Building internet enabled markets theories

INTERNET BUSINESS MODELS AND
STRATEGIES – MARKET CREATION IN THE
INTERNET ECONOMY
Ville Saarikoski

LIST OF THEORIES (CONCEPTS/IDEAS, WAYS OF
THINKING)
At the core to understanding digitalisation is understanding the
character of nformation, networks and interdependencies (game
theory),
1. Earning with Information
2. Wisdom of the crowds
3. Understanding interdependencies – game theory basics
4. Value creation and value capturing in a network environment
5. Measuring networks
6. How does Google search work?
7. Six Degrees and the logic of flat rate – are we only six
handhakes away from each other?
8. Long Tail – what happens to demand when supply is not
limited?
9. Reallocation of rights – dilemma of the commons

10. Build change by starting at an industry level
11. Groundswell
12. The innovators dilemma – Clayton Christensen
13. Creating Market Space – Mauborgne and Kim
14. Open innovation – Henry Chesbrough
15. The Mesh Business – Lisa Gansky
16. Business model Canvas - Osterwalder
17. Matching markets – Easley & Kleinberg chapter
10 (not discussed in class, under construction)
LIST OF THEORIES (CONCEPTS/IDEAS, WAYS
OF THINKING)

THE ARGUMENTS WERE GROUNDED IN
 Business models
 An emerging understanding of networks
 The science of Networks has developed hugely
since 2004. Here a present understanding is
used with an attempt at on simplification.
1.11.2016Tekijä 4
Networks Crowds
Markets on Google
Books
https://books.google
.fi/books?isbn=1139
490303

SETTING THE SCENE
 May you live in interesting times – a chinese saying

 Nokia – the ”burning platform”
 The Post Office, The mail man’s bag
 Music, from selling DVD,s and CD´s to selling digital music and
subscriptions e.g. Spotify
 Newspapers declining amount of readers, search for new digital
business model
 The paper industry
 The retail shops and supermarkets challenged by e-commerce
 Universities challenged by online education
 Health care moving to ehealth, eprescriptions, patient records etc
 Changing structures e.g. airlines from brick to click i.e. value creation
with information
=>1) Pick up a market creating company, understand theory and apply
theory to case ( a good theory, explains, predicts, categorises),
=>2) look at it from an industry perspetive
THE MACRO SCENE IN FINLAND - OLD STRUCTURES REACH A
”TIPPING POINT” AND EXPERIENCE A ”MELT DOWN”? => UNDERSTAND THE
LOGIC OF THE NEW ECONOMY:

 Would you tell your boss, something he really does
not want to know, which would probably cost him
and you your jobs, but which would be good for the
future of your organisation and your community?
 Who would?

The ocean
surface,
swimmer,
ocean bed
tools,
metaphor

 http://www.talouselama.fi/lehti/nyt-iskee-uber-ilmio-
pankkeihin-vaarassa-kolmannes-bisneksista-
6579002 4.9.2016
 Ministeri AnneBerner valtion rooli digitalisaatiossa
#digitalist n. 1.9.2016
https://www.youtube.com/watch?v=Jz1qrt1Irr4&featur
e=youtu.be&app=desktop

THEORY 1 EARNING WITH INFORMATION

TO EARN WITH INFROMATION, UNDERSTAND THE
CHARACTER OF INFORMATION
 Sunk cost, an investment cost which needs to be
recovered e.g. investment in a factory, ship or itangibles
like knowledge, patents or creating a movie or game
 Marginal cost, the cost needed to produce one extra
item
 A principle of Economics: In a perfect market (total
competition) price will go toward its marginal cost.
 Costly to produce, cheap to reproduce, The marginal
cost of an information product => zero
 Search for value (exchange value) to the
customer! Different segments have a different value
for the product/service
 Searching = advertising in the internet world.
 Avoid commodotization i.e. the only difference
between competitors is price. Put in a populist way:
avoid competition

WAYS TO EARN WITH INFORMATION I.E. HOW
TO AVOID COMPETITION
 Information asymmetry (information is power, what
do you keep secret), to an increasing degree
information is not only afeature of the product (e.g.
a movie) but a feature of a database (e.g. Netflix,
Facebook), algorythims and Big Data
 Bundling
 Customer lock in (the customer does not want to
move away because)
 Switching cost (switching to something else will
cost)
 Positive feedback, preferential attachment
 Network effects – very common in social media.
The larger the user base the more valuable it is for
an individual user
 Platforms, ecosystems

JAMES SUROWIECKI – THE WISDOM OF THE
CROWDS – ARE CROWDS WISE?
INFORMATION CASCADES
 How much do I weigh?
 Information cascades: Angela Hung, Charles Plott p 62
 experiment: which shows if you believe that you will be
rewarded for the group being right you will tell the truth,
however…
 Co-ordination problems
 Brian Arthur, El Farol Problem
 Schelling points: where to meet
 Que behaviour
 Imitation is a rational response to our own cognitive
limits
 On YouTube
http://www.ted.com/talks/james_surowiecki_on_the_turn
ing_point_for_social_media.html

THEORY 3 INTERDEPENDENCE GAME THEORY

 You are seriously considering dropping out of school
 You really want your own car
 Your parents want you to stay at school
 Your preference
 Quit school and have your parents buy a car 4p
 Stay in school and get a car 3 p
 Quit school and not have a car 2p
 Stay in school and not get a car 1p
 Your parents preferences
 You stay in school and they don´t buy you a car 4p
 You stay in school and they buy you a car 3p
 You quit school and they do not buy you a car 2p
 You quit school and they buy you a car 1p
NEGOTIATING - INTERDEPENDENCE

3
3
4
1
1
4
2
2
Pysyt koulussa Jätät koulun
Ostavat
sinulle
auton
Eivät osta
sinulle
autoa
Sinä
Vanhemmat

3
3
4
1
1
4
2
2
Stay in school Quit school
Buy a car
Do not buy
a car
YOU
NEGOTIATING - INTERDEPENDENCE
Formula
 Choose two options for both parties so that they are
interdependent
 Try thinking what and how the other players value their choices
 Solve the game theoretic problem

GAME THEORY – THE PRISONERS DILEMMA
LIISA B
PEKKA A
Keep silent Talks
Keep silent 1,1 5,0
Talks 0,5 3,3
The choice is made simultaneously (independent of each other), the game
is repeated
Solution: take it into pieces. If Lisa keeps silent, Pekkas best option is…If
Liisa talks… What can we conclude?
Note, both keeping silent would lead to the samllest cumulative solution
(social optimum). However the parties make their decissions
independently.

