Slides prepared by Dr.
Puja Pawar
Chapter/Topic 4
Digital Markets Stockholders and Relationship in Digital
Markets
Slides prepared by Dr. Puja Pawar
Learning objectives
• The definition of innovation
• Product life cycles, S-curves, and disruptive innovations
• The background of and motivation of business models
• How to apply the Business Model Canvas
• How to apply the Stakeholder Relationship Model
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Digital Innovation
• Definition - An innovation is the implementation of a new or
significantly-improved product (good or service) or process, a new
marketing method, or a new organizational method in business
practices, workplace organization or external relations.
• A digital innovation is an innovation that impacts the digital economy;
that is, an innovation in ICT, digital goods, or digital services.
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• In general, innovations may be categorized into the following types:
Technology, services, financial, managerial/organizational, marketing,
institutional, and other.
• Hence, in addition to the innovations listed in Figure 4.1, innovations
in the digital economy can also be new forms of trade, market
mechanisms, and organizational principles.
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Figure 4.1 Product life cycle of a successful
innovation
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• Here, the sales and profits of an innovation throughout its lifetime are
plotted as a function of time.
• The life cycle of an innovation consists of five stages: Development,
introduction, growth, maturity, and decline.
• Each stage has its unique challenges and opportunities.
• Not all digital innovations follow the PLC; however, it is a well-known and
useful framework for discussing the evolution of innovations and
technologies.
• In the development phase, the profit is negative because there are no sales
generating revenue, but there are potentially high costs to develop the
innovation.
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• Use of the innovation starts to accumulate in the introduction stage,
in which the innovation is fully developed and released in the market.
• Profits are usually still negative due to the costs of operations,
marketing, and refining the innovation.
• In the growth stage, sales increase and profits turn from negative to
positive at the break-even point.
• Costs decline as the innovation is fully developed and profits and
sales increase into the maturity stage.
• At some point, the sales or profits reach their peak value.
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• Following this peak value—and entering the decline phase—sales and
profits decrease, since the innovation at some time will be replaced
by new innovations and again become unprofitable before eventually
leaving the market.
• According to work done by Clayton Christensen, innovations can be
divided into two main types:
1. Sustaining innovation: An innovation that improves the good or
service.
2. Disruptive innovation: An innovation that creates a new market by
establishing a new set of value propositions and a new set of
performance metrics.
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• Sustaining innovations are improvements in performance or
functionality expected by consumers as the good or service is refined.
• Examples of this include, New models of a car, software updates, and
the regular release of new smartphone models.
• Disruptive innovations can be subcategorized as “low-end
disruptions” or “new market disruptions.”
• Low-end disruptions target customer segments with low
requirements for performance.
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• They include new products that are typically cheaper and simpler
compared to existing products in the market.
• Low-end disruptions are often assembled from off-the-shelf
technologies in a new and innovative way.
• Newmarket disruptions create a new market that is currently not
served. The performance metrics of the current market are redefined.
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Business Model
• Definition- A business model describes how an organization creates,
delivers, captures, and keeps value.
• The business of connecting customers or different user groups is
perhaps the most important contribution of ICT in business modeling.
• The business model of a company may need revision and updating
over time and is sometimes completely rewritten due to changes in
customer behavior, social trends, economic boundary conditions, and
technological evolution.
• Failure to update business models may result in reduced profits and,
eventually, bankruptcy.
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Business Model Canvas
• Alexander Osterwalder proposed the business model ontology as part of
his Ph.D. thesis in 2005.
• Later, this business model ontology was refined to the Business Model
Canvas (BMC).
• The BMC is a framework for describing business models.
• The BMC is based on describing the nine central building blocks of a
business and modeling the relationships between these building blocks.
See figure 4.2
• The BMC has been applied to several digital businesses to better
understand business operations and relationships between stakeholders
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Fig. 4.2 The Business Model Canvas: Outline
of BMC
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Building Blocks of BMC
• The nine building blocks of the BMC can be divided into three groups:
Value proposition, value turnover, and value generation.
Value proposition is the core building block of the BMC.
The advantages of well-defined value propositions are:
(1) Upholding a clear focus on the fundamental activities for the business;
(2) identifying and maintaining any core competencies that the company
may possess
(3) precise targeting of the production toward the products that the users
will have and, thereby, avoiding the production of goods that nobody will
buy
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(4) the ability to change direction as the market evolves and processes
and products are substituted by new ones
(5) effective marketing that focuses on user needs and user satisfaction
(6) a willingness to change direction based on feedback from the users
and the market evolution in general
(7) creating customer confidence in the product and
(8) understanding how and why the product creates value for the users.
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• Value turnover includes four building blocks: Customer segments,
channels, customer relationships, and revenue stream.
• These building blocks describe how the organization generates value from
its value proposition.
• More specifically, it describes how the customers generate revenue for the
organization.
• Value generation includes the building blocks of key partners, key activities,
key resources, and cost structures.
• More specifically, it describes what is needed in terms of resources,
activities, and partners to create the value proposition and the costs
associated with this.
• Value generation should also specify—either directly or indirectly—the
value model used by the company.
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Table 4.1: The nine building blocks of the
BMC
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Figure 4.3: Relationships between the
building blocks in the BMC
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1. The value propositions (the goods and services and their benefits for
the users) and the customer segments are defined (1 and 2 in Figure
4.3). That is, what the organization delivers and to whom.
