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Kul Bhushan C. Saxena
Swanand J.Deodhar
Mikko
Ruohonen
Business Model Innovation in Software Product Industry ManagementforProfessionals Moreinformationaboutthisseriesathttp://www.springer.com/series/10101
KulBhushanC.Saxena SwanandJ.Deodhar • MikkoRuohonen KulBhushanC.Saxena InformationSystemManagement FortuneInstituteofInternationalBusiness NewDelhi India
SwanandJ.Deodhar InformationandDecisionSciences,Carlson SchoolofManagement UniversityofMinnesota Minneapolis USA
MikkoRuohonen SchoolofInformationSciences UniversityofTampere Tampere Finland
ISSN2192-8096ISSN2192-810X(electronic) ManagementforProfessionals
ISBN978-81-322-3650-4ISBN978-81-322-3652-8(eBook) DOI10.1007/978-81-322-3652-8
LibraryofCongressControlNumber:2016948602
© SpringerIndia2017
Thisworkissubjecttocopyright.AllrightsarereservedbythePublisher,whetherthewholeorpart ofthematerialisconcerned,specificallytherightsoftranslation,reprinting,reuseofillustrations, recitation,broadcasting,reproductiononmicrofilmsorinanyotherphysicalway,andtransmission orinformationstorageandretrieval,electronicadaptation,computersoftware,orbysimilarordissimilar methodologynowknownorhereafterdeveloped.
Theuseofgeneraldescriptivenames,registerednames,trademarks,servicemarks,etc.inthis publicationdoesnotimply,evenintheabsenceofaspecificstatement,thatsuchnamesareexemptfrom therelevantprotectivelawsandregulationsandthereforefreeforgeneraluse.
Thepublisher,theauthorsandtheeditorsaresafetoassumethattheadviceandinformationinthis bookarebelievedtobetrueandaccurateatthedateofpublication.Neitherthepublishernorthe authorsortheeditorsgiveawarranty,expressorimplied,withrespecttothematerialcontainedhereinor foranyerrorsoromissionsthatmayhavebeenmade.
Printedonacid-freepaper
ThisSpringerimprintispublishedbySpringerNature TheregisteredcompanyisSpringer(India)Pvt.Ltd. Theregisteredcompanyaddressis:7thFloor,VijayaBuilding,17BarakhambaRoad,NewDelhi110001,India
Preface Thesoftwareindustryhasrarelybeenthroughsuchaperiodofdeepandspeedy changesduetoglobalization,newmarketexpectationsandITconsumerization.The shiftinconsumerdemandsandnewtechnologieshaveaprofoundimpacton businessmodelsinthesoftwareindustry.Asaresultsoftwarevendorshavebeen exploringnewbusinessmodelsthatcombineelementsfromproprietaryandsoftwareOSSmodelsaswellasnewdistributionsandrevenuegenerationschemes. ThecompetitionbetweentheproprietaryandOSSsoftwaremodelshasledtoa heterogeneousecosystemshowingseveraltrends:establishedlargecompanies usingOSSfordiversifi cationandcostreduction;andnewstart-upshavingthe choiceofproprietary,hybridorfullOSSbasedonrequirements.Thesetrendsare leadingsoftwareindustrytowardsanewmarketstructureparadigmwithmajor trendsbeingconsolidationandde-verticalization.Shiftsindemandarecreatingnew ecosystemsforsoftwaredevelopmentanduse,suchasincreasedco-innovation.
Thusthesoftwarebusinessenvironmenthasbecomeacomplexinterplayof threerelatedandoftenoverlappingmodels:the softwaremodel howthesoftware’sintellectualpropertyisreleasedorcontrolled;the developmentmodel how thesoftwareisphysicallydeveloped;andthe businessmodel howthesoftwareis marketedandsold.Businessmodelsareintimatelyconnectedtotheissueofrevenuegenerationandarelargelyorthogonaltothechoiceofothertwomodels.This bookislargelyfocusedonthebusinessmodelsandsoftwaremodels,andhowthe twocanbecombinedinnovativelyforcompetitivedifferentiationandrevenue growth.Oftenthesoftwarebusinessesfocusmoreonthe firsttwomodeltypesand somewhatignorethethirdone,leadingtocommoditizationandlossofgrowth.We believethatthethirdmodel businessmodel,shouldbethestartingpointforanew start-uporanewproduct,andthisiswhatwehavetriedtodemonstrateinthebook. FromanIndianperspective,andtosomeextentfromaEuropeanperspectiveas well,softwareproductindustryisfragmentedandnotthatmature.Thatisthe reasonwhywehavefocusedontheproducts.
Theoriginofthisbookisrootedinthesecondauthor ’sdoctoralresearch,butthe businessmodelinnovation bothresearchandpractice hasgrownupsomuch thatitisalmostanewworknow.Thebookistargetedatboththeresearchersand thepractitioners,andwehopetheywill fi ndituseful.
NewDelhi,IndiaKulBhushanC.Saxena Minneapolis,USASwanandJ.Deodhar Tampere,FinlandMikkoRuohonen
Acknowledgments Thecompilationofthisbookhastakenalongtimewithmultipleauthorshaving multipleroundsofbrief/longsicknesses.Buttheintellectualecosystemdidwork andwewereabletocompletethebook.Perhapsthisitselfwasademonstrationof ‘intellectualbusinessmodelinnovation!’ InthisendeavorIwouldespeciallyliketo mentiontheintellectualplatformsupportprovidedbyFortuneInstituteofInternationalBusiness,NewDelhi,tomakethisinternationalcollaborationacrossthree countries/continentssustainable.
Inthislongjourney,Iwouldliketoacknowledgetheimmenseencouragement andcarereceivedfrommywifeKusumandchildrenDevashishandShruti(with theirfamilies),whichensuredthecontinuityofworksometimeswithbothmajor andminorhiccups.IwouldalsoliketothanktheSpringerstaff Sagarika,Nupoor andSuresh,fortheirunderstandingand flexibilityoftimeforcompletingthe writing.SometimeswhenIthoughtthetaskathandisnotpossible,theyencouraged,givingmoretime;andsometimeswhentheysuspectedlazinessonourpart, theynudgeduspolitely.
