Before conducting a quantitative analysis of a new investment decision, it is important to identify the possible interactions with other market parties and have a clear view on the scope of the project. The first aspect allows to assess the impact of other players on your own case, while the second aspect serves as input for the delineation of the investment problem, making sure all roles are incorporated. Different models exist to perform such an analysis. We will introduce four models, the Porter five forces model, the Osterwalder model, the PEST analysis and value network analysis.
3.1.1 Porter five forces model
The five forces model was introduced by Michael Porter in 1979 [3.1] (Figure 3-1). It was built as a model for industry analysis and strategy development. The framework introduces five forces that shape competition within a market. Typically, competition focuses on the existing competitors in the industry. The more competitors within your industry, the less attractive the market is. The incumbent telecom operators were and still are operating in a market with few competitors. As they owned and operated the sole network infrastructure, customers had no choice but to buy services from them. However, regulation has stepped in to decrease their power, introducing competition by enforcing local loop unbundling at regulated prices. However, limiting the analysis to only include existing competitors narrows the problem too much and risks a misevaluation of the attractiveness. Therefore, Porter identified four other forces shaping competition. In addition to the existing competitors, two other horizontal forces are included in the framework, namely the threat of new entrants and substitutes. If the market is very attractive at the moment, and no or only low entry barriers exist, the threat of new players entering the market is high. In telecom, such cases are e.g. present in application development. Substitutes pose an analogue threat. These players do not offer the exact same product or service, but one with similar functionalities. Again, the more possible substitutes, the less attractive the market is. For example, if your own product or service is priced too high, customers will look for substitutes offering more or less the same functionality. This behaviour can be noticed in the mobile telephone market. The
emergence of data based services, like Skype for voice telephony or WhatsApp for messaging has churned customers away from the traditional operators. Next to the three horizontal threats, i.e. industry competition, new entry and substitutes, Porter also identified two vertical threats, the bargaining power of suppliers and consumers. If there is only one company supplying the input you require, you have no other choice than to buy it from him. This puts the supplier in a strong bargaining position. A mobile operator can only acquire a spectrum licence from the government. The same rationale can be followed for the consumer power.
Conducting a Porter five forces analysis offers an indication to the possible interactions between different market parties, but it does not allow a clear view on the detailed breakdown of the roles you need to perform to bring your product or service to market. As such, it offers no guidelines for the quantification required in techno-economic analysis.
Figure 3-1: Porter five forces model [3.1]
3.1.2 Osterwalder business model canvas
The business model canvas by Alexander Osterwalder offers a template for describing existing or developing new business models [3.2]. It divides the business activity in four main functional blocks: infrastructure, offering, customers and finances (Figure 3-2).
The model is centred around the value proposition, the collection of goods and services offered to the customer that distinguishes the company from its competitors. Both a quantitative and qualitative value proposition are possible. On the left of the value proposition, the main inputs of this value proposition are found. Clustered under infrastructure, the key partners, activities and resources
are defined. Activities aim at executing the value proposition, resources are required input for the value creation and can be human, physical, financial or intellectual. By identifying the key partners, the canvas allows to indicate the important actors impacting your value proposition.
The value proposition is aimed at customers. Differentiation between customers is included by identifying different customer segments. These segments are differentiated on customer needs. In order to reach the different customer segments, channels are included. These channels can be company channels, but a company can also rely on partners to operate the channel. The third aspect of the customer functional block is consumer relationship. This aims at building a relationship with the different consumer segments. Co-creation, self service or personal assistance are possible relations.
The flow from infrastructure over value proposition to customers are built upon the finance functional block. This block is subdivided in the cost and revenue structure. For techno-economic cases, the cost structure entails the detailed equipment model, operational processes, etc.
Analogue to the five forces model by Porter, the business model canvas allows to identify customers and suppliers for the value proposition. In addition, it offers a basic overview of the cost and revenue structure, which is absent in the five forces model. However, it lacks an overview of the possible competitive impact on the value proposition. Compared to the five forces model, the canvas identifies key activities to perform the value proposition, which are required to solve the second aspect of the research question, building a detailed quantitative techno-economic model.
3.1.3 PEST analysis
The four corner PEST or SEPT model is an extension of the Porter model to capture the business environment. The four dimensions of this model are Political/regulatory, Economic, Socio-cultural and Technological drivers [3.3, 3.4].
The Porter five forces and Osterwalder model focus on industry analysis and business model development, the PEST model has a broader scope to scan for macro-environmental factors. Indeed, such factors could have a clear impact, but are not included in the previous two models. Political factors refer to the degree government intervenes in the economy. Trade regulations, tax laws and privatization moves are examples of such political and regulatory factors. Related to the telecom environment, political and regulatory factors will play an important role. Examples are regulatory intervention in local loop access pricing, spectrum auctioning, etc.
Economic factors encompass macro-economic factors like economic growth, exchange rates, inflation, labour productivity and interest rates. Labour productivity has a direct impact on the cost structure of a company, while interest rates influence the cost of debt capital. In a globalised environment, changing exchange rates affect the cost for imported goods and the revenue for exported goods.
Socio-cultural factors include demographics, like age distribution and population growth. An aging population can result in increasing labour costs, but also in changes of demand for certain services. However, socio-cultural factors are not limited to these demographics. Environmental awareness and consumption habits also fall in this category.
Technological factors cover new scientific breakthroughs, innovation and R&D activity. Again, such factors influence costs, but they can also determine barriers to entry.
3.1.4 Value network analysis
The three models described above each have their own merits and drawbacks, but they fail at offering an integrated view on the entire value network in which the company operates. An approach is required that can indicate both competitive and cooperative interactions, like the five forces model, an identification of the roles and activities (business model canvas) for the quantitative evaluation of the value proposition and the impact of politics, regulation and technology.
Allee [3.5] defines a value network as any web of relationships that generate
tangible and intangible value through complex dynamic exchanges between two or more individuals, groups, or organizations. Within the scope of this
dissertation, we define a value network analysis is a methodology for visualising internal and external value networks. Its building blocks are roles, actors and flows in the environment. Roles are the basic building block of a value network and are defined as the lowest granularity in which an activity can be split up. A role thus refers to an activity with only one responsible. Roles are interconnected, with one role interacting with one or more other roles. These interactions can be information flows, product flows or financial flows. Such a network of roles and their interactions is a value network. For any case studied, there is only one value network.
In the next step of value network analysis, the different roles are attributed to different actors. These actors can be current market parties, but new entrants also need to be considered. This is especially the case when innovative markets are investigated, e.g. the changes in the energy market resulting from a smart meter introduction, as will be described below. While the value network is unique for every case considered, since roles can be attributed to different actors, different value network configurations emerge.
As a value network configuration visualises the different roles taken up by the different actors in the ecosystem, it offers a starting point for the quantitative technology modelling of the business case for the different actors. Additionally, as the value flows were identified, these offer insight in the interactions with other market parties, comparable to what the five forces model offers. However, as different configurations can be identified on the same value network, it can also be used to indicate how competitors address the same value proposition.