WHAT DOES GAME THEORY TEACH US? (VIARIOUS
THINKING I.E. WHAT WOULD THE OTHER PLAYER(S)
DO?
Company B (in red)
Company A
0,0 5,15
15,5 10,10

Company B (punaisella)
Company A
0,0 25,40 5,15
40,25 0,0 5,15
10,5 15,5 10,10
http://areena.yle.fi/1-2922031
Yhteiskunta ylös juoksuhaudoista Ville Saarikoski,
Arvassalo ry:n haastateltavana 3.9.2015
PRISONERS OF OUR CONSTRUCTS (INSTITUTIONS): AN INDIVIDUAL PLAYER
CAN NOT MOVE AWAY WITHOUT HIS INDIVIDUAL SITUATION BECOMING WORSE
EVEN IF E.G. TECHNOLOGY WOULD OFFER A BETTER (SOCIAL WELFARE)
OPTIMUM (EXAMPLES: NOKIA CASE, E-IDENTITY, ONLINE EDUCATION,
POLUTION)

THE NEW ECONOMY, THE NEW OPTIMUM
The optimum
structures of
the industrial
economy
The new
optimum
structures of
the internet
economy

THEORY 4 VALUE CAPTURING IN A NETWORK
ENVIRONMENT

ERIKOISTUMINEN JA VAIHDANTA
 Lähde Matti Pohjola Taloustieteen perusteet s 22
*40 tuntia käytettävissä, puolet ajasta menee maidon tekemiseen eli 20 tunnissa
saavat aikaan yhden litran maitoa ja 2 leipäkiloa
 Korhoset ovat absoluuttisesti tehokkaampi kuin Virtaset
 Vaihtoehtokustannus: Jos Virtaset haluaisivat yhden leipäkilon lisää heidän olisi
siirrettävä 10 tuntia pois maitolitran tuottamisesta. Virtaset olisivat voineet 1
leipäkilon sijasta tuottaa 10/20 = 0,5 litraa maitoa
Korhoset vaihtoehtokustannus 8/1 = 8 litraa maitoa, Leipäkilon tuottaminen on
Virtasille, vaihtoehtokustannuksilla mitattuna, selvästi halvempaa
Tuottamiseen tarvittu
aika tunneissa
Aika tasan jakaen
tunneissa
Maitolitra Leipäkilo Maitolitra Leipäkilo
Virtaset 20 10 1* 2
Korhoset 1 8 20 2,5

Virtaset Korhoset
Maitoa
(litraa)
Leipää
(kiloa)
Maitoa
(litraa)
Leipää
(kiloa)
Omavaraistaloudessa 1 2 20 2,5
Vaihdantataloudessa
-tuotanto
-vaihdanta
= kulutus
0
3
=3
4
-1
=3
24
-3
=21
2
+1
=3
Vaihdannan hyöty
- Kulutuksen kasvu 2 1 1 0,5

THE STRENGTH OF WEAK TIES GRANNOVETER-
SOCIAL NETWORKS AND TRIADIC CLOSURE
 Strong triadic closure: If nodeA has strong ties to
two other nodes e.g. C and D, then a strong or
weak tie should exist between C and D
(Grannoveter).
A
C
D
s
s
According to strong
triadic closure: there
should be a weak or
strong link ere
The theory does not say what is a strong
or weak link. It just says what happens if

THE
STRENGTH
OF WEAK
TIES, SOURCE P 47
NETWORKS, CROWDS
AND MARKETS, DAVID
EASLEY AND JON
KLEINBERG
Strong triadic closure: If nodeA has strong ties to two other nodes e.g. C and D, then a strong or
weak tie should exist between C and D (Grannoveter). The above picture does not violate this
argument.
Example: if A-F were strong then there should be a tie between F-E
Note the link between A and B is a (local) bridge and it can not be a strong tie

THE GAMES BUSINESSES PLAY – VALUE
CREATION, VALUE NET FRAMEWORK
 The Right Game – use game theory to shape
strategy HBR July - August1995, Adam
brandenburg and Barry J Nalebuff
 The importance of value creation and value
capturing in Value Networks
 PARTS, Players, added value, rules, tactics, scope

THE VALUE NET , THE RIGHT GAME HBR
1995 JULY - AUGUST, ADAM BRANDENBURG
AND BARRY J NALEBUFF
Company
Supplier
Substitutor Complementor
Customer

THEORY 5 MEASURING NETWORKS
 Introduced in the extra material of the course
chapter 8

WHO IS IN THE BEST POSITION IN THE
NETWORK?
Source Coursera course Brinton& Chiang, Princeton
Networks Illustrated: Principles Without Calculus
Seee also Chiang Mung, Friends, Money and Bytes
Princeton/Coursera
Anna
David
Calle
Eero
Benjamin
Filip

MEASURING A NETWORK 1: DEGREE
CENTRALITY (HOW MANY CONTACTS)
Anna
David
Calle
Eero
Benjamin
 David 3
 Calle 3
 Eero 3
 Filip 2
 Benjamin 2
 Anna 1
 Critic intuitively Calle should be in a more central position compared to
e.g. David or Eero. Calle holds the network together
 Benjamin connects Anna to the network. Intuitively Benjamin should
be more important than either Eero or Filip
Source Coursera course Brinton& Chiang, Princeton Networks Illustrated: Principles Without Calculus
Seee also Chiang Mung, Friends, Money and Bytes Princeton/Coursera

