KLEIN follow a definition similar to STÄHLER’s. In their view, a business model includes the "architecture of the value creation, the benefits that customers or other stakeholders can extract from the business operations (value proposition) and the sources of revenue, which open the business operations" [26]. The main difference to STÄHLER'S business model concept lies in the consideration of the actors and participants. AMIT and ZOTT similarly imply that a business model expands the traditional boundaries of the company and includes the customers and partners [27].

CHESBROUGH and ROSENBLOOM describe business models in the context of innovation as mediators between new technologies and economic output. The business model transforms technological characteristics and potentials into values [18]. Consequently, the existing definitions of business models are diverse and multifarious, just as the components are.

3. Research objectives The contemporary discussion of the business model concept in the engineering and economics literature is insufficiently structured, which results in a multitude of heterogeneous terms. In addition, a well-grounded empirical foundation for a holistic acquisition of business models is still lacking, even though it constitutes an indispensable basis for offering customer-specific IPS². In order to fill this research gap, the focus of this investigation is about the development of a comprehensive business model concept for IPS², in which neither a specific industry, nor a specific kind of business model will be the focus. A synopsis of the existing business models in theory and practice has to be generated. Based on this, qualitative and quantitative modeling approaches for dynamic

IPS² business models can be developed that focus on the following aspects:

- robustness, integrity and completeness of business models,

- generation of a basic (dynamic) understanding of a business model and its attributes (e.g. by visualizing reinforcing and balancing feedback loops),

- decision support through simulation experiments (e.g. to derive a reasonable maintenance strategy),

- benchmarking of business models (e.g. to compare a firm's business model with those of competitors),

- revenue and profit forecasting (e.g. to allow realistic budget planning in controlling and finance), In order to achieve these objectives, this paper focuses on the following unanswered

questions:

- How can the term business model be defined with regard to IPS²?

The 30th International Conference of the System Dynamics Society 13th PhD Colloquium 2012 St.Gallen, Switzerland

- Is it possible to systematize existing business models and to derive IPS²-specific partial models?

- How can business models be visualized considering the special characteristics of IPS²?

- How can business models systematically be developed in a team by means of System Dynamics?

To answer these questions, a business model concept has to be developed that considers both the supplier and the customer perspective. To facilitate this, a comprehensive theoretical and empirical analysis is necessary, to identify the existing business models in practice. Furthermore, a morphology of the identified attributes and characteristics of business models has to be developed. Subsequently, partial models for reducing complexity and for analyzing the central dimensions of a business model can be generated. The possibility of adapting to changing customer needs is one of the central characteristics of IPS². Business models must be able to change over time and to adapt flexibly to the respective requirements. Consequently, the empirical investigation of the dynamics and flexibility of existing business models is extremely important for identifying success and failure factors in practice.

4. Definition and differentiation of business models

The heterogeneous understanding of the business model concept results in a relatively unstructured discussion in the engineering and economic literature. The first requirement for the exploration of business models for IPS² should be a definition of what is meant by a business model. An IPS² is a solution for a customer and is tailored to her/his individual situation. Thus, in the majority of cases, an IPS² is unique. A business model varies according to the dynamics of an IPS², e.g. as caused by a change of the customer’s requirement and hence, the underlying product-service combination. Business models for IPS² are distinguished by the fact that they characterize the specific relationship between a provider and a customer, while other value-adding partners can also be involved (e.g.

suppliers) for the provision of an IPS² [28]. Thus, we define a business model for IPS² as

follows:

The business model characterizes the relationship between a provider and a customer as well as potential third value-adding parties over the entire life cycle of an IPS². It describes the value, the risk distribution, revenues streams, and the ownership for all parties in the IPS² network as well as its organizational implementation.

The business model is not equivalent to the strategy of a company. The strategy describes long-term objectives of an enterprise and the resulting behaviors to achieve these objectives The 30th International Conference of the System Dynamics Society 13th PhD Colloquium 2012 St.Gallen, Switzerland [29]. A strategy can be implemented through multiple business models, because the company may choose a different model in cooperation with each customer. This solution space is defined in the business concept. The business concept describes which business models a company potentially offers, based on its strategy [23]. By contrast, the IPS² business model illustrates the customer-specific configuration of concrete characteristics of the IPS² business concept. The IPS² business model is determined by an IPS² contract that enables a fundamental flexibility in the provider's use of the product and service elements.

Furthermore, an IPS² contract creates an institutional framework in which rights, duties, and responsibilities are regulated [30].

5. Framework for IPS² business models

5.1. Reduction of complexity In order to achieve improved transparency and to reduce complexity, partial modeling is used by some authors as an approach for structuring the business model [31]. A partial model enables the analysis of key dimensions of a business model and can be helpful for a differentiated approach [22]. To reduce the complexity and simplify the descriptiveness,

WIRTZ systematizes his business model approach through the following six partial models:

market model, procurement model, performance creation model, performance provision model, distribution model and capital model [22]. Although these sub-models are presented in an integrated business model, they can also be described in isolation and considered in more detail. STÄHLER also divides his business model concept into the three levels of value model, revenue model and architecture of the value [24]. MORRIS, SCHINDEHUTTE and ALLEN develop a business model framework that consists of three levels integrating basic components, enterprise-specific components, and the rules of a company [10].

To date, research has not reached a consensus with respect to the choice of partial models.



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