(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]
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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.
?
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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
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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
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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
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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?
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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
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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
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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?
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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/
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Cf. Open Mobile Alliance
Source: Nokia
http://www.openmobilealliance.org/
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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?
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Example – software marketplace
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Example – WSI/WWRF
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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?
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Access to interoperability
Mobileterminals
Sensors,Actuators
Embeddedservers
Networkservers
HomeAutomation
LogisticsTelematics …
InfotainmentEntertainment
IndustrialAutomation
Applications
PAN ... LAN ... WAN
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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?
(c) Veikko Seppänen, Winter 2003 18
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
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And software becomes free?
http://www.completelyfreesoftware.com/index_all.html
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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/
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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
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Network management
http://www.3csoftware.com/careersMarket.html
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Integrators need to acquire parts
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And manage system platforms
http://www.celesta.com/products.html
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Also as part of products
Source: www.nokia.com
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Vendors need to partner!
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But with which channel?
Integration of offering and channel
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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
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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”
?
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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
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Justification of the service model
http://www.business2.com/articles/web/0,,15025,FF.html
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European software markets 2001
source: http://www.cespri.uni-bocconi.it/essy/steinmu3.PDF
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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?
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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
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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?
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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
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Missing viewpoint: the buyer!
(c) Veikko Seppänen, Winter 2003 38
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
with supportingprojects
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
with supportingprojects
IV. A SOFTWARE PRODUCT FIRM
with supportingprojects
III. SOFTWARE
PRODUCTFIRM
V. A SYSTEM HOUSE
SUPPLIERS’ WAY OF OPERATING
Source: Sallinen 2002
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How to help software buyers?
http://www.sei.cmu.edu/arm/acq.home.html
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Example 1: teach them?
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Example 2: SA - CMM http://www.sei.cmu.edu/arm/SA-CMM.html
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Example 3: purchasing process
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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?
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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.
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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.
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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.
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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.
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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