KulBhushanC.Saxena
Attheoutset,Iwanttoacknowledgethecontinuoussupportofmyparentsandmy spouse,Shaveta.Withouttheirencouragement,thisworkwouldnothavebeen possible.IalsowanttothankProf.RajenK.Guptaandtheco-authorsofthisbook fortheirtirelessmentoringinrefiningtheearlyideas.Finally,Iwanttothank administratorsatManagementDevelopmentInstitute(MDI),MukeshPatelSchool ofTechnologyManagement(NMIMSUniversity)andFortuneInstituteofInternationalBusiness(FIIB)forprovidingresourcesthatplayedaninstrumentalrole towardscompletionofthisbook.
SwanandJ.Deodhar
Tekes,theFinnishFundingAgencyforTechnologyandInnovationandAcademy ofFinland,havebeenimportantfundingpartnersinanumberofsoftwaredevelopmentandoutsourcing-relatedresearchprojects,whichhasenabledthecollaborationofthethreeauthorsofthisbook.Thisisacknowledgedwithgratitude.
MikkoRuohonen
2.6.1ZottandAmit
3.9.1BusinessModelInnovationinSMEs
3.9.2BusinessModelInnovationinSMEs
3.12.1Outside-InProcessforOpenBusiness
3.12.2Inside-OutProcessforOpenBusiness
3.12.3CoupledProcessforOpenBusiness
4.3InnovationsinEngineeringServiceFirms: ACaseStudy(Dymd2015)..........................65
4.4AmbidexterityinSoftwareBusiness(Martini2015).........67
4.4.1AgileSoftwareDevelopmentandAmbidexterity.....67
4.5AmbidexterityandOrganizationCulture.................70
4.5.1Resources................................71
4.5.2Processes.................................72
4.5.3SuccessinInnovation........................73
4.5.4Values..................................73
5HistoryofthePenguin:EmergenceofOpenSourceSoftware Paradigm ...........................................79
5.1SoftwareIndustry:Overview.........................79
5.1.1SoftwareProductIndustry:Overview.............81
5.2SoftwareLicensingSchemes.........................81
5.2.1ProprietaryLicensingScheme..................81
5.2.2SuccessofProprietaryLicensingApproach.........81
5.3ProprietarySoftwareBusinessModel:Challenges...........82
5.3.1FreeandOpenSourceSoftware(FOSS) DevelopmentandDistribution..................85
5.4ChallengesofProprietaryLicensesandRoleofFOSS.......87
5.5MergingProprietaryandFOSS:Emergence ofCommercialOSS(COSS).........................88 5.6Conclusion.....................................91 References..........................................91
6OrganizationalPracticesforHybridBusinessModels ..........95
6.1OpenbravoERP..................................95
6.1.1Stage-I:TransitiontoOpenSourceLicensing........96
6.1.2Stage-II:TransitiontoModularArchitecture........96
6.1.3Stage-III:AdoptionofCentralizedDistribution Platform.................................97
6.2OperationalPractices:ProductEcosystem................98
6.2.1PlatformModularity.........................98
6.2.2StandardizedDevelopmentToolkit...............99
6.2.3CentralizedMarketplace......................100
6.3OperationalPractices..............................101
6.4.1FreeProvisionofCommodityFunctionality.........104
7IntellectualPropertyManagementinSoftwareBusiness
7.1IntellectualPropertyRightsinSoftwareDevelopment........109
7.3ProprietaryLicensing..............................110
7.3.1TypesofNewLicensesinProprietaryLicensing.....110
7.4.2LicensingandBusinessModels.................115 7.4.3CommonlyUsedOSSLicenses.................116
7.5LicensinginSoftwareEcosystems.....................118
7.6HybridorDualLicensing...........................120
7.7ChoosingtheAppropriateLicensing....................121
7.8AntecedentsofLicenseChoice........................122
7.9ChoiceofLicensinginLiferayContentManagement
8.5.1AdvantagesofCrowdsourcing..................136 8.5.2RisksofCrowdsourcing......................137
AbouttheAuthors KulBhushanC.Saxena isanacademicandaconsultantonbusinessprocess innovation,businessmodelinnovation,digitaltransformationandhighereducation management.HeisProfessorEmeritusandhasbeenDeanatFortuneInstituteof InternationalBusiness,NewDelhi,India;andProfessoratManagementDevelopmentInstitute(Gurgaon,India)andIndianInstitutesofManagementatBangalore andAhmedabadformorethan22years.Hehasalsoservedasaprofessorat ErasmusUniversity,RotterdamandHongKongPolytechnicUniversityforafurther14years.PriortothishewasinITmanagementpositionsinprivateandpublic sectororganizationsformorethanadecade.Dr.Saxenahasbeenaconsultantto variousorganizationsinIndia(e.g.NationalAluminiumCompanyLimited,Bhilai SteelPlant,BokaroSteelPlant,DurgapurSteelPlant,PowerGridCorporation, IndianArmyOrdinanceCore,IBMDaksh,etc.),HongKongandNetherlands.Dr. Saxenahasco-authoredthree(thisisthefourth)booksandhaspublishedmorethan 120papersinvariousconferenceproceedings,nationalandinternationaljournals. Dr.SaxenahasalsobeenamemberoftheNATO’sAdvancedSummerSchoolon DecisionSupportSystemsinLucca,Italy;hehaswon,amongothers,the “DistinguishedAchievementAward” oftheIndianSpaceResearchOrganization.
SwanandJ.Deodhar ispursuinghisPh.D.fromtheCarlsonSchoolofManagement,UniversityofMinnesota,USA.Hisresearchinterestsincludecollective intelligence,crowdsourcingandopensourcesoftwarecommunities.Heholdsa MastersinBusinessAdministrationfromSymbiosisInternationalUniversity,Pune andisaFellowofManagementDevelopmentInstitute,Gurgaon.
MikkoRuohonen isProfessorofBusinessandInformationSystemsatthe UniversityofTampere,Finland.Dr.Ruohonenhasworkedinthe fi eldofinformationstrategy,digitalizationandorganizationaldevelopmentsince1984.Hehas publishedover130articles,reportsandcolumns,fourtextbooks,largeresearch reports.HehasservedTechnicalCommittee3(Education)oftheInternational FederationofInformationProcessing(IFIP)since1990s.Hehasalsoservedas
memberoftheadvisoryboardsforFinnishcompanies.Inadditionheservedasthe PresidentofExecutiveBoardforAssociationofInformationSystems(AIS)ScandinavianChapter2006–2007.IFIPgrantedhimIFIPSilverCoreAwardyear2007. SilverCoreisconferredonthosewhohaveservedIFIPasGeneralAssembly (GA)members,committeeoffi cers,membersofIFIPCongressProgramCommitteesandeditorsofproceedingsofIFIPconferences.
