Disruptive innovation in the Swedish payment market: A supply-side perspective

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Disruptive innovation in the Swedish

payment market: A supply-side

perspective

PATRIK TIDEBRANT

Master of Science Thesis Stockholm, Sweden 2013

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Disruptive innovation in the Swedish

payment market: A supply-side perspective

Patrik Tidebrant

Master of Science Thesis INDEK 2013:18 KTH Industrial Engineering and Management

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Master of Science Thesis INDEK 2013:18 Disruptive innovation in the Swedish payment

market: A supply-side perspective

Patrik Tidebrant Approved 2013-04-03 Examiner Staffan Laestadius Supervisor Niklas Arvidsson Abstract

For the last decades there has been a steady shift from cash to card payments and with increased smart phone penetration, payments have started to move into our mobile devices. This thesis studies how mobile payments can change the traditional payment landscape. The purpose is to assess the disruptiveness of the Swedish mobile payment market and describe key stakeholder strategies for managing a potentially disruptive change.

The study has been designed as a combination of a theoretical and an empirical study where the theoretical part consisted of a literature review that hinted on a gap in terms of available literature on the disruptiveness of different mobile payment business models. Main theoretical concepts used are; disruptive innovation, business model innovation, and theories on competing solutions and dominant design. The subsequent empirical study consisted of a number of qualitative, in-‐depth interviews with key stakeholder from the Swedish mobile payment industry: five mobile payment providers, one major merchant, and the Swedish Trade Federation.

This thesis shows that two fundamentally different types of mobile C2B payments are emerging; mobile payment solutions based on existing card payment schemes and mobile payment solutions that build on new and independent payment schemes. The independent model has been defined as the most powerful disruptive force in relation to the existing market for card payments, mainly because it offers opportunities for innovative players to build simple new payment schemes that bypass traditional card payment players and therefore can be made far more cost-‐efficient. However, many established card payment players are inhibiting this development since they are afraid it could seriously harm their existing card business.

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List of figures

Figure 1: General interview framework ... 6

Figure 2: Performance impact of sustaining versus disruptive innovations ... 12

Figure 3: Design hierarchies and dominant design ... 17

Figure 4: Major stakeholders in the mobile payment ecosystem ... 24

Figure 5: SEQR Consumer-‐to-‐Business (C2B) ... 26

Figure 6: Payair Consumer-‐to-‐Business (C2B) ... 27

Figure 7: Bart Consumer-‐to-‐Business (C2B) ... 28

Figure 8: Swish Consumer-‐to-‐Consumer (C2C) ... 28

Figure 9: WyWallet -‐ Three ways to top up ... 29

Figure 10: WyWallet POS Consumer-‐to-‐Business (C2B) ... 30

Figure 11: The Swedish cash distribution system ... 33

Figure 12: Payment market scenarios ... 53

Figure 13: C2B mobile payment provider classification matrix ... 55

Figure 14: The independent mobile payment model ... 58

List of tables

Table 1: Nine business model components ... 13

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List of abbreviations

FMCG Fast-‐moving consumer goods

C2C Consumer-‐to-‐consumer

C2B Consumer-‐to-‐business POS Point-‐of-‐Sale

EMV Card payment standard (Europay, MasterCard and Visa)

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Acknowledgements

First of all, I would like to thank my supervisor Associate Professor Niklas Arvidsson for continuous support and helpful guidance throughout the research process.

Besides my supervisor, I would also like to thank the rest of the advisors from the Industrial Dynamics Masters Seminar Group, Staffan Laestadius, Cali Nuur, and Pär Blomkvist for constructive feedback during the seminar sessions.

Finally, I would like to thank my fellow INDEK student Peter Ahlström for many productive discussions and cheering comments.

Patrik Tidebrant

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1 Introduction

This chapter aims to introduce the reader to the thesis. It starts with a general background and a presentation of the problem, followed by the specific purpose, formulated research questions, and a section on definitions and delimitations. The chapter ends with a thesis outline to help guide the reader through the rest of this thesis.