MEASURING NETWORKS 2: CLOSENESS
CENTRALITY (AM I IN THE CENTER?)
Anna
David
Calle
Eero
Benjamin
 Choose a person,
 Search for the shortest route
from the chosen to all others
 Count the average
 Do 1/average
 E.g. Anna: AB=1,AC=2, AD=3,
AE=3, AF =4, Anna has 5 in the network, average
(1+2+3+3+4)/5 = 13/5, 1/average 5/13 = 0,385
 Count others…
Source Coursera course Brinton& Chiang, Princeton Networks Illustrated: Principles Without Calculus
Seee also Chiang Mung, Friends, Money and Bytes Princeton/Coursera

Anna
David
Calle
Eero
Benjamin
Filip
 Now the order is Calle, David &Eero,
Benjamin, Filip, Anna
 A better result
 Calle and Benjamin perform better
 Challenge David and Eero do not
”glue” the network. Calle holds the network
together and also Benjamin connects Anna to
the network. Calle and Benjamin should
perform better
0,385
0,556 0,714
0,455
0,625
0,625
MEASURING NETWORKST 2: CLOSENESS
CENTRALITY,

MEASURING NETWORKS 3: BETWEENNESS
CENTRALITY (ARE YOU A GLUE OF THE
NETWORK?)
Anna
David
Calle
Eero
Benjamin
 Choose a person e.g. Calle,
 Choose a pair of nodes, go through all node
pairs
 Search for all the shortest routes between
a node pair
 On how many of the shortest routes is
the chosen person on
 E.g. choose Calle. Start first with Anna 1) AB, 1, 0
=> 0/1=0 2) AD, 1,1 =>1/1 =1 3) AE…=1 AF, 2,2
=>2/2=1 these all together 3. But count also all
others
 BA (already done i.e AB), BE..1,BD…1, BF 2/2=1
 DE=0,DF=0,FE=O All together 6

Source Coursera course Brinton& Chiang, Princeton Networks Illustrated: Principles Without
Calculus
See also Chiang Mung, Friends, Money and Bytes Princeton/Coursera
MEASURING A NETWORK 3: BETWEENNES
CENTRALITY (GLUE OF THE NETWORK)
Anna
David
Calle
Eero
Benjamin
Filip
 Order Calle, Benjamin,
Eero & David, Filip ja Anna
 Note Calle most important,
Benjamin more important than
David and Eero 0
4 6
0
1,5
1,5

SUMMARY
Degree Closeness Betweenness
Value Order Value Order Value Order
Anna 1 3 0,56 3 0 4
Benjamin 2 2 0,3 5 4 2
Calle 3 1 0,71 1 6 1
Eero 3 1 0,63 2 1,5 3
David 3 1 0,63 2 1,5 3
Filip 2 2 0,45 4 0 4
Anna
David
Calle
Eero
Benjamin

FB, DEGREE CENTRALITY,CLOSENESS
CENTRALITY JA BETWEENNESS CENTRALITY-
FRIENDWHEEL
 Real life networks (e.g
friendwheel) friends are
also friends with each other
 Clustering Coefficient
measures how many of my
friends are frineds with
each other out of all
possible.
 https://www.youtube.com/w
atch?v=K2WF4pT5pFY

CLUSTERING COEFFICIENT
 Another way of thinking:
 A has four friends B,C,D,E
 Who could be friends with each other?
 BC, BD, BE, CD, CE, DE i.e. six.
 How many are realized in the picture (taken from
YouTube)?
 Only one (red) i.e one out of six, clustering
coefficient is 1/6
 Note there is another way of counting (another
definition) which does not always lead to the
same result)

THEORY 6 HOW DOES GOOGLE SEARCH
WORK – SEE EXTRA MATERIAL CHAPTER 8

LOS ANGELES TIMES
Snowden gained almost 300,000 followers in
less than two hours after he tweeted his first
message Tuesday morning. Soon after, he
posted a cheeky swipe at his former employer,
the NSA, whose account only has 76,000
followers
Snowden NSA
1 out
degree300 000
in degree

RANDOM SURFER
Two choices
 You follow a link found on a page
 You take a random page and follow links from that
page

YOU ARE A FIRST TIME VISITOR IN A NEW TOWN AND YOU GO AND
ASK DAVID: WHAT IS THE BEST RESTAURANT AND ALSO WHO
KNOWS WHERE THE BEST RESTAURANTS IN TOWN ARE?
Anna Benjamin
Calle
David

DAVID ANSWERS AND ALSO TELLS YOU THAT HE RECOMMENDS YOU
ASK ANNA, CALLE AND BENJAMIN. YOU CONTINUE ANS ASK ANNA
CALLE AND BENJAMIN AND YOU ALSO ASK WHO DO THEY
RECOMMEND?
Anna
Benjamin
Calle
David

THE FOLLOWING NETWORK IS FORMED. WHO
SHOULD YOU LISTEN TO?
Anna
Benjamin
Calle
David
½ A
½ A
1/3 D
1/3 D
1/3 D
1C
½ B
½ B

CREATE THE EQUATIONS
Anna
Benjamin
Calle
David
½ A
½ A
1/3 D
1/3 D
1/3 D
1C
½ B
½ B
- A = 1/3D
- B =½ A + 1/3 D
- C= ½ A + ½ B
- D = C
- All information is equal
to one i.e.
- A+B+C+D =1
- Solve these equations
- A=0,129, B=0,258,
C=0,290 , D= 0,387
- Google PageRank will
give you the answer
D,B,C,A

 You might also look up
 https://www.youtube.com/watch?v=KyCYyoGusqs tai
 https://www.youtube.com/watch?v=Ylare5LoDdE
 https://www.youtube.com/watch?v=u8HtO7Gd5q0

THEORY 7 SIX DEGREES AND THE LOGIC OF
FLAT RATE
 YouTube video the science behind six degrees of
seperation
https://www.youtube.com/watch?v=TcxZSmzPw8k

BUSINESS MODEL OF THE INTERNET
In the real (physical) world e.g. bottle of coke costs 2
Euro and 100 bottles would cost 200 Euro´s, why then
should the price for consuming e.g. 10 Gigs be the
same as 100 Mbytes?
 Which member of parliament sends the most
Chrismas Cards?
http://www.savonsanomat.fi/teemat/eduskuntavaalit/i
l-kari-k%C3%A4rkk%C3%A4inen-suoltaa-
joulukortteja/627307
 What happened when an operator allowed for
flat rate sms in Finland c 2005?

