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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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Nevertheless, revenue, demand, and performance provision models are often represented as partial models. First indications for a description of the elements in business models also exist in e-commerce [32]. However, these systematization proposals are based on only one line of business and are consequently not transferable to other industrial contexts. For further analysis, appropriate partial models for IPS² business models have to be derived.

These relate to required sections of the business model that must be considered to adapt it to the individual situation of the customer. The IPS² business model basically includes the value model, the architecture of value creation and the revenue model. Depending on customer requirements, further IPS²-specific partial models are considered necessary, e.g.

risk model, organizational model.

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

5.2. IPS²-specific partial models The IPS²-specific partial models investigated to date (value proposition, value architecture, revenue model [5]) have been extended by assigning the previously identified IPS² specific attributes. An overview of the possible forms (value, organization, risk distribution, revenue streams, accessibility) is presented in table 2.

Value First, the customer and the provider can jointly decide what benefit the customer receives.

This can be rendered ‘classically’ to the customer through the acquisition and use of a service. In addition, individual services can be offered to the customer, e.g. the training of the customer’s employees on the machine. However, other models are more typical for IPS²; i.e. the ones in which either the availability of such contributions is guaranteed for the customer or even their performance results. In the case of guaranteeing a performance result, the provider operates the product [12]. The architecture of value creation describes how the benefits are generated for the customer. This can be done either in a productoriented, service-oriented or integrated way.

Organization The duties and corresponding tasks of the involved parties in the IPS² network result from the value which has to be provided to the customer. This task distribution and process responsibility with regard to the life cycle activities is set in the organizational dimension of the business model. In the case of a product sale, the customer (buyer) is responsible for organizational aspects. If additional services are necessary, the customer initiates these services on request to the provider. For a guaranteed availability, the provider performs all tasks that are necessary to maintain the product on its own. Maintenance, repair, and overhaul (MRO) processes will also be executed by the provider’s staff. If the provider sells the performance result of an IPS², then the product is operated with the provider’s personnel.

Risk distribution The risk distribution between the parties is based on the value model and task distribution.

In the traditional, transaction-based case, the customer bears the risk of failure as well as the market risks. The provider assumes the risk only until the product is transferred to the property of the customer. If the provider sells additional services, s/he also takes on the risk of contractual execution of these services. If guaranteeing the availability of the product, the provider then bears the risk of an unexpected failure and therefore also the costs for preventive maintenance and repair [12].

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

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The 30th International Conference of the System Dynamics Society 13th PhD Colloquium 2012 St.Gallen, Switzerland In the case of the sale of the performance result, the manufacturer will assume risks arising from misuse, incorrect use or accidents. Additionally, there is also a correlation to the market success of the customer. If the degree of capacity utilization is low, less or no revenue is generated [12]. Therefore, the manufacturer also bears market risks from the customer. In this case, the risk distribution can be controlled either by a minimum, economically regulated utilization or a service fee which proportionally covers the fixed costs of the provider.

Revenue streams The issue of revenue for the provider or the payment for the customer is closely linked to the question of value and risks. This is not just a payment for the value generated for the customer, but also a compensation for the risks the provider bears. In the traditional, transaction-based case, the customer pays once for the acquisition of the product.

Accordingly, there is no continuing relationship between the supplier and the customer. If the customer receives additional services, each order-related payment occurs in a certain instant of time during the IPS² life cycle. If the availability is guaranteed by the provider, regular cash flows are possible. Hence, the revenue model is based on an availability index or the utilization period. For a performance result purchase, the payment occurs according to the frequency of use, e.g. depending on produced units, and it can be combined with a basic fee for a minimal utilization [12]. In this case, a part of the risk borne by the provider will be transferred to the customer. Thus, risk and revenue models are determined mutually by each other, while the provider receives compensation for the assumed risks.

Furthermore, the distribution of risk can be simultaneously altered, to a certain extent, through payment.

Accessibility Moreover, the ownership can vary, depending on the business model. In the traditional business model, the customer acquires the machine and thus its ownership. In the case of availability guarantee, the IPS² provider is responsible for maintenance and repair, and the plant operation is usually performed by the customer. This involves the risk of negligence and incorrect use of the product by the customer, because the provider bears the maintenance and repair costs. Such a change in behavior, incurred by the insurance, is known as moral hazard [33]. To circumvent the problem of moral hazard, it is useful if the product becomes the property of the IPS²-user (customer). In the case of the sale of a performance result, the provider operates the system and the product remains in the provider’s ownership, because of moral hazard.

The separation of identified business models into several partial models was an important step towards analyzing key dimensions, such as value proposition, value architecture, revenue structure, or risk distribution. It becomes obvious that the business model The 30th International Conference of the System Dynamics Society 13th PhD Colloquium 2012 St.Gallen, Switzerland characteristics interact and mutually determine each other [34]. In addition, the procedure of partial modeling is essential for reducing complexity and for structuring the business model design. Combining these partial models in a structured team model building process makes it possible to derive problem-specific business model simulations that are fundamental for supporting and evaluating strategic decisions in practice.

