Summary of Cloud Computing and Transformation of e-business Model Petri Ahokangas, Marko Juntunen & Jenni Myllykoski University of Oulu, Finland Oulu Business School Department of Management and Business petri.ahokangas@oulu.fi, marko.juntunen@oulu.fi, jenni.myllykoski@oulu.fi 8th SKM Symposium / Track 6 (Special Track V) Business Model Innovation Abstract Business model has been regarded as a vehicle that closes the gap between the abstract and the practice within strategic management and international business. Despite this, our knowledge of how international business models are created or transformed has remained elusive and empirical research on the topic remains rare. By revisiting the Internet internationalization and e-business model literature, this paper explores the transformation of international business models in the context of international ICT businesses where cloud computing has triggered a major paradigm change in the way how software and hardware related services are offered to international customers. Earlier research indicates that e-business have several implications to internationalization, including speeded up and earlier start of the internationalization processes, dilution of the sequencing of the internationalization process, virtualization of (international) locations and services, multiple simultaneous market entry through the Internet, and enhanced building of international networks. All these changes have major consequences on the business models of the firms, and among international e-businesses the emergence of cloud service concepts such as IaaS (Infrastructure-asa-Service), PaaS (Platform-as-a-Service), SaaS (Software-as-a-Service) and DaaS (Data-as-a- Service) has brought about a need to fundamentally rethink the business models. Through comparative analysis of two cases companies, this paper examines the business model transformation processes in the cloud computing context, and contributes by re-conceptualizing the international business model as a concept and by rooting the conceptualization with the business model transformation process. Keywords: Business model, cloud computing, internationalization Acknowledgements: This research has been supported by the Tivit Cloud Software Program. 1 P a g e
Cloud Computing and Transformation of e-business Models 1. Introduction The evolution and convergence of modern communication technologies and the Internet has opened up a new era and opportunity field for internationally oriented companies the era of international Internet services and online internationalization. business through or in the Internet requires, however, a business model (e.g., Osterwalder 2004, Morris et al., 2005; Morris et al., 2006; McGrath 2010; Teece 2010; Chesborough 2010; Zott et al., 2011) that makes it possible for companies to operate in it, also across country borders (Daniel & Wilson 2003; Pavic et al., 2007). The latest stage of this internetization and online internationalization is cloud computing or cloudification i.e., running applications on the web via the browser (The free dictionary, 2013) that has not only created new international product/service markets but also destroyed and increasingly keep on destroying existing markets. Providing software over the Internet in the cloud represents a new form of ICT business which is increasingly challenging the traditional software and hardware product business models and ecosystems. But, while cloud computing has brough virtualized technologies into large-scale use, it is not only a technical process, as it has made possible to virtualize and therefore internationalize also business applications, processes, locations and services. Thus, cloud can be regarded as intrinsically international (c.f., Kobrin, 2001) as it is transforming the entire software business by changing the way how software and hardware are delivered, utilized and charged (McLaughlin 2008). The business model concept emerged within the e-business context to explain how firm create capture value. It is the specific context where business models have been discussed and developed the most (e.g., Timmers, 1998; Dubosson-Torbay et al., 2001; Amit & Zott 2001; Chen 2003; Osterwalder, 2004; Morris et al. 2005; Teece 2010; Zott and Amit, 2010; Wirtz et al., 2010; Casadeus-Masanell & Ricart 2010; Chesborough 2010; McGrath 2010; Teece 2010; Zott et al., 2011). The motivation for discussing business models and cloud businesses in this paper has come from two notions made by Chesborough (2010) that alternative business models can be applied to take businesses into new markets and that that when a mediocre technology is pursued within a powerful business model, it can be more valuable than a powerful technology within a mediocre business model. Thus, the question arises as to how could we utilize the business model concept to research cloudification? Cloudification has also lead to the doubt whether or to what extent it is possible to identify, capture, describe, and explain the specificities of internationalization of cloud businesses by applying the existing conceptions, approaches, or theories of international business and internationalization even those of the e-business (c.f., Axinn & Matthyssens 2002; Chrysostome & Rosson 2004; Zahra 2005; Forsgren & Hagström 2007). A more reality-driven approach in the cloudification context to would be to ask how could we utilize the business model concept to research internationalization? Although internationalization in the Internet and e-business models have been popular topicis of research, so far no systematic effort has been made to discuss and research business models and 2 P a g e