HTTP://WWW.VOICE.FI/VIIHDE/IL-EDUSKUNNAN-
JOULUKORTTIKINGI-LAHETTAA-4000-KORTTIA-
32568

ARGUMENT (POPULISTIC VERSION)
 2005 April on an interview by Howard Rheingold
in an article titled ”email scale free networks and
the mobile internet” I used the sentence
”connecting people inefficiently”
 Nokia’s slogan is ”connecting people”, so I was
making a direct reference and asking efficiently
or inefficiently?

THE ARGUMENTS IN THE THESIS
 In 2004 the mobile business model was
transaction based. The argument in the thesis
defended in December 2006 was:
 for the mobile internet to become successful (a
starting the market problem) one needs to move
away from transaction based pricing (pay per
minute, pay per message pay per
kilobyte/megabyte) toward flat rate data (marginal
price zero)
 The text message SMS is a barrier to mobile growth
 Email will be in every mobile handset

SIX DEGREES
 Stanley Milgram – we are only six degrees away from
each other.
 How is this possible?
 What if we each have 100 friends
100*100*100*100*100*100 = 10 billion
 This is fine, however we are often friends with our friends
i.e high clustaring

Person 1
PERSON
100
Six degrees: The person with a lot of contacts
is a glue to the network – paths shorten
High clustering (red nodes) and super connected nodes
(yellow)

SIX DEGREES - COMMUNICATION IS NOT ABOUT
AVERAGES!
LOOK AT THE DATA FROM A NEW PERSPECTIVE –
SEARCH FOR THE SUPER NODES
 How many sms messages do you send per month?
 How many calls do you make per month?
 How many pictures do you take and send?
 How many contacts do you have on your phone?
 How many hours of music do you have on your phone?
 How many bookmarks do you have on your mobile phone?
 How many times do you access the Internet per day from your
mobile? (on 28.9.2015 I heard from Google that it is as many
as over a hundred!!-note google has the android platform – it
might be able to measure it!)

SIX DEGREES (DISTANCE IN NETWORKS) THEORY: MILLGRAM, WATTS,
STROGATZ, NEWMAN, BARABASI,
COURSERA:
MATT JACKSON (SOCIAL AND ECONOMIC NETWORKS)
MUNG PRINCIPLES OF NETWORKS WITHOUT CALCULUS
25.8.2010 http://gizmodo.com/5620681/all-300000-biggest-websites-
visualized-with-their-
icons?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A
+gizmodo%2Ffull+%28Gizmodo%29&utm_content=Google+Reader

 Communication is about the flow of information
in a network. Marginal price goes to zero => the
individual’s willigness to spread links and
information, ”to spin the web” increases. =>
from price per minute or per message
(transaction based pricing) to flat rate
 Ideas introduced on
 the Financial Times 5/2004
 The Finnish National TV direct broadcast 6/2004
 A interview by Howard Rheingold (A blog post)
titled ”Email, Scalefree networks and the mobile
internet which contained the sentence
”Connecting people inefficiently” (Connecting
people is the mission of Nokia and this was hence a
direct reference.
 PhD-thesis 12/2006 Oulu University (after walking
out of Aalto university in 2005) titled ”The Odyssey
of the mobile internet – the emergence of a
networking attribute”

The Long Tail
Chris Anderson (2006) The Long Tail: What happens
to demand when supply is no longer limited

The Long Tail and
change
Chris Anderson (2006) The Long Tail: What happens
to demand when supply is no longer limited
Remeber: Bricks and Clicks, The Virtual world
combines with the physical world

Combining six degrees and the Long tail -
Companies should focus on building from the the tail.
Create communities that can scale up
and busines models that benefit from
scaling
Capture interest economy, huomiotalous, (Sarasvuo)
Participation economy, osallistumistalous (Hintikka)

THEORY NINE, REALLOCATION OF RIGHTS
(DILEMMA OF THE COMMONS)

THE REALLOCATION OF RIGHTS - A CENTRAL
QUESTION TO BUILDING THE INFORMATION
ECONOMY!
 Huge increases in transmission speeds
 Huge growth in storage and prcessing
capacity
 Reallocation of rights (Yochai Benkler,
Lawrence Lessig)
 Example
 Number portability
 Open wlan
 Creative commons (copy left)
 Public data: should data created with tax payer
money be available for free (open access)?
64
https://www.ted.com/
speakers/larry_lessig

THEORY TEN. BUILD CHANGE AT AN
INDUSTRY LEVEL

 Look into Landon eCommerce 2014, describes the
shaping of several industries

HOW TO CREATE NEW MARKETS? – WHICH
MARKET IS/ARE EMERGING?
• Focus on
• Put theory into practice
• Lobby for new laws and regulations
• Regulators will ensure that competition will
exist also in new environments
• Create new structures (destroy old
structures) e.g. new ecosystems,
• New business models
• Focus on Lead users
• Establish market creating products
11/1/2016 Laurea University of Applied Sciences 67

EXAMPLE THE EMERGENCE OF THE MOBILE
MARKET
 Vision: ”mobile into your pocket”
 New infrastructure 3G, UMTS
 Laws:
 In Finland changes in telecom law e.g. allowing bundling of phone and subscription,
number portability,
 Progress in creating a dataroaming market by establishing cap prices in the
EU
 Business model: toward monthly flat rate pricing
 Key market creating products: mokkula (c 2004-2005) a data connection to
your computer, I-phone, (both arrivals from the outside to Finland), smart phones
2011
 Structures:
 three competitors, service operator and new market entrants changed the rules of the
market
 Liberalisation of the telecom market in Finland in 1994 created competition and
encouraged new markets to emerge
 Future: ?