6. Structured development of dynamic IPS² business models with System Dynamics

6.1. Team model building IPS² are characterized by their dynamic adaptability over the entire life cycle corresponding to changing customer needs [9]. To date, dynamic aspects of business models have only been sporadically examined in the literature MEINHARDT investigated the change of business models in dynamic industries. In particular, the motives for the change of business models in response to changing market conditions were examined [35]. The further development of the partial model approach in terms of dynamics and flexibility is therefore one of the key challenges of the business model research in the context of IPS², for which a uniform definition and a uniform reference framework has been established in this paper.

To date, comprehensive research on the development of IPS² business models has not been conducted, which has resulted in a lack of modeling and simulation methods that depict their dynamic behavior. Hence, it is necessary to provide an IPS²-specific business model design and engineering approach by means of System Dynamics (SD).

SD models are often built by teams, that include a facilitator, an expert modeler and policy makers/managers [36, 37]. MORECROFT describes three distinct phases of work that are necessary to build SD models collaboratively [37]. Phase 1 focuses on identifying the problem situation and mapping the relevant feedback structure in a team of 5 to 10 people.

In the second phase, the developed stock and flow diagram from phase 1 is converted into friendly algebra. Additionally, a variety of diagnostic simulations are conducted by a subset of the team because of the associated time-consuming nature of this step. In the third phase the SD model is transformed into a specially packaged simulator (‘learning laboratory’, ‘microworld’) to communicate the insights with ease, e.g. in workshops [37].

6.2. Requirements on IPS²-specific team model building A key aspect of successfully developing an IPS² as well as its business model is the combination of various competences and qualifications from the tactic and strategic management level of an IPS² solution provider, e.g. controlling, finance, human resources, ergonomics, etc. However, the customer plays a vital role in the team model building process for IPS² business models. Thus, the analysis and integration of customer requirements are essential to develop a sustainable, customer-specific business model for an IPS².

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

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Depending on the problem situation, a selection of relevant policy makers and managers can be necessary. An exemplary composition of such a team is represented in figure 2. The necessity of a heterogeneous team becomes particularly evident when reconsidering the characteristics of the identified partial models in the morphology (table 1, p. 8): value, organization, risk distribution, revenue streams and accessibility. Considering these dimensions, the team model building phases from MORECROFT have been adapted to the special needs of dynamic IPS² business models (fig. 1, p. 2). By analogy, phase 1 business model design defines the problem as well as the broad scope and architecture of a dynamic business model in terms of performance through time (fig. 3, p. 12). ZOTT and AMIT consider business model design from a more static perspective by means of design themes and design content. Design themes refer to the system’s dominant value creation drivers and design content examines in greater detail the activities needed to be performed, the linking and sequencing of the activities and who will perform the activities [38]. Business model design for IPS²-specific problems includes the qualitative modeling and description of a relationship between a provider and a customer as well as potential third value-adding parties over the entire life cycle of an IPS². It refers to defining the business and value logic of this relationship at the strategic level. MORECROFT describes three alternative paths the modeler can take in going from performance over time to a stock flow diagram (causal loop, direct path, sector map) [38]. In addition to that, we can define certain business model configurations by means of the IPS² business model morphology to receive a blueprint of the business model structure. As a problem-structuring and problem-solving technique, the morphology analysis supports the modeling team in describing multi-dimensional, complex The 30th International Conference of the System Dynamics Society 13th PhD Colloquium 2012 St.Gallen, Switzerland problems qualitatively. Particularly, if such a team comprises persons from various disciplines or with different levels of qualifications, it is very important to provide such a blueprint as a ‘navigation system’.

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The majority of approaches in the field of business model research are focused on business model design, whereas there is almost no attention for dynamic aspects, flexibility, validation and implementation of business models [39, 40]. Hence, phase 2 business model engineering supports quantitative modeling and simulations as a continuous design, validation and implementation cycle (fig. 3). Subsequent to mapping the problem qualitatively, a variety of diagnostic simulations are conducted. This work is carried out by a dedicated modeling team [37], usually a subset of the original business model design team, including the facilitator, the expert modeler and at least one person who has specific knowledge about the value-oriented solution space of the respective customer-specific IPS² business model. To create a robust and well-calibrated simulator, in this phase equations have to be written, parameters to be obtained and graphical functions to be sketched [37].

In phase 3 the engineered model is transformed into a ‘learning laboratory’ or ‘microworld’ for IPS² business models, in analogy to MORECROFTS approach, to transfer insights of the dynamic business model to the project team [37].

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

6.3. Case study: design and engineering of an availability-oriented IPS² business model with focus on value logic, risk distribution and revenue streams To give a first insight into the design and engineering of an exemplary IPS² business model with System Dynamics, a practice-oriented case study of a solution provider’s business model, that focuses on fundamental modeling structures and their dynamic correlations, is now introduced. A series of simulation runs, based on THUNS Total Productive Maintenance model [41], is performed to support the management’s decision process in finding an adequate strategy for the sustainable implementation of a new business model.

This case study serves two major objectives. First, is to describe the introduced business model design and engineering approach by using System Dynamics in a practical perspective. Second, is to demonstrate how System Dynamics can be used as a realistic method for the design and engineering of IPS² business models.

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