internationalization in the cloud business context. Starting from this, the purpose of this paper is to study the international transformation of cloud companies by using the business model as the unit of analysis (Zott et al., 2011) from two standpoints; that of cloudification and that of internationalization. Through the analysis of two Finnish case companies that are transforming their businesess to utilize cloud technologies for their internationalization, we aim at contributing first by creating a conceptual framework for understanding and analyzing internationalization of cloud businesses and second by exploring the process how cloud services internationalize. 2. The international cloud context The reality of the Internet internationalization is not necessarily so promising as described by the opportunities, but it seems that it opens up the opportunity to challenge as well as suffer from the identified liabilities of internationalization, i.e., the liabilities of smallness, newness, inexperience (Madsen & Servais, 1997; Zahra, 2005), foreignness (e.g., Petersen & Pedersen, 2002), and outsidership (Hymer, 1976; Zaheer, 1995; Zahra, 2005; Johanson & Vahlne, 2009). Regarding international business theories, discussion around the Internet has contributed to what we know about the correspondence between company size (small vs. big), type of offering (product vs. service), industry sectors, and the internationalization processes. Most interestingly, the hottest topics initiated around the process of Internet internationalization have been the speed of internationalization and the disappearance of the traditional sequencing and incremental development of internationalization. Similarly, the dilution of the role of distance, whether spatial, temporal, psychological, or cultural, in the internationalization of internet companies, has raised a lot of attention. In addition, the role of entry modes in the Internet internationalization processes and the role of experiential learning in internationalization have been discussed, especially in connection with the disappearance of the sequencing of the internationalization process. One of the recent findings has been the increased role of customer value for internationalization. Many of these topics have been touched upon in the discussions over the business models in the Internet. 3. Business models and their transformation The the business model concept fosters a new, dynamic approach within strategic management in terms of competitive advantage. McGrath (2010) discussed two traditionally recognized views of competitive advantage, industry positioning and the resource-based or dynamic capability views. She argued that in today s economy, competitive advantages are rarely sustainable and therefore continuous engagement with changing customer value creation, as well as experimentation with new business models (cf., Chesbrough, 2010) are necessary to complement the long-term development of industry position, resources and capabilities. The business model as a concept is closer to action and therefore working on the business model improves the conditions managers work under when making decisions during the ongoing search for temporary competitive advantage in turbulent environments (McGrath, 2010). 3 P a g e
4. Methodology This paper is a qualitative case study of two companies that have recently changed their business model. The cases were examined through the qualititative action research method, and the entire data was derived from it. This research method enables a deep examination of the situation when company is transforming its business model. The action research method was exploited as it offers data as change occurs. Ballantyne (2004) and Gummesson (2000) argued that action research is a suitable method for seeking an in-depth understanding of the mechanisms of change, as well as when bringing about changes in organizational settings. Daniel and Wilson (2004) suggest that action research is a valuable method in research dealing with dynamic and turbulent environments. The method enables the researchers to get close to the business reality and fosters the development of deep, rich insight and understanding of complexities within decision-making (Carson et al., 2001). The research followed the action research process consisting of a spiral of planning, acting, observing and reflecting (Carson et al., 2004). This paper seeks to answer the questions how could we utilize the business model concept to research cloudification and how could we utilize the business model concept to research internationalization by looking at two rather well established Finnish technology/service oriented case companies, Alpha and Beta. Alpha and Beta have been building capabilities to provide their services for their international clientele through the cloud as it supports both firms orientation towards international business growth. Both companies are service providers in Business-To- Business (B2B) market segment where their customer base vary between small and large. Alpha is a mid size state-owned organization with relatively formal operational processes. Beta is entrepreneurially managed and privately owned SME that actively seeks new international customers and its operational processes are rather informal. The reliability of the research was maintained by presenting open and detailed descriptions of the action research process and the organized workshops in this paper. Furthermore, special attention was paid to the roles of the researchers in the workshops, as the difficulty of simultaneously participating as a change agent and a researcher was recognized (Gummesson, 2000). While the validity and reliability of the action research has been questioned and debated in the literature, it has also been argued that action research enables to reach a deep, rich insight and understanding of the complexities of decision making, even to a degree that other research methodologies could not hope to reach (Carson et al., 2001). The access to the in-depth data through the workshops can be said to be the strength of the empirical research presented in this paper. The action research was constructed in a way that instead of giving normative suggestions to the managers, a lot of questions were asked about issues relevant for the business model change. The roles of the researchers was not to say how the business model should or could be changed but instead to provide a suitable framework, working process and avenues of thought for the participating managers. 4 P a g e