2. The organization defines how the product is provided to the
identified customer segments through specific channels; for example,
over the Internet or by postal services.
3. The customers must pay for the product and, hence, generate the
revenue stream for the organization
4. The organization may have one or several relationships to its
customers.
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5. To create or enable the value proposition, the organization performs
a set of key activities
6. A key activity may support one or several value propositions. In
addition to key activities, the organization needs key resources to
create and enable the value propositions.
7. Both key activities and key resources cost money.
8. Finally, the organization may need to form strategic relationships
with one or several key partners to support its value proposition, key
activities, and key resources.
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The Stakeholder Relationship Model
• The relationships between an organization and its stakeholders are
core aspects of its business operations.
• The Stakeholder Relationship Model (SRM) identifies key stakeholders
engaged in the organization’s business model and the interactions
that the organization has with these stakeholders.
• Stakeholders in the SRM can be the organization itself, customer
segments, or key partners.
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• Customers and key partners are also identified and described in the
BMC.
• Relationships defined in the SRM can, for instance, be an exchange of
services, value, money, formal agreements, network effects, or other
dependencies between the stakeholders.
• Figure 4-4 shows the notations used to visually model the SRM.
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Figure4.4: Notations used in the Stakeholder
Relationship Model.
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• One key relationship between stakeholders is network effects
• Network effects can either be positive or negative.
• The SRM models three different kinds of network effects between
two stakeholders, A and B: (+/+), (-/-), and (+/-). The (+/+) network
effect means that Stakeholder A induces a positive network effect on
Stakeholder B, and vice versa.
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• Users in a telephone network have, for example, a positive network
effect on the other users in the network.
• The (-/-) network effect implies that Stakeholder A has a negative
network effect on Stakeholder B, and vice versa.
• An example of this is highway traffic, in which each car has a negative
network effect on other cars on the road because of potential traffic
congestion and the increased probability of accidents.
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• The (+/-) network effect means that Stakeholder A has a positive
effect on Stakeholder B, but Stakeholder B has a negative effect on
Stakeholder A.
• One example of this is commercials on television: The number of
viewers has a positive effect on advertisers that want as large of an an
audience as possible for the commercials, while advertisements
interrupting the program have a negative network effect on the
viewers.
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• The SRM supplements the BMC by visualizing the relationships
between the organization and other stakeholders.
• One important purpose of the SRM, especially for businesses in the
digital economy, is that it illustrates the network effects that may
modify the competitive strength of the organization.
• Sometimes, these network effects are dependent on each other, and
induce positive feedback that adds to the complexity of the business
model.
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Fig. 4.5 Wikipedia modeled using the SRM.
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• The SRM of Wikipedia is shown in Figure 4.5. There are three stakeholders:
benefactors, writers, and readers.
• All three stakeholders have a relationship to Wikipedia—the writers develop
Wikipedia, the readers use Wikipedia, and the benefactors fund Wikipedia.
• There are no relationships between these stakeholders because:
• The authors are anonymous.
• Usually, several authors contribute to each article.
• The readers may also take the role of watchdogs monitoring the quality of the
content and, if necessary, correcting it.
• The benefactors contribute because of the quality and correctness of the
encyclopedia and the importance the encyclopedia has on the society at large.
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• Bitcoin is a cryptocurrency offering pseudonymous transactions
between two users without any involved trusted third-parties to
verify the transaction.
• Bitcoin is an example of the multi-sided platform business model.
• Bitcoin is modeled using the BMC in Figure 4-6 as a four-sided
platform with the following user groups: Bitcoin users, Bitcoin miners,
merchants, and digital currency exchanges.
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Fig. 4.6 Bitcoin modeled using the BMC.
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• Bitcoin enables transactions between two users, in which one user
transfers bitcoins to the other user from their Bitcoin wallet
(1) These transactions are verified by many distributed Bitcoin miners
(2) Bitcoin miners receive a mining reward for successfully verifying
transactions
(3) This mining reward is provided by the Bitcoin ecosystem by issuing
new bitcoins for circulation for each successful block of transactions
added to the Bitcoin ledger.
Hence, the number of bitcoins in circulation increases continuously,
from about sixteen million bitcoins in 2017 to an estimated amount of
twenty-one million bitcoins in 2140.
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Fig. 4.7 Bitcoin modeled using the SRM.
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• Figure 4-7 shows Bitcoin modeled using the SRM.
• There are negative network effects between Bitcoin miners, since having
more miners means that there is an increased competition to receive the
reward for successful mining.
• Also, note that there are no network effects between Bitcoin miners and
the other stakeholders.
• This is because the incentive for Bitcoin miners depends on the price of
Bitcoin and the number of bitcoins issued for each successful block of
transactions only.
• Hence, Bitcoin mining is an independent—but still necessary—part of the
business model.
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Summary and Key points
• An innovation is the implementation of a new or significantly-
improved product (good or service) or process, a new marketing
method, or a new organizational method in business practices,
workplace organization, or external relations.
• A disruptive innovation is an innovation that creates a new market by
establishing a new set of value propositions and a new set of
performance metrics.
• A business model describes how an organization creates, delivers,
captures, and keeps value.
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• The Business Model Canvas (BMC) and the Stakeholder Relationship
Model (SRM) are tools for modeling digital businesses and
relationships between stakeholders.