1.1 Background

A shift from traditional cash-‐ and card payments to new mobile payments is currently re-‐shaping the global payment industry (Ding & Hampe, 2003). The electronic payment market has historically been dominated by banks and global payment scheme owners (e.g. VISA and MasterCard). With the mobile revolution however, new stakeholders such as telecom companies, retailers and start-‐ups are entering the market – determined to secure their share of the vast stream of global payment revenues. Developments in the market for mobile payments is increasingly referred to as a “war” which indicates that the stakes are high and that there is a huge uncertainty about the future roles of involved players. Traditional card payment stakeholders have invested heavily in the existing infrastructure and they are not going to give up without a fight, but they need to innovate if they should be able to stay ahead of competition (The Economist, 2012). Forming effective partnerships will be a key success factor for all mobile payment stakeholders.

Globally, mobile payment adoption is growing along with the increasing penetration of smart mobile devices. Mobility has changed the business landscape for many industries in recent decades and now the payment industry may be next in line. Mobile payments could potentially be the biggest disruption the payment industry has seen, and incumbents need to carefully choose the right strategies in order to avoid being substituted by emerging, independent stakeholders. Card payment stakeholders risk loosing large market shares when merchants realize that new entrants can provide them with more competitive price models. Banks are in a good position to leverage a mobile payment disruption, but they need to innovate traditional business models or they, too, risk falling behind.

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At the Royal Institute of Technology (KTH), there are currently several on-‐going research projects in the field of mobile payments and there are yet many questions to be answered. One of those questions is how the emergence of a new payment ecosystem will affect established payment players and how they are planning to handle such a potentially disruptive change.

1.2 Problem

As mentioned above, the payment sector is currently facing many challenges and the progressive shift from traditional electronic systems to mobile solutions will definitely change the way we make payments in the future (Au & Kauffman, 2008). Such a potentially disruptive development raises some interesting questions on industry dynamics. It is unclear how mobile payments will change the traditional payment landscape, who the new stakeholder are, how traditional stakeholders will be affected and what stakeholder strategies will be employed to handle a disruptive change in the payment market.

Answering this problem would help to better understand how and to whom new mobile business models may be disruptive and how affected stakeholders are managing this change.

1.3 Purpose

The purpose of the proposed master thesis is to assess the disruptiveness of the Swedish payment market and describe strategies for managing a potentially disruptive change, by extracting acclaimed theories and using them to analyse qualitative data gathered from interviews with key supply-‐side stakeholders in the mobile payment ecosystem.

1.4 Research questions

To fulfil the specific research purpose, four research question have been formulated:

1. How can various mobile payment systems be disruptive?

2. What mobile payment business models and provider strategies can be identified? 3. What business model expectations do merchants have and what are their mobile

payment strategies?

1.5 Definitions and delimitations

First of all, it is necessary to define mobile payments. For this thesis, the definition by Lai and Chuah (2010) serves as a good guideline; mobile payments are “electronic

payments made using mobile devices either to directly purchase or to initiate or to confirm payment for goods or services for both online and physical point-‐of-‐sale transactions” (p.

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In terms of disruptive innovation, disruptiveness concerns mobile payments in relation to the space of electronic payments and the players in the corresponding ecosystem. The new mobile payment ecosystem contains four main groups; consumers, merchants, regulators, and providers (Au & Kauffman, 2008) and the proposed study will focus mainly on merchants and providers of mobile payments systems. Throughout the rest of the thesis the term supply-‐side stakeholders will be used to denote this delimitation. It should however be noted that merchants also have a demand-‐side role.

Moreover, the proposed research will focus primarily on mobile payment systems enabling POS transactions between consumers and merchants (C2B transactions) much like today’s debit and credit card purchases. Consumer-‐to-‐consumer (C2C) payments will not be primary objects of study. However, given the complexity of the payment ecosystem and the interrelation between different forms of payment, it is possible that mobile payment types other than C2B POS transactions will be touched upon.

In general, it is also hard to properly define the scope of an interpretivist study given the exploratory nature (Collis & Hussey, 2010). The complexity of the mobile payment ecosystem and the high pace at which it changes also makes it hard to delimit the thesis beforehand. In terms of geographical market delimitations, the proposed study is only concerned with players acting on the Swedish market. However, important players from other markets may be mentioned if it is considered likely that they would enter the Swedish market.

1.6 Thesis outline

This first chapter (Introduction) has provided some background on the research topic and argued for why the topic is relevant to study. The purpose of the study and the research questions have also been presented.