5. Description and analysis of the cases Alpha The business model transformation process of Alpha was basically about transforming from traditional scientific ICT infrastructure service provider to cloud service provider through a series of steps with a renewed value proposition where low costs gave room to professionally managed worldclass cloud service provider and identified basis for differentiation. Adopting a cloud business model meant also building cloud expertise and cloud service concept specific support processes. Without proper processes it would have been impossible to serve international customers. Similarly, also sales and marketing activities required renewal and international reach. Parallel to changing the internal processes, also the basis for had to be changed to pay-per-use mode although the way how customers finance their operations has remained unchanged. On the cost side the Alpha faced difficulties when trying to find a new way to allocate internal costs when the ministry budget logic remained fixed. The steps Alpha took to virtualize its services were from PaaS to IaaS with a target to SaaS and selected DaaS (as a part of SaaS) services (Figure 3). Along the virtualization process, Alpha was able to start first serving international customer groups in Finland, groups that had collaboration sites in Europe. Becoming a cloud service provider enabled the company start its internationalization, but speeding up the process seems to be possible only through increased sales efforts. No evidence was found to support the idea that virtualization would help to dilute the sequencing of the internationalization process or help to enable multiple simultaneous market entry. However, the building of international networks was enhanced by the cloud. Looking from cloudification perspective, enabling dynamic scalability in service provisioning and adopting pay-per-use in service utilization. Beta There were barriers for the internationalization and growth because Beta s current business model and technology did not allow rapid enough scaling-up of the business. From the business model perspective there were several issues to be renewed. First, at customer side more emphasis was paid to retailers and to the increased role of the cloud solutions in customer service when integrating consumers to retailers and manufacturers systems. Second, also the cloud platform require attention to enable scalability and decreas tailoring. Also, the model was to be modified to enable value capture from bigger enterprises. Beta s sales operations were to be expanded internationally by further developing the own direct sales and by creating a new efficient external sales channel. Furthermore, operating efficiently in a larger scale would require sharpened value proposition, i.e., designing a solution that would be easy to buy. From the technical side the labour-intensive implementation scalability of the solution were causing bottlenecks for growth. Cloud technologies provided an answer for a great part to scalability issues, but there were still many questions and challenges concerning the utilization of the cloud within Beta s offering. In addition to the technical bottlenecks, the current business processes and practices were not suitable for the rapidly growing and globally dispersed company that Beta was transforming into. 5 P a g e
Beta initiated its transformation by focusing first on the service utilization: and international sales activities. The steps Beta took to virtualize its services were targeted at SaaS with a platformbased offering. Along with the virtualization process, Beta was able to start first serving its customers in new geographical locations such as US. Becoming a cloud service provider enabled the company start to scale-up its internationalization, but speeding up the process required increased sales efforts. As Beta offered services that were new for many potential customers in the furniture industry, lot of marketing and concept selling was required. However, Beta was able to dilute the sequencing of the internationalization process by offering a cloud concept, and the concept also enabled multiple simultaneous market entry as Beta was starting new business in Asia, US, and Europe. Also, the building of international networks was enhanced by the cloud as the Beta needed partners to customize their solution. From cloudification perspective, ubiquituous access and dynamic scalability of service provisioning were found to serve as a basis for the success of the company. Table 2. Cloud impact on Alpha and Beta business models Cloud characterictics Resource pooling service provisioning Dynamic scalability service provisioning On-Demand availability service provisioning Pay-per-use service utilization Ubiquitous access service utilization Company Alfa, business model impact What - offering, value proposition, customer segments, differentiation Credible infra Wide service offering under one cloud research groups Individual researchers research groups Individual researcers and international research groups How - key operations,basis of advantage, mode of delivery, selling, marketing Large data center and computing capasity Existing services into cloud New services Cloud expertise and support Utility based charging sales Why - base of, way of charging, cost elements and cost drivers New data center establishment and operations Cloud system knowledge R&D marketing Pay-per-use Where geographically, internally or externally to the firm Internally Internally Internally as processes In customer premises through the cloud Internally in cloud Internally in cloud Company Beta, business model impact What - offering, value proposition, customer segments, differentiation Enabled to become a global service provider Easy and reliable system for all international customers Global B2B and B2C customers Flexible structure Easy access User interface Anywhere Easy access Quick and global access to services How - key operations,basis of advantage, mode of delivery, selling, marketing Flexible capacity to deliver the service Common platform required Minor tailoring needed Common platform growth Utility based charging Enhanced user interface Reliable international cloud provider Why - base of, way of charging, cost elements and cost drivers Cloud platform costs R&D costs Maintenance costs R&D costs sales and marketing Utility based Development and Cloud costs Where geographically, internally or externally to the firm External cloud Internal R&D Internal and with partners Internal and subcontratedl Internal and with partners Directly and through distributors Anywhere Anywhere Table 2 (above) outlines to what degree the targeted business models of Alfa and Beta are exploting the characterictics of the cloud. It is evident that the utilization of the cloud as well as the comptetitors entry to Alpha s domestic markets influenced the transformation of all business model elements. For Alpha, the decision was first to invest in own hardware and platform, and build internal business processes to support and service their existing customers in Finland and new customers also abroad. Own hardware investments required a certain level of customers and usage, 6 P a g e