SoftwareasaBusiness Abstract
Thischapterdescribestheemergenceofsoftwaredevelopmentasabusinessand itstwomodels proprietaryandopensource(orthebazaar)model.Italso describesthetwowaysintowhichasoftwarebusinesscanbeorganized asa servicebusinessorasaproductbusinessaswellasamixofthetwocalledthe hybridmodel.Afterdiscussingtheprosandconsofthetwobusiness approaches,itdescribesthe productization processbywhichaservicebusiness cantransformitselfintoaproductbusiness.
1.1ViewingEngineeringofSoftwarefromaBusiness Perspective Whereassoftwarehasplayedanincreasinglyimportantroleinmostaspectsofa businesssinceWorldWarII,initsinitialstagesbusinessesconsidereditmerelyasa wayto automate itsprocesses,contributingtoitsproductivitybyspeedingupwhat wasalreadybeingdoneinthebusiness.Butovertime,businessesrecognized softwarenotmerelyasan automationtool butmorebroadlyasanapproachfor providingproductsandservicesnotyetoffered.Thesoftwaredevelopersbroadened theirperspective,creatingsoftwarearchitecturesandsupportstrategiesthatwould fitthe ‘businessmodel’ inwhichsoftwareproductsandserviceswillbeembedded. Consequently,today’ssoftwareengineeringcommunityhasstartedfocusingon ‘softwaredevelopmentandsupport’ asabusiness(Cusumano 2004).
Thesoftwarebusinesshasfacedfundamentalchangesinthepast10years.First, digitizationoftheelementaryfunctionsofbusinessoperationsandtheemergence oftheInternetasthebackboneoftheindustryecosystemhavechangedtheways software fi rmsdevelopanddelivertheirofferings.Second,theemergingservice dominancehasdemonstratedfundamentalchangesinthebusinessmodelof
© SpringerIndia2017
K.B.C.Saxenaetal., BusinessModelInnovation inSoftwareProductIndustry,ManagementforProfessionals, DOI10.1007/978-81-322-3652-8_1
software firms,includingtheproliferationofalliancesandnetworksasstrategic resources(SwaminathanandMoorman 2009).Thisiscongruentwiththecurrent literatureonservices;e.g.thewidespreadservice-dominantlogic(VargoandLusch 2004, 2008).Thisemphasizesresourceaccessinsteadofresourceownershipaswell asuserinvolvementintheservicedeliveryandvaluecreationthroughservice,both ofwhicharevisibleinthecontemporarysoftwarebusinessmodelsin business-to-businessandbusiness-to-consumermarkets(RaoandKlein 1994). Moreover,theemergenceoftheopeninnovationparadigmhaschangedsoftware developmentprocessesandopenedsoftwareinnovationactivitytowardsuser communities(vonHippelandvonKrogh 2003).Theopensourcephenomenonhas hadfundamentaleffectsonsoftwarebusiness(Fitzgerald 2006).
Consequently,fromabusinessperspective,thereareatleastthreekeyquestions whichconfrontthesoftwareindustrytoday:
• Fromabusinessperspective,howdosoftwarecreationandsupportorganizationsaddressa firm’sexistingbusinessmodel?Thatis,howdoesasuccessful businessenterpriseembracesoftwareproductsandservicestosustainor improveitscompetitiveness?
• Howdoesabusinessenterprisewhoseprimaryfocusis software (components, applications,andservices) findasuccessfulbusinessmodelforitssoftware business?
• Fromasoftwareengineering,whatarchitecturesandsupportstrategieswillyield productsandservicesthatenhanceabusinessenterprise’sbusinessmodel?
Theanswerstothesequestionswillrequireanalysisofhow,when,whyand whetherabusinessshouldincorporatesoftwareintoitsproducts,processesand services.Forthisthe firststepwillbetodeterminewhetherthesoftwareshouldbe marketedasaproductorasaservice.Therearetwotypesofbusinessesinthe Softwareindustry servicebusinesses thatdevelopcustomizedsoftwarebasedon thecustomer-specifi cneeds,and productbusinesses thatdevelopstandardsoftware basedonthemarketneeds.Thussoftwarecanbedistinguishedintotwotypes customizedandstandardsoftware.Customizedsoftwareissoftwarethatistailored totheneedsofonespeci ficcustomerwiththepurposeofsatisfyingthatcustomer; andstandardsoftwareissoftwarethatisdesignedbasedontheneedsofaspeci fic market.
Softwareproductbusinessescansometimesswitchtoservicebusinesswhen theirproductsalesstarttodecreaseonthemarket.Ontheotherhand,several softwarecompaniesthatdevelopcustomer-specificsoftwareidentifyaneedto transformtodevelopingandsellingstandardproductsoftware.Thistransformation processiscalled ‘Productizationprocess’ .
1.2Free/OpenSourceModelofSoftwareDevelopment3
1.2Free/OpenSourceModelofSoftwareDevelopment TheFree/OpenSource(F/OS)modelofsoftwaredevelopmentisoftenconsidered tobeoneofthemostpromisingnewmodelsofsoftwareproductionandlabour organizationtoemergeasaresultofthewidespreadavailabilityofinformationand communicationtechnologies(ICTs)inthelastmorethan20years.Partofits signifi canceliesinthatmaybeapplicabletootherdomainsofproduction,suchas contentproduction,asindicatedbythesuccessofWikipedia.However,existing explanationsofitssuccesstendtoadoptalimitedperspectivethatfailstoaddress importantissuesofaccess,controlandpower.
Theterm ‘opensource’ describes:
• softwareprotectedunderspecialcopyrightlicensesaimedatensuringavailabilityandfree(re)distributionofthesourcecode.Sourcecodereferstotheset ofprogramswrittenbydevelopersthatmakeupasoftwaresystem.Proprietary softwareisdistributedonlyintheformofobjectcode,themachinereadable translationofthesourcecode,whichisrequiredforcomputerstorunprograms. Opensourcesoftwareisdistributedbothassourceandobjectcode.
• aprocessofsoftwaredevelopmentthatincorporatessomeuniquetechnicaland socialcharacteristics,suchastheabilityofuserstosuggestnewfeatures,report faultsinprograms,etc.
