A holistic approach to visualizing business models for the internet of things

Abstract

The Internet of Things (IoT) promises huge potential economic benefits. However, current IoT applications are in their infancy and the full potential of possible business opportunities is yet to be discovered. To help realize these economic benefits, workable business models are required that show where opportunities exist. In this article we describe the Business DNA Model - a representation of a business model in terms of Design, Needs, and Aspirations, which greatly simplifies presentation, analysis, and design of business models. This model can be used by IoT stakeholders to generate and analyse stories, models, and projects for strategic management, business strategy, and innovation. We present one scenario - smart logistics - to illustrate how the Business DNA Model might be applied.

Introduction

The Internet of Things (IoT) will reshape our society. Our lives will be improved and enriched both materially and spiritually. The Internet of Things allows people and things to communicate with each other person, at the right time and place, with the right service, and at the right price .A symbiotic interaction among the physical and virtual cyber worlds would be implied in the Internet of Things [1]. In the IoT connectivity becomes a commodity that is available to both human users and smart things. Examples already exist in industries such as the power, transport and buildings [2]. Pervasive computing and ubiquitous intelligence will characterize the future and is the subject of significant national programmes such as U-Japan, U-Korea, Sensing China, etc.

In recent years, numerous IoT technologies - including identification technologies, sensor technologies, and embedded smart technologies, are widely used in many industries. But the path to the broader development of the IoT has many challenges ahead – and economic factors might be the biggest stones on the road [3].

Figure 1 shows the three layers of the IoT. Deployment costs of sensing are the most important sensing costs in the sensing layer – they impact data acquisition and utilization since reducing of the sensor costs will enable massive volumes of data to be used economically. The network layer aims at disseminating large quantities of real-time and multitudinous information. Customers can find goods at the highest quality and lowest cost, while businesses can acquire customer behavioral data and control inventory. Information exchange is no longer among people, but extends to between people and things, or among things. In the application layer, intelligence or being smart is one of the most important features, while the data processing center is a central feature of the intelligent in the Internet of Things.

Figure 1

The structure of the Internet of Things.

A lack of business models to describe these layers and how they interact is evident in IoT, and answers to simple questions, such as What is the value proposal? What is the cost and benefit? How does a company profit from the IoT technologies?, are currently hard to answer.

This article aims at developing an operable business model based on DNA Model [4] from the perspective of designing a business model in the Internet of Things. We will reveal that business model innovation do hold the potential of reforming existing or creating new business models. Furthermore, they can bring continuous financial or nonfinancial benefit to flourish companies.

Business model and innovation

Business models

The concept of a business as a legal entity (“corporation”) dates back over 400 years. Until in the last 60 years, a corporation or business system was abstract. Businesses were intuitively described, analyzed, designed, planned, and managed without their detailed structure and relationships being visually represented. In the mid-1950s, Jay Forrester developed the field of Systematic Dynamics while modeling the performance of business units at General Electric (GE). However, the term “business model” was first used in a 1957 article by Bellman and Clark [5]. Use of the term “business model” gained prominence in the 1990s during the proliferation of Internet (“dotcom”) companies. A popular accepted definition is that business model is an integrated architecture of the products, services and information flows, including the involved actors and roles as well as the potential value created for all participants and the source of revenue [6]. Business model can be regarded as a system of components, linkages between the components, and dynamics [7]. According to Thomas, business model is to run a profitable business involving the overall structures of process, customers, suppliers, channels, resources and capabilities [8]. Business model is associated with industry application, where customer demands are the main driving force and value is the main offering [9]. Herein, a business model is a story or visual representation of how an organization works to achieve its hierarchy of goals. A general goal for an organization is to create, deliver, capture, and share value. For a business, the most critical goal relates to profitability and in particular, how to minimize cost and maximize revenue.

Business model innovation

A successful company can embrace market challenges as opportunities and innovations play the most important role in facing a market. Innovations can not only bring continuous change to successful companies, but also enable struggling companies to survive. Business model innovations are becoming new routes to competitive advantage. In an IBM Global Services Report in 2006, the study shows that interviewed CEOs consider business model innovations as the strongest drivers of business differentiation, value creation, and sustainable competitive advantage, while product and service innovations are less sustainable [10]. By creating new business models or renewing traditional business models, many companies like Dell, IBM, IKEA, Haier, Galanz, have achieved great success in the last decade.

Business model innovators have a growth in operating margin that is more than five times those of product/service innovators [11]. The current trend is to focus on business model innovations as the best way to improve profit as well as to avert competitive threats in the long term. Other benefits of business model innovations include cost reduction, strategic flexibility, exploitation of new market opportunities, and reduced risk of capital investment.

There are many advantages for companies to develop business models at a time when we are stepping into the time of the Internet of Things.

• Enabling companies to gain first-mover advantage during the development of the Internet of Things.