forcing the company to seek additional users and services requiring higher capacity. The cloudification route that Alpha chose was a technical one, i.e., to provide technology and platform first, then come out with commercialization and customer operations. This was based on the fact that the technical skills of Alphas customers were rather developed and they were used to manage many of the technical things themselves. Only after the adoption of the cloud concept with easier service utilization (e.g., with customer interface) and it was possible to expand customer base also internationally. For Beta the process was not so much of a technical one but customer a centric one. There were alternative cloud conceptions available to provision the service, and Beta chose a route where it started to develop a product platform for which they used cloud as a channel. Also, for Beta the cloud opened up the possibility to change their structure in a way that made bigger international customers a feasible target. The target of both companies was to scale up their business internationally, and the cloud was seen as a means to enable scaling. Transformation Figure 3. Alpha and Beta cloud concept development As the transformation of both companies required major changes in the business model, also the technical conceptions and developmental steps taken had to be planned. The steps and cloud conceptions of Alpha and Beta are depicted in Figure 3 (above). While Alpha s transformation was of technical nature, i.e., from infrastructure and platfroms toward services, the transformation of Beta was of commercial nature and the technical steps were subject to customer service requirements. The scaling up of the concept for increased number of customers was enabled by cloud for both companies. Alpha realized that the bottleneck for its growth and efficiency was its customer service processes, whereas Beta found the bottleneck to be in its product offered in the cloud as each new customer required tailoring, an implementation project and maintenance before the adoption of the cloud concept. 7 P a g e
6. Discussion and conclusions This study discusses the international transformation of cloud companies by using the business model as the unit of analysis from two standpoints; that of cloudification and that of internationalization. We reviewed Internet internationalization and cloud literatures, and comprised a model that uses service provisioning and utilization as the central point to understand the internationalization of cloudification of ICT services. Similarly, we reviewed business model literature and discussed especially the transformation business models in the cloud context. The introduced business model concept, consisting of the elements What (offering, value proposition, customer segments, differentiation), How (key operations,basis of advantage, mode of delivery, selling, marketing), Why (base of, way of charging, cost elements and cost drivers) and Where (geographical location, internally or externally to the firm) was found suitable for depicting change in the case companies and it provided valuable information of the transformation of the case companies both from cloudification and ization points of view. Due to the complexity of the cloud concept as such, the practical implementation and transformation of international cloud businesses necessitates as a two-sided approach to the process: technical and business. It appeared evident that the key challenges of the case companies were related to business model transformation as cloud computing was triggering a change in most of the business model elements. Also, the transformation processes of the case companies were found to be stepwise. The key in these changes was related to the opportunity and change of the value proposition (what) of the companies as both case companies were looking for international growth. All changes in how elements, i.e., delivery of the services and why elements, i.e., basis of, were subject to the decision to cloudify company offering around the identified opportunity. It could be concluded that the business model conceptualization as such helped the companies to manage the transformation process. Regarding internationalization, both case companies found that cloud does not mean automatic internationalization, the service or the product need to be sold to customers, and international selling,, and charging as such require efforts, marketing and selling, that could not be carried out in the cloud. In a way the cloud opened up the opportunity to internationalize the companies, either as a channel or as a mode of operating internationally, but it required investments. The speeding up of the internationalization did not happen because of the cloud but it enabled earlier start of international and simultaneous entry to several markets and helped to build international networks to suppliers and distributors. However, the sequencing of the internationalization process remained, but in a different sense than traditionally: now the steps were related more to the technical readiness of the company either regading the service or the product. Regarding cloudification, the development of cloud services was found to be a process with several steps. We identified two different routes to cloudify services: technical and customer centric route. Paradoxically, the technical route was concerned with defining service and provisioning it while the customer centric route was concerned with the product platform to be utilized. To conclude, the ramifications of the presented research include at least three interconnected notions for future research. First, we find a need to define the concept of the business model in a way that 8 P a g e
suits the cloud and internationalization. We argue that business models have in earlier research often been presented as static and fixed, although the dynamism of all business has been recognized. We see that the contributions of Chesbrough (2010), Zott et al. (2011), Onetti et al. (2012), and Sosna (2012) as paving the way to seeing business model transoformation in a holistic way, but a dynamic conceptualization of the business model is still in its infancy. Second, a longitudinal, systemic, and systematic view of business model transformation is unfolding and we see this paper as one attempt to create such an approach. Chesbrough (2010) argued that business models are often far from clear to managers; they typically involve trial and error, and require experimentation, and we find this to be exactly the case with Alpha and Beta. This highlights our third interconnected notion, the role of the cloud context, proving Teece s (2010) argument that business models need to be calibrated to the context. 9 P a g e