• Amovementbasedontheidealsofthehackerculturewhichispremisedupon thefreedomtouse,createandtinkerwithsoftware,andthevaluesofthegift culture,suchastheidealofreciprocity.
ProminentexamplesofopensourcesoftwareincludetheGNU/Linuxoperating system,theApacheserverprogramandthePythoncomputerlanguage.
1.3TheBazaarModelofSoftwareDevelopment Theemergenceofthebazaarmodelofsoftwaredevelopmentrepresentsanew, decentralizedmodelofsoftwareproductionanddistribution.Thistermwascoined byRaymond(2001)todescribethedecentralized,bottom-up,almostorganic, processofsoftwareproductionrepresentedbytheF/OSmodelofdevelopment.The secondrelatestothegeneralizationofthegifteconomythroughtheInternet (Leyshon 2003).Raymond firstusedtheterm ‘bazaar ’ inhisfamousessay ‘The CathedralandtheBazaar ’ inwhichhecontrastedtheF/OSmodelwiththetraditionalmodelofsoftwaredevelopmentwhichhadbeenconceptualizedbyan influentialsoftwareengineer,Brooks(1995)asaprocessresemblingthebuildingof acathedral.Whereasinthecathedralmodelorderisachievedthroughcentralized controlandadherencetoamasterplan,inthebazaarmodel,orderseemstoemerge organicallythroughthecomplexinteractionsofamultiplicityofactors.Thegift economyreferstosociallyembeddedformsofeconomicrelationsthatareusually
associatedwithprecapitalistsocietiesthathavesurvivedinmodernsocieties. Whereastheexchangeeconomyconsistsofcommodityandmonetaryexchanges takingplacewithinaframeworkshapedbyscarcityandtheimpersonaleffi ciencyof markets,thegifteconomyischaracterizedbyredundancyandconstitutesasystem oftransactionsbetweeninterdependentindividualsonthebasisoftheprincipleof reciprocity.Inaddition,whiletheexchangeeconomyisdrivenbythepursuitof individualgain,inthegifteconomyindividualsgiveunconditionallyinorderto freelybenefitfromthecollectiveeffort.InF/OSthevaluesystemunderlyingthis particularformofgiftgivingisoftenreferredtoasthe ‘giftculture’
1.4SoftwareIndustryBusinessModels Abusinessmodeldescribesthegoodsorservicesacompanyprovidesandthe revenueitearnsfromthat.Formallythebusinessmodelhasthreecharacteristics: thetypeofgoods/services,thebusinessmodelarchetypeandtherevenuemodel (Popp 2011).Fourtypesofmodelsdescribethebasicpatternsofdoingsoftware business:
• A creator transformssuppliedgoodsandinternalassetsintoaproduct.The creator ’smainworkisdesigningtheproduct.
• A distributor buysaproductandprovidesittocustomers,asincaseofcommoditywholesalersandretailersorsoftwareresellers.
• A lessor providestherighttousebutnotownaproductorservice.Forexample, companiesthatlicensetheirsoftwaretocustomers.
• A broker facilitatesthematchingofpotentialbuyersandsellers.Abrokernever takesownershipoftheproductsandservices.
Insoftwarebusiness,inventorscreateintangiblegoodsandservicessuchas software.Themaintaskisinventing(designing)thenewserviceorproduct.Often thistaskisexpensive,especiallywhentheinventordesignsandprogramssoftware byleveragingdevelopersthroughemployment.Aftertheinventionactivitieshave ended,softwarecompaniesmakethesoftwareavailabletocustomersthroughthe intellectualproperty(IP)distributororlessor.
IPdistributorsselltheirIPrightsoranothersoftwarevendor ’susagerightsto customers.TypicalwaystodistributeIPinthesoftwareindustryare ‘original equipmentmanufacturer(OEM)’ agreementsforsoftwarecomponentsanddistributionrightsforredistributables.Redistributablesareoftenbundledwithdevelopmenttoolsandintegratedandshippedwithasoftwareproduct.
IPlessorsprovideintangiblegoods ‘forrent’,suchaswhensoftwarecompanies providesoftwareusagerightstocustomers.
Servicebusinessinthecontextofsoftwareisde finedasbusinessesfocusingheavily oncustomizingtheproductsforeachcustomerandprovidingservicessuchas strategyadvice,trainingandintegrationworkwithothersoftwaresystems,aswell assellinglargeamountofmaintenance(specialproductenhancementsaswellas regularproductupgradessoldunderlong-termcontracts)andtechnicalsupport (Cusumano 2004).ThebestknownexamplesofthistypeofbusinessesareconsultingcompaniessuchasAccenture,CapeGemini,ErnstandYoung,etc.
BasedonIBMexperiences,Gerstner(2002)observesthatthe ‘economicsof service-orientedbusinessaredifferentbecauseaservicescontractmaylast6to10 years(anoutsourcingcontract).Thesecontractsmaylosemoneyforthe firstyearbut maystillbeprofitableasawhole.Thisconceptdoesnotexistintheproduct-oriented business.Theskillsrequiredtomanageserviceprocessesdifferverymuchfromthe processesthatdrivesuccessfulproductcompanies’.Gerstner(2002)furtherstates thatIBMhadtostrugglethroughthetransitionbecausethecompanyhadno experienceinbuildingalabour-intensivebusiness.Healsomentionsaboutthe difficultiesthatwerefacedduringthetransitionofIBM: ‘Wewereexpertat managingfactoriesanddevelopingtechnologies.Weunderstoodcostofgoodsand inventoryturnsandmanufacturing.Buthumanintensiveservicesbusinessisentirely different.Inservices,youdon’tmakeaproductandthensellit.Yousellacapability. Yousellknowledge.Youcreateitthesametimeyoudeliverit’ . AccordingtoApostolouandMentzas(1999), ‘Service-orientedcompaniesare knowledgeintensiveandhavethecharacteristicssuchas,their “products” are intangible,i.e.theydonotconsistofgoodsbutofcomplexproblem-solvingservices;their “productionprocess” isnon-standardizedandhighlydependenton teamwork;themajorityoftheiremployeesareeducatedandcreativepeople;their customersaretreatedindividuallyandthe “products” areadaptedtothemthanvice versa’.Forservice-orientedcompanies, ‘economiesofscopearethe “holygrail” to strivefor,andthesecomefromstructuringknowledgesuchashowtodo requirementsanalysis,manageprojects,customizeapplications,conductuser acceptancetesting,orreusedesignframeworksandevenpiecesofcodeacross differentprojectsandcustomers’ (Cusumano 2004).Inthissense,thefocusofthese companiesliesonsatisfyingtheircustomerstomeetthespecificneedsbasedonthe services,whicharedeliveredtothecustomersbasedonthe service-levelagreement betweentherelevantparties.