Name: 00601 Operative Systems and Commerce
FOCUS: INDIVIDUAL TRAVEL PLAN
E-SERVICE
CONNECT TO
REAL WORLD
VALUE
SERVICE PROVIDER /
BUSINESS MODEL
WHO IS
LOOSING?
COMMUNITY
MY
E-TOOLS
1
2
3
4
5
69
Bricks and
clicks
VALUE
CREATION/CAPTURING
IN A NETWORK
- value to me
- value to company
- value (cost, time, quality)
- blog
- web site
- wiki
- contact networks
-videomeeting
connectpro
- e-library
-- e-survey
Change in the
way of doing
things =
innovation =>
focus on the
process
flow of goods, information and
resources in a repair cycle
http://en.wikipedia.org/wiki/Lo
gistics
From data to
networking
Use this framework to
identify changes in value
creation and capturing after
adoption of services like
online booking and the
availability of online
customer recommendations

THE MUSIC INDUSTRY
 Excercise: Look at the video.
 Try and plot all the different earning cases on to the
business model canvas and identify the key elements
that remain the same through different cases.
 Discuss and identify cases on how the music industry is
changing.
 Take an example company and discuss how that
company can act in the market place to create a new
market.
 The video
 http://www.youtube.com/watch?v=Njuo1puB1lg
 CwF, Connect with fans
 RtB, Reson to buy

THE E-HEALTH INDUSTRY
 Excercise
 Identify a new entrant to the market
 Discuss its business model
 Look into possible new infrasrtucture elements it is
attempting to build on e.g. patient records,
eprescriptions,
 Look into databases and are these databases
hierarchical or is power given to the users? To what
extent is open data thinking allowed and applied to the
creation of new services?

GROUNDSWELL THE USER LEAD REVOLUTION –
IDENTIFY THE ROLE OF THE USER!
Individual
Society
Corporation

GROUNDSWELL CHARLENE LI, JOSH BERNOFF 2008
– IDENTIFY THE ROLE OF THE USER
 What is groundswell p 9(verkkovalta)?
 A social trend in which people use technologies to get things they
need from each other, rather than from traditional institutions
like corporations
 The strategy for corporations: If you can´t beat them, join them
 The BIG principle for mastering the groundswell p 18: Concentrate
on the relationship, not the technologies
74

TECHNOLOGIES AND CLASIFICATION P 18-
People
creating:
blogs,
user
generate
d
content
People
connectin
g: social
networks
and virtual
worlds
People
collabora
ting: wikis
and open
source
People
reacting
to each
other:
forums
ratings,
and
reviews
People
organizin
g
content:
tags
Accelarat
ing
consump
tion: rss
and
widgets
How they
work
Participatio
n
How they
enable
relationshi
ps
How they
threaten
institutional
power
How you
can use
them
See next slide for example

EXAMPLE: BLOGS
• How they work:A blog is a personal (or group) journal of
entries containing written thoughts links and often pictures
• Participation: Blog reading is one of the most popular
activities in Groundswell with one in four online Americans
reading blogs (2006). Video reviewing is also popular.
Podcasters and even podcast listeners are rare
• Participation: The authors of blogs read and comment on
others blogs. They also cite each other adding links to other
blogs from their own posts

EXAMPLE CONTINUED:
• How they threaten institutional power: Blogs, user generated
video and podcasts aren´t regulated, so anything is possible.
Few YouTube video uploaders check first with the subjects of
their videos. Companies frequently need to police employees
who post unauthorized content about their employees and
their jobs
• How you (a company) can use them: First listen, read blogs
about your company. Search for blogs with most influence.
Start commenting on those blogs

THE PROFILES, THE SOCIAL TECHNOGRAPHICS
PROFILE – KNOW YOUR CUSTOMER? P 40
• Creators:
• publish a blog,
• publish own web pages,
• upload video you created
• upload music you created
• write articles and post them
• Critics:
• publish a blog,
• post ratings/reviews of products or services
• comment on someone else´s blog
• contribute to on line forums
• contribute to/ edit articles in a wiki

THE PROFILES, THE SOCIAL TECHNOGRAPHICS
PROFILE – KNOW YOUR CUSTOMER? P 40
• Collectors:
• Use Rss feeds
• Add tags to web pages or photos
• Vote for web sites online
• Joiners:
• Maintain profile on social networking sites
• Visit social networking sites
• Spectators:
• read blogs
• watch video from other users
• listen to podcasts
• read online forums
• read customer ratings/reviews
• Inactives:
• None of these activities
http://www.youtube.com/watch?v=kGJTmtEzbwo

81
Innovators dilemma: why a garage based
company can succeed when an incumbent
(large company) fails (Business aikido)
http://www.innosight.com/

THE INNOVATORS DILEMMA – COMPANIES TRADITIONALLY
FOLLOW A VALUE PROPOSITION, THE CHALLENGE OF
OVERSHOOTING CUSTOMER NEED => POORER IS BETTER
82

WHY DID WESTERN UNION THE LEADER
IN THE TELEGRAPH BUSINESS NOT
INVEST IN THE TELEPHONE
 The established processes, resources and values
encouraged investing in present customers.
 The Phone was in its early stages a short distance
mediium – performed porly on long distances
 Western Union saw that the phones performance in long
distance was getting better, but it continued investments
along its present value performance base
 When the future was evident, it was already too late

EXAMPLES OF DISRUPTIVE INNOVATION –CAN
YOU FIND ANY?