• Speeding up the pace of transformation or strategic realignment to meet the challenges of the Internet of Things.

• Better seizing the opportunities in the Internet of Things.

In the Internet of Things, innovation on business models might address on the following elements [12].

• Customers: Who are our core customers? Where are they? Are they changed?

• Markets: Are our markets changed? Should we change our market positioning?

• Channel: What’s the channel to offer product/service?

• Infrastructure: Who are our key partners? What are our key activities? Where are our available key resources?

• Value: What’s the value offer to customers?

• Revenue & Cost: Whether revenue exceeds the costs?

Business DNA model for the internet of things

Figure 2 shows the design of a business DNA model for the Internet of Things. The D or Design block, which refers to elements of the given system, deals with the question of “How?” The supply infrastructure consists of three elements: Key Partners, Key Resources and Key Activities. The N or Needs block focuses on players in the external environment and deals with the question of “What?” There are three categories of elements for the N-block as the external or demand infrastructure of a business model: Channels, Customer Relationships and Customer Segments. The A or Aspirations-block deals with results and responds to the question of “Why?” The A-block which deals with offer or value consists of three elements: Value Proposition, Revenue and Cost.

Figure 2

Business DNA model for the Internet of Things.

These three modules influence and complement each other. In the logical of the DNA Model, the A-block refers to the ultimate “ends” to be achieved by the organization. The N and D-blocks constitute the “means” to achieve the “ends.” In particular, the N-block focuses on the external infrastructure for satisfying needs of the customer, market, and stakeholders. The D-block covers elements of the organization’s internal infrastructure for supplying a product or service.

Case study

Logistics is one of the earliest application areas in the Internet of Things. The ultimate goal of logistics is to transport the right products to the right place and the right person at the right time and at the right cost [13]. Figure 3 shows the process of smart logistics in the Internet of Things where the core component is the data processing center that integrates suppliers, packaging, loading, transporting, uploading, and customers. Suppliers are the start of the logistics business, while customers are the endpoint. A transport fleet may be equipped with GPS navigation systems, and RFID chip may embed into each item, so enabling instant tracking and location data for items. Loading and uploading can be better automated, so reducing the employee involvement, achieving more accurate positioning, reducing operational delays, improving efficiency, and ultimately reducing costs.

Figure 3

The process of smart logistics.

Figure 4 shows the DNA business model in smart logistics with three blocks - Design, Needs and Aspirations block. In Design, the key partners of the smart logistics are those enterprises that produce food, books, e-products, clothes and so on. The data processing center and the transport fleet are the key resources, with the while the former being most important, and transport is the main activity. In Needs, there are many channels to reach customers - the most common being via the Internet, a mobile network, or just through the retail stores. Customer relationships may be either long term or just temporary. Customers (individuals or companies) can join in designing a better logistics experience by being not just recipients but participants. In Aspiration, the value proposition of smart logistics is to achieve better meet customer demand and to achieve “6R”- transporting the right products to the right place and the right person at the right time and at the right cost. Economic opportunities here include distribution service charges (pay-per-use), reduced staff fees and incremental management efficiency due to the construction of information network platform. The cost of infrastructure and staff are some most important costs in the smart logistics.

Figure 4

Business DNA Model for the Smart Logistics.

Comparison

There are various ways to represent a business model both at enterprise level and industry level. The most common ways at an enterprise level include the Value Chain [14], Strategy Map [15], Four-Box Business Model [16], and Business Model Canvas [12], and at an industry level include Five Forces [17], Value Net [18], Supply Chain [19], and Business Model Environment [12]. Among these models, Value Chain and Business Model Canvas are more widely used in both academic circles and practical circles. The Business Model Canvas provides a very visual approach since it can be printed out on a large surface for people to understand, discuss, create, and analyze their business activities while designing a business model with the four elements of value proposition, infrastructure, customers, and finances.

However, the Business Model Canvas does not illustrate a clear cause and effect linkage between ‘means’ and ‘ends’, and it is complex and time-consuming to develop multi-level business model analysis, design, and management in the Business Model Canvas because the enterprise and industry business models have different visual formats.

In contrast, the DNA Model uses a consistent visual format at both levels. The underlying logic of the DNA Model is a linear cause-and-effect or input-processing-output relationship. The inherent structure of the DNA Model is a linear fractal: the basic visual structure and relationships between the DNA blocks - design, needs, and aspirations - are the same at any level of the business model. This linear fractal structure greatly simplifies presentation, understanding, analysis, design, and planning of business models especially within and across industries.

Conclusion

The article has presented an analysis of business models and business model innovation for the Internet of Things, and examined a case study of smart logistics that illustrates how a business model for IoT can be developed. We believe that this is an easy-to-use approach for practitioners to grasp business opportunities and to present stories, models, and projects for IoT.