Softwareservicecompaniesneedtocreaterelationshipswiththeirindividual customers,basedontheircapabilities.Consequently,servicecompaniesbuild technologiesthatlooklikeproductsorcanbepackagedinsomeway,butgenerally theycatertotheneedsofindividualclients(Cusumano 2004).Buildingcapabilities inclientmanagementaswellasprojectmanagementarethemainfocusareasfor servicecompanies.Therefore,theyneedtolearnhowtoleveragetechnologyand knowledgegainedinoneprojecttootherprojectswithoutcompromisingcustomer confidentiality.
Theeconomicsofservice-orientedsoftwarebusinessaredifferentbecauseaservicescontract(calledanoutsourcingcontract)mightlast6to10years(Gerstner 2002).Thesecontractsmaylosemoneyforthe firstyearbutmaystillbeprofi table asawhole.Thisconceptdoesnotexistintheproduct-orientedsoftwarebusiness. Theskillsrequiredtomanagesoftwareserviceprocessesdifferverymuchfromthe processesthatdrivesuccessfulsoftwareproductcompanies.IBMhadtostruggle throughtheirtransitiontoaservicebusinessbecausethecompanyhadnoexperienceinbuildingalabour-basedservicebusiness(Gerstner 2002).Theywereexpert inmanagingfactoriesanddevelopingtechnologies.Theyunderstoodcostsofgoods andinventoryturnsandmanufacturing,butnothuman-intensiveservicebusiness whichweretotallydifferent.Inservices,youdonotmakeaproductandthensellit. Insteadyousellacapability;yousellknowledge.Youcreatethesametimeyou deliverit.
Service-orientedcompaniesareknowledgeintensive.Their ‘products’ are intangibles,i.e.theydonotconsistofgoodsbutofcomplexproblem-solving services.Their ‘productionprocess’ isnon-standardizedandhighlydependenton teamwork.Themajorityoftheiremployeesareeducatedandcreativepeople.Their customersaretreatedindividuallyandthe ‘products’ areadaptedtothemthanvice versa(ApostolouandMentzas 1999).Forservice-orientedcompanies, ‘economies ofscope’ arethe ‘holygrail’ tostrivefor,andthesecomefromstructuring knowledgesuchashowtodorequirementsanalysis,manageprojects,customize applications,conductuseracceptancetesting,orreusedesignframeworksandeven piecesofcodeacrossdifferentprojectsandcustomers(Cusumano 2004).Inthis sense,thefocusofthesecompaniesliesonsatisfyingtheircustomerstomeetthe speci ficneedsbasedontheservices.
Consequently,basedontheircapabilities,softwareservicecompaniescreate relationshipswiththeirindividualcustomers.Servicecompaniesbuildtechnologies thatlooklikeproductsorcanbepackagedinsomeway,butgenerallytheycaterto theneedsofindividualclients(Cusumano 2004).Buildingcapabilitiesin client management aswellas projectmanagement arethemainfocusareasofthese companies.Thesecompaniesneedtolearnhowtoleveragetechnologyand knowledgegainedinoneprojecttootherprojectswithoutcompromisingcustomer confidentiality.
1.7SoftwareasaProductBusiness
Softwareproductcompaniesarethosethatgeneraterevenuethroughsalesof ‘shrink-wrapped’ softwarepackages.Inthissense,softwareproductcompanies makeandsellalotofcopiesofwhateverproductstheymakeasis thatis,without addingchangessuchasone-of-a-kindfeaturesforindividualcustomers(Cusumano 2004)ortheproductsthatneedcustomization(called ‘Enterprisesolutions’)(Artz
etal. 2010).Thebestknownexamplesofbusinessesofthistypearecompanies suchasMicrosoft,AdobeandBusinessObjects.
Thesoftwareproductbusinessismainlyabouteconomiesofscale,whichmeans volumesales,sellingorlicensingasmanycopiesofastandardizedproductasyou can.Thebasicgrowthstrategiesherearescalingorduplicatingwhatyouhavedone insimilarmarkets(Cusumano 2004).Inthiscontexta softwareproductcompany is definedasacompanythatcanpackageandreplicatetheirsoftwareoffering(Hietala etal. 2004).AsoftwareproductinthiscontextisdefinedbyXuandBrinkkemper (2007)as ‘apackagedconfigurationofsoftwarecomponentsorasoftware-based service,withauxiliarymaterials,whichisreleasedforandtradedinaspeci fic market’.Oneoftheuniquecharacteristicsof ‘softwareasaproduct’ isthatonceitis developed,itcanbereplicatedatclosetozeromarginalcosts(Messerschmittand Szyperski 2003).Forinstance,Microsoftcouldbecomethemarketleaderbecause ofitsvolumesalesandsetdefactotechnicalstandardsthat ‘locked-in’ theircustomersbecausetheirsoftwareapplicationsanddatabasesworkedonaparticular operatingsystemorhardwareplatform.
1.8CharacteristicsofSoftwareasaProductBusiness Focusonproduct-orientedsoftwarecompaniesisonresearchanddevelopmentto buildsoftwareproductandoncethesoftwareproductisreadytobedelivered,the focusshiftstoitssales;sellingmillionsofcopiesofcertainsoftwarepackagetoa certainmarket.Fromamarketingandsalesperspective,theprimarygoalofsoftwareproductcompaniesistomarkettheirbrandsandproducts.Marketingbeginsat theproduct-orientedcompaniesintheproductdevelopmentstageitself.
Casestudieshaveshownthattimepressuredominatesproductsoftwaredevelopmentindustry(Sawyer 2000).Thepressuretocreatereturnoninvestmentsleads tointenseattentionatbringingbothnewandinnovativeproducts.Forproduct softwarecompanies,productsoftwarereviewsarealsoofgreatimportanceinthe sensethattheawarenessofthesoftwareproductremainsinthemindsofthetarget market.Onceaproductsoftwareisa ‘breakthroughproductorakillerapplication’ , theproductsoftwarecompaniescandevelopalargeinstalledbaseorcreatenew markets(Sawyer 2000;Cusumano 2004).