THEORY 13 CREATING MARKET SPACE

STRATEGIACANVAS EXAMPLE
( x-akselilla kuvataan asiakkaiden arvoja ja y-akselilla yrityksen ja sen
kilpailijoiden tarjontaa )

Poista
• Ylimääräiset toiminnot tai
tekijät poistetaan
• Asiakkaalle tarjotaan lopulta
sitä mitä he oikeasti
haluavat
• Esim. Omenahotelli
Supista
• Turhat kustannukset poistetaan
• Asiakas ei joudu maksamaan
ylipalvelusta
• Esim. IKEAn itsepalvelukassat
Paranna
• Jo olemassa olevia tuotteita tai
palveluita parantamalla lisätään
asiakastyytyväisyyttä
• Asiakkaiden tarpeiden
selvittäminen ja niihin
vastaaminen
• Esim. Apple
Luo
• Tarjotaan asiakkaille jotain uutta
mitä toimialalla ei ole aiemmin
ollut saatavilla
• Uusien toimintojen tulisi synnyttää
kysyntää, sekä muuttaa toimialan
ajattelutapaa
• Esim. Verkkokauppa
Uusi
lisäarvokäyrä

USE THE STRATEGY CANVAS TO CREATE A
BLUE OCEAN STRATEGY
http://en.wikipedia.org/wiki/Blue_Ocean_Strategy
http://www.blueoceanstrategy.com/

THE CHRONOLOGICAL DEVELOPMENT OF MODELS
OF INNOVATION (TROTT 5 TH EDITION P 26)
91
Date Model Characteristics
1950/60 Technology-push Simple linear sequential process; emphasis on R&D; the
market is a recepient of the fruits of R&D
1970 Market pull Simple linear sequential process; emphasis on marketing;
the market is the source for directing R&D; R&D has reactive
role
1970`s Dominant design Abbernathy and Utterback (1978) illustrate that an innovation
system goes through three stages before a dominant design
emerges
1980`s Coupling model Emphasis on ontegrating R&D and marketing
1980/90 Interactive model Combinations of push and pull
1990´s Network model Emphasis on knowledge accumulation and external linkages
2000`s Open innovation Chesbrough´s emphasis on further externalisation of the
innovation process in terms of linkages with knowledge
inputs and collaboration to exploit knowledge outputs
Excercise: draw these models on the innovation filter

92
http://www.desai.com/our-approach/innovation-
funnel/tabid/88355/Default.aspx 15.2.2012
From innovation process to open
innovation

OPEN INNOVATION - CHESBROUGH
93
http://en.wikipedia.org/wiki/Open_innovation

CONCEPT 1:THINK OF YOUR BUSINESS AS A SERVICE BUSINESS – OPEN
SERVICE INNOVATION CHESBROUGHP37
94
Service-Based view of transportation
Selection
of vehicle
Delivery of
vehicle
Maintena
nce of
vehicle
Informatio
n and
training
Payment
and
financing
Protection and
insurance
Car purchase
or lease
(product-
focused
approach)
Customer
chooses
Customer
picks from
dealer
stock
Customer
does this
Customer
does this
Customer
dealer, or
third party
Customer
provides
Taxi Supplier
choose
Customer
is picked
up
Supplier
does this
Supplier
does this
Enterprise car
rental
Customer
chooses
from local
stock
Customer
picks up or
is picked
up
Supplier
does this
Supplier
does this
By the day Customer is
responsible
Zipcar Customer
chooses
from local
stock
From
Zipcar
locations
Supplier
does this
Supplier
does this
By the hour Customer
purchases from
supplier

Concept 2: Innovators must co-create with customers
 The value of tacit knowledge
 e.g. example riding a bicycle: go faster to stay up,
 balancing on a rope…
 One way:
 Let the customer themselves provide the information,
 Let the customer have control of the process
95
FOUR STEPS TO OPEN SERVICE INNOVATION:
Make
reservation
Arrive at
restaurant
Ask for
table
Go to
table
Receive
menu
Order drinks
and food
Eat Order
bill
Pay Visit
restroom
Leave
Chesprough Open services
innovation p 59

 Concept 3: Open innovation accelerates and
deepens service innovation
96
FOUR STEPS TO OPEN SERVICE INNOVATION

 Concept 4: Transform your business model with
services
97
FOUR STEPS TO OPEN SERVICE INNOVATION
Grocer Chef
Target market Consumers Diners
Value Proposition Wide selection, quality
price
Dining experience
Core elements Rapid inventory turns,
choosing correct
merchandise
Great food, skilled cooks,
atmosphere
Value chain Food suppliers, related
items, logistics,
information technology,
distribution centers
Fresh produce, local
ingredients, quality
equipment,
knowledgeable and
couteous service
Revenue mechanism Small markup over cost,
very high volume, rapid
inventory turns
High markups over cost,
low volume, alcohol, tips
Value network, ecosystem Other services on
premises, parking
Cookbooks, parking,
special events

THE MESH, LISA GANSKY,
WWW.MESHING.IT
Eg. hammer Mesh sweet spot
Eg. Tooth brush? Eg. Smart phones
How
often
do
you
use it
Often
Seldom
CostCheap
Expensive
p 22
Own-to-mesh
http://www.ted.com/talks/lisa_gansky_the_f
uture_of_business_is_the_mesh.html

THEORY 16 BUSINESS MODEL CANVAS

EIGHT KEY ELEMENTS OF A BUSINESS MODEL
P 325
 Value proposition
 Revenue model
 Competitive environment
 Competitive advantage
 Market strategy
 Organizational development
 Management team

REVENUE MODELS
 Advertising
 Subscription revenue model
 Transaction fee revenue model e.g. eBay (x % of
transaction)
 Sales revenue model e.g. amazon sells books
 Affeliate revenue model, companies steer business
to another company and receive a referal fee or
percentage (sisäänheittäjä)

CATEGORIZING E-COMMERCE MODELS
 B2B and B2C
 Major business to consumer models
 Etailer online retail stores
 Community provider
 Content provider
 Portals
 Transaction Brokers
 Markert creator
 Service provider

BUSINES MODEL GENERATION
Definition: A
business model
answers the
question how value
is created and
captured
www.businessmod
elgeneration.com
http://www.youtube.c
om/watch?v=QoAOz
MTLP5s business
model canvas 2 min
http://www.youtube.c
om/watch?v=8GIbCg
8NpBw Osterwalder
53

CASE
 http://www.youtube.com/watch?v=Njuo1puB1lg
 RtB
 CwF

BUSINESS MODEL GENERATION 9-ELEMENTS
(BUILDING BLOCKS) OF THE CANVAS
 Customer Segments
 mass market, niche market, segmented, diversified,
multisided platforms (or multisided markets)
 Value Propositions
 Newness, performance, customization, getting the job done,
design, brand/status, price, cost reduction, risk reduction,
accessibility, convenience/usability
 Channels
 Customer Relationships
 personal assistance, dedicated personal assistance, self-
service, automated service, communities, co-creation
 Revenue Streams
 asset sale, usage fee, subscription fees,
lending/renting/leasing, licensing, brokerage fees, advertising