Fromthecapabilitiesperspective,softwareproductcompaniesorganizethemselvesaroundproductteamsthattargetspeci ficcompetitorsorcustomersegments. Alsosoftwareproductcompaniesfocususuallyonproductdevelopmentforgeneral usersintheirmarketunlesstheyareinaverysmallnichemarket.
Softwareproductcompaniescandelivertheirpackagedsoftwaretotheglobal marketseasilysincetheirproductisgenericandcanbecustomizedforspeci fic markets,forinstancechanginglanguageorcurrencysettings,etc.,(oftencalled localization)withoutchangingthecorefunctionalityofthesoftware.However,one challengeasoftwarecompanyhasishowtomaketheproductofferingsogeneric thatitmeetsalltheneedsofitscustomers(Koeing 2005).Oncethesoftware
productisdevelopedandisreadyfortheglobalmarket,thefocusisthenonglobal marketingandmasscustomization.
1.9SoftwareasaHybridBusiness Therearealsosoftwarecompaniesthatfocusonthedeliveryofsoftwarethrough somecombinationofproductandservicebusinessasastrategicchoice,whichis called ‘hybridorientation’ ora ‘hybridbusiness’.Theprimaryfocusofhybrid softwarecompaniesistosellamixtureofproductsandservices,withmaintenance upgradesorspecialproductenhancementsthatmustbesupportedinthefuture (Cusumano 2004).Oftenthesecompaniesaretheoneswhohavenotbeenabletoor donotwanttoproductizetheirtechnologyfully.Hybridorientationexistsin companieswhichareinastateoftransformationbetweenproductandservice orientations.ThebestknownexamplesofthistypeofbusinessesareSAP,IBM, etc.
1.10Productization Productizationmeans standardization oftheelementsinthesoftwareoffering.It includesseveraltechnologicalelementsfromtheveryearlystagesofdesigninga softwareproduct(suchasmanagingtherequirements,selectionoftechnological platforms,designofproductarchitecture,etc.)tothecommercialelementsof sellinganddistributingthesoftwareproduct(suchasdeliverychannels,positioning oftheproduct/companyandothersalesactivities).Thetermproductizationis mainlyusedinthecontextofserviceorsoftwareindustrieswiththepurposeto transformintangibleservicesintomoreproduct-like,definedsetofdeliverables. Basedonglobalizationofsoftwareindustry,productizationcanalsobedefinedasa shiftfromuniqueservice-intensivecustomerprojectstowardstangiblestandardized productstargetedatglobalmassmarkets.
Artzetal.(2010)haveidenti fiedsixstagesfortheproductizationprocess,which describethesituationsfromcustomer-speci ficdevelopmentperspectivetoproduct softwarebusinessperspective.Thesestagesaredescribedbelow.
• Stage1:Independentprojects .Thisstagedescribesthesituationofaservice organizationwhichprovidesspecifi csolutionspercustomeronprojectbasis. Theseprojectsareexecutedindependentlyfromeachotheranddifferinbudget, technologyandfunctionality.Theysharebarelyanystandardfunctionsor features.
• Stage2:Reuseacrossprojects .Atthisstage,reusabilityofexistingcomponents,functionalitiesandfeaturesisthemainfocusacrossvariousprojects. Reusingexistingcomponentsfrom finishedprojectsprovidescompaniesthe
advantagetoincreasetheoverallqualityandreliabilityofsoftwaresincethey alreadyhavebeentestedwithinearlierprojects.Atthisstage,however,custom implementedfeaturesarestillmorethanthestandardfeatures.
• Stage3:Productrecognition.Inthisstage,thecompanystartsidentifyingthe similaritiesofcustomers’ wishes,whichleadsittotheidentifi cationofaproduct scope.Atthisstage,thestandardizedpartoftheprojectsislargerthanthe customizedpartsbecauseofthereusedfunctionalities,componentsandfeatures. Thisstagealsoconcernsthedecisionmomenttodeveloptheidenti fiedproduct furtheronandtobecomeamarket-drivenbusiness.
• Stage4:Productbasis.Thisstagerepresentsthesituationwherethebasisfor theidenti fiedproductiscreated.Thismeansthatthecompanyneedstodevelop along-termplantobringthesoftwareproductintothemarket.Thisstageis describedbyArtzetal.(2010)as: ‘Asetoffeaturesthatformacommon structure,fromwhichastreamofderivativeproductscanbeefficientlycustomized,developedandproduced’.Thecompanyalsostartsatthisstage gatheringmarketrequirementsfordeterminingthecontentoffuturereleasesof thesoftwareproduct.
• Stage5:StandardizedProductplatform.Atthisstage,thecompanychanges towardsmarketorientationandbringstheemergingproducttothemarket.In comparisontoStage4,thesetoffeatures,componentsandfunctionalitiesare increasedthroughtheproductplatform.
• Stage6a:Customizableproduct.Thisstagedescribesthesituationwhere companiesofferthesoftwareproductascustomizableproductforspeci fic customers.
• Stage6b:Standardproduct.Thisstagedescribesthesituationwherecompaniesofferthesoftwareproductasafullystandardproduct.
1.11SoftwareProductManagement(SPM) VandeWeerdetal.(2006)havedevelopedareferenceframeworkthatreflectsthe softwareproductmanagementprocessesinsoftwareproductcompanies.Thereare certainartefactsforsoftwareproductcompaniestoconsiderintheirproduct managementpracticessuchasrequirementsanalysis,products,releases,etc. Ahierarchicalorderingoftheseartefactsimposesastructureontheprocessareas. Thescopeoftheworkofsoftwareproductmanagementstartswiththecompleteset ofproductsoftheproductcompany,calledthe ‘Productportfolio’.Theproduct portfoliocanconsistofmanyproductsorjustoneproductdependingonwhether thecompanyislargeorsmall.Eachproducthasareleasesequenceofpast,present andfuturereleases.Finally,eachreleasedefi nitionconsistsofasetofselected requirements.Eachrequirementimpliestheadditionofatechnicalorfunctional featuretotheproduct.Theprocessareasformanagingasoftwareproductconsists of:PortfolioManagementtodealwiththeproductsintheproductportfolio;Product
Roadmappingtodealwiththedifferentreleasesofeachproduct;ReleasePlanning todealwiththecollectionsofrequirementsofeachrelease;andRequirements Managementtodealwiththecontentofeachindividualrequirement.
Fromanorganizationperspective,asoftwareproductcompanywilldevelopits corporatestrategy,productstrategyandservicestrategyaccordingtoitstarget market.Theproductandservicestrategiesareinserviceofthecorporatestrategy. Processandqualitycontrolprovideanoverviewtotheproductionprocessand guaranteecertainlevelofquality.
Fromthesoftwaredevelopmentperspective,thesoftwareproductcompany includesrequirementsengineering,architecture/designdevelopment,deliveryand implementationservicesstages(XuandBrinkkemper 2007).Requirementsmanagementinasoftwareproductcompanydealswithcapturingallthemarket requirementsrelevantfortheproduct.Thesemarketrequirementsareimplemented incertainreleasesandbroughtuponthetargetmarketattherighttime.
Anotherimportantareainthedevelopmentofsoftwareproductisthesoftware architecture,which ‘codifi esthestructuralcommonalityamongaseriesofsoftware products’ sothatthehigh-leveldesigndecisionsinherentineachproductneednot bereinvented,revalidatedorredescribed.
Fromthedeliveryofasoftwareproductperspective,itmeansthattheproductis launchedandofferedtothemarket.Inthissense,therearetwoimportantaspectsto consider:configurationmanagementanddocumentation.Con figurationaimstokeep evolvingsoftwareproductsundercontrolandhelpsatisfydelayandqualityconstraints.Softwaredocumentationdescribestherequirementsofthesoftwareproducts, whichneedtobesatis fied,thedesign,implementation,capabilitiesandlimitationsof thesoftwareproducttomaketheproducteasiertouse,maintainandreuse.
Sawyer(2000)statesthatsoftwaredevelopersatsoftwareproductcompanies hold ‘linepositions’.Thismeansthattheneedsofthesedevelopersarecentralto theperformanceoftheorganization.Productsoftwaredevelopershavealsodistant relationshipswiththeirsoftwareusercommunity.Inthissense,consultantsor helpdeskpersonnellinkuserstodevelopers.Furthermore,softwareproductcompanieshavea product (notprocess)viewofsoftwaredevelopment,whichmeans theshippingoftheproductisthemaingoalandallotheractivitiesaresecondary. Consequently,thesoftwaredevelopmentapproachatsoftwareproductcompaniesis iterative, flexibleandconstantlyevolving.
1.12Conclusion Softwaredevelopmentcanbetakenuponanorganizedinternalbasis(likea cathedral)aswellasthroughanopencommunity(asinabazaar).Tocommercialize softwareproductionthroughanyoftheabovetwoways,therearetwotypesof businessesintheSoftwareIndustry: Servicebusinesses thatdevelopcustomized softwarebasedonthecustomer-specifi cneedsand Productbusinesses thatdevelop standardsoftwarebasedonthemarketneeds.Softwareproductbusinessescan
sometimesswitchtoservicebusinesswhentheirproductsalesstarttodecreasein themarket.However,itisquitechallengingtoswitchfromservicetoproduct business.Theproductizationprocessenablesthesoftwarecompaniestotransform themselvesfromaservicetoproductbusiness.Thischapterdescribesthecomplexityof productization processandtheextenttowhichthisprocesscouldbe applicableinaservice-orientedsoftwarebusiness.
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Hietala,J.,Kontio,J.,Jokinen,J.,Pyysiainen,J.(2004).Challengesofsoftwareproduct companies:ResultsofanationalsurveyinFinland.In Proceedingsofthe10thIEEE InternationalSymposiumonSoftwareMetrics (pp.232–243).
Koeing,H.(2005).Fundamentalsofthesoftwarebusiness.In Buildingasuccessfulsoftware business:TopCEOsonsoftwareproductmanagement,growthstrategies,salesandmore. AspatoreBooks(pp.113–119).
Leyshon,A.(2003).Scarymonsters’ softwareformats,peer-to-peernetworksandthespectreof thegift. EnvironmentandPlanningD:SocietyandSpace,21,533–558. Messerschmitt,D.,&Szyperski,C.(2003). Softwareecosystem:Understandinganindispensable technologyandindustry.USA:MITPress. Popp,K.M.(2011).Softwareindustrybusinessmodels. IEEESoftware,28,26–30. Rao,P.M.,&Klein,J.A.(1994).Growingimportanceofmarketingstrategiesforthesoftware industry. IndustrialMarketingManagement,23(1),29–37. Raymond,E.(2001). Thecathedralandthebazaar http://www.tuxedo.org/*esr/writings/ cathedral-bazaar.pdf .Accessedon24Jan2016.
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TheBusinessModelConcept andItsUse Abstract
Thischapterdefinesthebusinessmodelconceptformallyandrelatesittothe strategyandcompetitivenessofa fi rm.Next,itdescribesvariousbusinessmodel ontologiesandhowbusinessmodelscanbevalidatedandevaluated.Useofa populartooltorepresentabusinessmodel thebusinessmodelcanvas (BMC)isexplainednextwithanexample.
2.1BusinessModel Itisgenerallyacceptedthatnopartoftheknownworldissosimplethatitcanbe completelygraspedandunderstoodwithoutsomelevelofabstraction.Inabstraction,theconceptofmodelsandmodellingbecomeimportant,inwhichonlythe mostsalientpartsoftheentityunderstudyisincludedtosimplifyandfoster comprehension(RosenbluethandWiener 1945).Modelsare,therefore,important partsofthescientificapproach.Modelsaresimpli fiedandconceptualizedrepresentationoftheentityconcerned,inwhichasubsetoftheattributescanbedepicted invariousforms.Consequently,amodeldoesnotnecessarilyhavetoincludeall aspectsofthatwhichitseekstodepict.Amodelcanbeconstructedto fitwith differentrequirements,suchaseaseofcomprehension,visualacuityorother aspectsofthatmakethemodelmoreapplicableinunderstandingthemodelled entitybetter.
Turningtothemostsimplisticviewoftheterm ‘businessmodel’—thedefinitionsofthewords ‘business’ and ‘model’ itself mightgiveussomeindicationof theconstruct’sintention.Thedictionarydefi nitionofbusinessistheactivityof providinggoodsandservicesinvolving financial,commercialandindustrial aspects;andmodelhasbeendefinedabove.Thustheconceptofabusinessmodelis
© SpringerIndia2017
K.B.C.Saxenaetal., BusinessModelInnovation inSoftwareProductIndustry,ManagementforProfessionals, DOI10.1007/978-81-322-3652-8_2
anattempttobreakdownbusinessactivitiesintosomethingsimplerandmore tangible.