BUSINESS MODEL GENERATION 9-ELEMENTS
(BUILDING BLOCKS) OF THE CANVAS
 Key Resources
 physical, intellectual, human, financial
 Key Activities
 production, problem solving, platform/ network
 Key Partnerships
 optimization and economies of scale, reduction of risk
and uncertainty, acquisition of particular resources and
activities
 Cost Structure
 cost driven (driving down costs), value driven, fixed
costs, variable costs, economies of scale (e.g. lower
bulk purchase rates), economies of scope(e.g. same
channel supports multiple products)

 Unbundling business models
 customer relationship businesses, product innovation
businesses, infrastruture businesses
 The Long Tail (selling less of more)
 Multisided Platforms
 bring together two or more ditinct but interdependent groups
of customers e.g. Visa, Google, eBay
 Free as a business model (Freemium) includes Bait
and Hook
 Non paying customers are financed by another customer
segment e.g. Metro, Skype
 Open Business Models
 companies systematically collaborate with outside partners to
create and capture value
BUSINESS MODEL GENERATION – 5
PATTERNS

THEORY 17 MATCHING MARKETS – HOW
MARKETS EMERGE

MATCHING MARKETS (CHAPTER 10 EASLEY
KLEINBERG)
 See also…Experimental studies of Power and
exchange
 Source, Networks, Crowds and Markets, David
Easley and Jon Kleinberg 2010

Room 1
Room 2
Room 3
Aleksi
Kalle
Tytti
Room 4
Room 5
Maija
Anne
Wish list
Room 1
Room 2
Room 3
Aleksi
Kalle
Tytti
Room 4
Room 5
Maija
Anne
A matching market
MATCHING MARKETS

Room 1
Room 2
Room 3
Aleksi
Kalle
Tytti
Room 4
Room 5
Maija
Anne
By just removing Aleksi´s wish of
room 3, there is no match
Room 1
Room 2
Room 3
Aleksi
Kalle
Tytti
Room 4
Room 5
Maija
Anne
Identifying a constricted set
A GRAPH WITH NO MATCHING
Matching theorem: If a bipartite graph (with
equal number of nodes on the left and right)
has no perfect matching, then it must contain
a constricted set

Sellers
Room 1
Room 2
Room
3
Xin
Yoam
Zoe
Buyers Valuations
12,4,2
X values:
sellers a product at 12,
sellers b product at 4
sellers c product at 2,
8,7,6
7,5,2
INTRODUCE ”PRICE” – HOW MUCH THEY LIKE EACH
OBJECT (10.2 VALUATIONS AND OPTIMAL ASSIGNMENTS)
Sellers
Room 1
Room 2
Room
3
Xin
Yoam
Zoe
Buyers Valuations
12,4,2
8,7,6
7,5,2
Optimal assignment

WHAT IF THE BUYER WANTS TO OPTIMIZE HIS PAYOFF?
(10.3 PRICES AND MARKET CLEARING PROPERTIES P 255-257)
Sellers
a
b
c
x
y
z
Buyers
Valuations
12,4,2
X values (v) sellers
a product at 12,
sellers b product at
4 and sellers c
product at 2, The
payoff (profit) of
x = v-p
e.g.if he buys a for
4 his payoff is 12-4
= 8
8,7,6
7,5,2

LETS LOOK AT SOME ASKING PRICES
Sellers
a
b
c
x
y
z
Buyers Valuations
12,4,2
8,7,6
7,5,2
Prices
5
2
0
X will buy a,
”profit” 12-5 = 7,
note a is her
unique prefered
seller b = 4-2= 2,
c = 2 -2 =0
y will buy c,
”profit” 7-0 = 7
note c is her
unique preferred
seller
z will buy b,
”profit” 5-2 = 3
note b is her
preferred seller

EXCERCISE: WHO ARE THE PREFERRED
SELLERS IN THIS SET UP?
Sellers
a
b
c
x
y
z
Buyers Valuations
12,4,2
8,7,6
7,5,2
Prices
2
1
0

Sellers
a
b
c
x
y
z
BuyersPrices
2
1
0
Valuations
12,4,2
8,7,6
7,5,2
X would profit 12-2 = 10 from a,
4-1 =3 from b and
2-0= 2 from c => x would prefer a
Y would profit 8-2 = 6 from a,
7-1 =6 from b and
6-0= 6 from c => y has no unique
preference a, b or c is just as good
z would profit 7-2 = 5 from a,
5-1 =4 from b and
2-0 = 2 from c => a is z´s
unique preference

Sellers
a
b
c
x
y
z
BuyersPrices
2
1
0
Valuations
12,4,2
8,7,6
7,5,2
4-1 =3 from b and
7-1 =6 from b and
6-0= 6 from c => y has no unique
preference a, b or c is just as good
5-1 =4 from b and
2-0 = 2 from c => a is z´s
unique preference
No clear solution

EXCERCISE 2 HOW ABOUT NOW?
Sellers
a
b
c
x
y
z
BuyersPrices
3
1
0
Valuations
12,4,2
8,7,6
7,5,2

10.4 HOW DO YOU CREATE MARKET CLEARING
PRICES P 258-261
 Existence of market clearing prices: For any set
of buyer evaluations, there exists a set of
market clearing prices
 Optimality of market clearing prices: for any set
of market clearing priices, a perfect matching in
the resulting preferred seller graph has the
maximum tota valuation of any assignment of
sellers to buyers
=> How to constryct market clearing prices

10.4 CONSTRUCTING MARKET CLEARING
PRICES P 258
I. At the start of each round, there is a current set of prices, with the
smallest one equal to 0.
II. We construct the preferred seller graph and check whether there is
a perfect matching
III. If there is, we´re done: the current prices are market clearing
IV. If not, we find a constricted set of buyers, S, and their neighbors
N(S)
V. Each seller in N(S) (simulatneously) raises his price by one unit
VI. If necessary, we reduce the prices: the same amount is subtratced
from each price so that the smallest price becomes zero.
VII. We now begin the next round of the auction, using these new prices