Theterm ‘businessmodel’ firstcameintopopularuseinthelate1980s,aftera largenumberofpeoplegainedexperiencewithpersonalcomputers(PCs)and spreadsheetsoftware(suchasVisicalc,Multiplan,etc.).Popularuseofthese technologicalinnovationsmadetheentrepreneursandbusinessanalystsbelievethat theycouldeasily ‘model’ thecostandrevenuesassociatedwithanyproposed business.Afterthismodelofthebusinesswassetup,ittookthemonlyafew keystrokestoobservetheimpactofindividualchanges(forinstanceinunitprice, profitmargin,and/orsuppliercosts)onthebottomline.Thisbusinessmodelling couldeasilyprovideproforma financialstatements,whichwerethenagreathelpin businessmodelling.Whenthedotcomfeverbecamerampantinthelate1990s,the term businessmodel hadalreadyrosetoprominenceandbecameincreasingly ubiquitousinthedailyhowtocapture ‘value’ businessconversations.Business people,journalists,academicsandotherobserversfoundtheycouldnotrelateeasily tothenotionofa ‘neweconomy’,giventhediffi cultyofpointingtospeci ficassets andtangibleproducts.However,thebusinessmodelconceptgavethemsomething torelateto.Sothebusinessesusedthemagicterm ‘businessmodel’ tojustifyfuture potentialprofitvaluationsbuiltonfrenziedmultipleconcepts,andtoblameitifthe valuationdidnotwork.Interestingly,eventhen,mostpeoplewerenotableto articulateexactlywhata businessmodel meant.
Inspiteoftheincreasingpopularityoftheterm ‘businessmodel’,therehasnot beenanygenerallyaccepteddefinitionoftheterm(Shaferetal. 2005;Zottetal. 2011).Thoughthebusinessmodelconceptisstillconsideredanill-de fined ‘buzzword’ (Osterwalderetal. 2005;Al-DebeiandAvison 2010);convergencehas arisenaroundspecifyingthebusinessmodelasthewaya firmcreatesandcaptures value(Asparaetal. 2013;Zottetal. 2011).Inparticular,Teece(2010)arguesthat ‘abusinessmodelarticulatesthelogicandprovidesdataandotherevidencethat demonstrateshowabusinesscreatesanddelivervaluestocustomers.Italsooutlinesthearchitectureofrevenues,costs,andprofi tsassociatedwiththebusiness enterprisedeliveringthatvalue’
2.2DefinitionofaBusinessModel Zottetal.(2011)givearepresentationofwhatbusinessmodelshavebeenreferred throughrecentyearsinliterature: ‘Atagenerallevel,thebusinessmodelhasbeen referredtoasa statement (StewartandZhao 2000),a description (Applegate 2000; WeilandVitale 2001);a representation (Morrisetal. 2005;Shaferetal. 2005);an architecture (Dubosson-Torbayetal. 2002;Timmers 1998),a conceptualtool or model (GeorgeandBock 2009;Osterwalder 2004;Osterwalderetal. 2005);a structuraltemplate (AmitandZott 2001);a method (AfuahandTucci 2001);a framework (Afuah 2004),a pattern (BrousseauandPenard 2006),anda set (Seelos andMair 2007)’.However,allthesedefi nitionsrepresentonlyapartofwhata
2.2DefinitionofaBusinessModel15
businessmodelis;andnoneofthemrepresentswhatabusinessmodelreallyis (Al-DebeiandAvison 2010).
Al-DebeiandAvison(2010)havedevelopedahierarchicaltaxonomyofthe businessmodelconceptby fi ndingdifferentdefinitionsofthebusinessmodel conceptandthencombiningthesetooneunifieddefinition.Tocomeupwiththis unifieddefinition,severalinferencecriteriahavebeenused:
• Thedefinitionshouldbecomprehensiveandgeneral
• Itshoulddefi nemorethanjustthecomponents;and
• Itshouldsynthesizethedifferentpointsofviewpresentedinearlierliterature.
SuchacombineddefinitionofbusinessmodelisdefinedbyAl-Debeiand Avison(2010)as
anabstractrepresentationofanorganization,beitconceptual,textual,and/orgraphical,of allcoreinterrelatedarchitectural,co-operational,and financialarrangementsdesignedand developedbyanorganizationpresentlyandinthefuture,aswellallcoreproductsand/or servicestheorganizationoffers,orwilloffer,basedonthesearrangementsthatareneeded toachieveitsgoalsandobjectives.
ChesbroughandRosenbloom(2002)definethebusinessmodelasthemethodof doingbusiness,bywhichacompanycansustainitself;thatisgeneratingvalue.The businessmodelspellsouthowanorganizationmakesmoneybyspecifyingwhereit ispositionedwithinthevaluechain.Theydefinetherequirementsthatthebusiness modelshouldful filatalllevelofanalysis
• Articulatethevalueproposition,thevaluecreatedbyusersbytheoffering.
• Identifyamarketsegment;theuserstowhomtheofferinganditspurposeare useful.
• De finethestructureofthevaluechainwithinthe firmrequiredtocreateand distributetheoffering.
• Estimatethecoststructureandprofitpotentialofproducingtheoffering,given thevaluepropositionandvaluechainstructurechosen.
• Describethepositionofthe firmwithinthevaluenetworklinkingsuppliersand customers,includingidenti ficationofpotential complementors and competitors
• Formulatethecompetitivestrategybywhichtheinnovating firmwillgainand holdadvantageoverrivals.
AccordingtoananalysisdonebyMorrisetal.(2005),therearethreegeneral categoriesofdefinitionsofbusinessmodel,basedontheirprincipalemphasis, whichtheycalleconomic,operationalandstrategicandrepresentthemasahierarchyinthatthebusinessmodelperspectivebecomesmorecomprehensiveasone progressivelymovesfromthe economic tothe operational tothe strategic levels.
Atthebeginninglevel,thebusinessmodelisdefinedsolelyintermsofthe economicmodelofthe firm,whereitdescribesthelogicofprofitgenerationgiving astatementofhowa firmwillmakemoneyandsustainitsprofitstreamovertime.
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