1. FIRST ROUND: WE GIVE ALL THE PRICE ZERO
AND SEARCH FOR CONSTRICTED SET N(S) AND
LOOK AT WHAT S IS?
Sellers
a
b
c
x
y
z
BuyersPrices
0
0
0
Valuations
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer a
5-0 =5 from b and
2-0 = 2 from c => a is z´s
unique preference

SEARCH FOR CONSTRICTED SET N(S) AND LOOK
AT WHAT S IS?
Sellers
a
b
c
x
y
z
BuyersPrices
0
0
0
Valuations
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer a
5-0 =5 from b and
2-0 = 2 from c => a is z´s
unique preference
=> N(S) is a and S is x,y,z, Give a price 1

2 SECOND ROUND: A IS 1, SEARCH FOR
CONSTRICTED SET N(S) AND LOOK AT WHAT S IS?
Sellers
a
b
c
x
y
z
BuyersPrices
1
0
0
Valuations
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer a or b
5-0 =5 from b and
2-0 = 2 from c => a is z´s
unique preference

CONSTRICTED SET N(S) IS EITHER S = X,Z AND
N(S) = A (I.E. RAISE A BY 1) OR S = X,Y,Z AND N(S) = A,B
(I.E. RAISE A,B BY ONE)?
Sellers
a
b
c
x
y
z
BuyersPrices
1
0
0
Valuations
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer a or b
5-0 =5 from b and
2-0 = 2 from c => a is z´s
unique preference
=> Give a price 2 (S=x,z)

3. THIRD ROUND: A IS 2, SEARCH FOR CONSTRICTED
SET N(S) AND LOOK AT WHAT S IS?
Sellers
a
b
c
x
y
z
Buyers
2
0
0
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer b
5-0 =5 from b and
2-0 = 2 from c => z would prefer a or b
=> Note both a and b are a constricted set

3. THIRD ROUND: A IS 2, SEARCH FOR CONSTRICTED
SET N(S) AND LOOK AT WHAT S IS?
Sellers
a
b
c
x
y
z
BuyersPrices
2
0
0
12,4,2
8,7,6
7,5,2
4-0 =4 from b and
7-0 =7 from b and
6-0= 6 from c => y would prefer b
5-0 =5 from b and
=> Note both a and b are a constricted set, S
is x,z), raise the price of a and b

4. FOURTH ROUND: A IS 3 B IS 1, SEARCH FOR
Sellers
a
b
c
x
y
z
BuyersPrices
3
1
0
12,4,2
8,7,6
7,5,2
4-1 =3 from b and
7-1 =6 from b and
6-0= 6 from c => y would prefer b or a
5-1 =4 from b and

4. FOURTH ROUND: A IS 3 B IS 1, SEARCH FOR
Sellers
a
b
c
x
y
z
BuyersPrices
3
1
0
12,4,2
8,7,6
7,5,2
4-1 =3 from b and
7-1 =6 from b and
6-0= 6 from c => y would prefer b or
a
5-1 =4 from b and
2-0 = 2 from c => z would prefer a or
b

10.5 HOW DOES THIS RELATE TO SINGLE ITEM AUCTIONS?
- GIVE OTHER ITEMS VALUE 0 AND SOLVE
Sellers
a
b
c
x
y
z
Buyers
0
0
0
Prices
Valuations
3,0,0
2,0,0
1,0,0

10.5 HOW DOES THIS RELATE TO SINGLE ITEM AUCTIONS?
- GIVE OTHER ITEMS VALUE 0 AND SOLVE
Sellers
a
b
c
x
y
z
Buyers
0
0
0
Prices
Valuations
3,0,0
2,0,0
1,0,0
A payoff 3-0 = 3
B payoff 0-0 = 0
C payoff 0-0
Chooses A, as does all
the others

10.5 HOW DOES THIS RELATE TO SINGLE ITEM
AUCTIONS? - GIVE OTHER ITEMS VALUE 0 AND SOLVE
Sellers
a
b
c
x
y
z
Buyers
0
0
0
Prices
Valuations
3,0,0
2,0,0
1,0,0
A payoff 3-0 = 3
B payoff 0-0 = 0
C payoff 0-0
Chooses A, as does all
the others
=> Add one to price a

Sellers
a
b
c
x
y
z
Buyers
1
0
0
Prices
Valuations
3,0,0
2,0,0
1,0,0
A payoff 3-1 = 2
B payoff 0-0 = 0
C payoff 0-0
Chooses A,
A payoff 2-1 = 1
B payoff 0-0 = 0
Chooses A
A payoff 1-1= 0
=> Add one to price a

Sellers
a
b
c
x
y
z
Buyers
2
0
0
Prices
Valuations
3,0,0
2,0,0
1,0,0
A payoff 3-2 = 1
B payoff 0-0 = 0
C payoff 0-0
Chooses A,
A payoff 2-2 = 0
B payoff 0-0 = 0
Chooses A
A payoff 1-1= 0
=> Sold to buyer x at
price 2

AUCTIONS? – NOTE YOU COULD ALSO HAVE LEFT THE
ZERO´S
Sellers
a
b
c
x
y
z
Buyers
2
0
0
Prices
Sellers
a
b
c
x
y
z
2
0
0
Valuations
3,0,0
2,0,0
1,0,0

 Vickrey Auction, Nobel prize 1996
https://en.wikipedia.org/wiki/Vickrey_auction
 Vickrey Clark Groves mechanism
https://en.wikipedia.org/wiki/Vickrey%E2%80%93Clarke%E2%8
0%93Groves_auction
 http://www.nobelprize.org/nobel_prizes/economic-
sciences/laureates/
 Game theory related Nobel Prizes:
 Jean Tirole 2014
 Roth and Shapley 2012
 Aumann and Schelling 2005
 Akerlof, Spence, Stiglitz 2001
 Mirrlees, Vickrey 1996
 Harsnyi, Nash, Selten 1994
 Coase 1991
 Hicks, Arrow 1972

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