The second chapter (Methodology) describes the chosen research methodology and methods used. It includes limitations in terms of likely compromises and weaknesses of the proposed study. There is also a short presentation of the interviewees.

The third chapter (Theory and literature review) aims to present the reader with the current and past research on mobile payment system as well introduce acclaimed theories on disruptive innovation, business models, business model innovation and competing technologies.

The fourth chapter (Mobile payments in Sweden) will familiarise the reader with the Swedish mobile payment market; some general developments are described, important stakeholders are mapped and current mobile payment solutions are presented in detail. The fifth chapter (Empirics) describes raw empirical findings from interviews with key supply-‐side stakeholders and the sixth chapter (Discussion) analyses findings from all previous chapters in relation to the theory presented in chapter 3.

The seventh and last chapter (Conclusion) ends the research by answering the initial

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2 Methodology

This chapter describes how the research problem was investigated and motivates the different methods employed in relation to the chosen research paradigm. There is also a short presentation of the interview respondents. Finally, limitations of the research design are discussed.

2.1 Approach and methods

In terms of the two main paradigms proposed by Collis and Hussey (2010), the conducted research had mostly interpretivistic characteristics; data was primarily gathered from a limited number of qualitative interviews, the study had a natural location in the Swedish payment market, the research was not concerned with hypothesis testing, instead it was concerned with gathering a rich and nuanced understanding of what is currently happening in the Swedish mobile payment market. In order to satisfactory answer the research questions the study was performed as a combination of a theoretical and an empirical study. The theoretical part consisted of a literature review and the formulation of a theoretical foundation. The empirical part consisted of a number of interviews with key stakeholder from the Swedish mobile payment industry and a subsequent analysis of the interview data.

2.1.1 Theoretical study

The first step of the theoretical study was to form an understanding of both the Swedish mobile payment market but also the more traditional electronic payment market. This initial scan was based solely on secondary data. Since the mobile payment market is undergoing raping changes, literally transforming itself on a week-‐to-‐week basis, it was necessary to have a progressive information-‐gathering approach and complement the data gathered from published literature with press releases, white papers, consulting reports and newspaper articles. To maintain a high level of data integrity, all sources had to be individually validated in terms of intention, objectivity and credibility.

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(e.g. disruptive innovation (Au & Kauffman, 2008; Ondrus & Pigneur, 2005, 2006, 2007), business models and business model innovation (Bourreau & Verdier, 2010; Camponovo & Pigneur, 2003; Lai & Chuah, 2010; Lao & Liu, 2011)) In many aspects, the three theories are highly interrelated and they will be used in parallel to facilitate an insightful, multi-‐perspective analysis of the empirical data. Even though the theory serves as a basis for the interview template, the theoretical foundation was continuously validated throughout the empirical study.

2.1.2 Empirical study

For the empirical part of the thesis, primary data was gathered from key industry stakeholders. All major providers of mobile payment systems in Sweden were contacted and most of them agreed to participate in this study. The market was also searched for progressive merchants taking an active role in the emergence of mobile payment systems. One major merchant agreed to participate and an additional interview was conducted with the Swedish Trade Federation to gain a broader perspective on how other Swedish merchants may reason when it comes to mobile payment systems. (See section 2.1.3 for a presentation of the interviewees.) It should be noted that consumers were not targeted in this study. The main reason for this is that such an approach would have been very time-‐consuming and would therefore not have fitted within the given time frame. Nevertheless, several studies have already been conducted on consumer adoption of mobile payment systems and consumer insights could thus be gathered from secondary sources. Such consumer data has been used to create a more nuanced picture of the underlying industry dynamics.

In accordance with the interpretivistic paradigm, the empirical data gathered was of a qualitative nature. Such qualitative data is best collected from semi-‐structured face-‐to-‐ face interviews (Collis & Hussey, 2010). General questions and subjects were defined beforehand, but the interviews were conducted in an open manner allowing the interviewees to properly express their own standing and present thoughts on subjects that were not covered in the interview framework.

The last step of the research process was to analyse the empirical data. All interviews were recorded and transcribed directly after the interview. The first step of the analytical process was to reduce the data. As argued by Collis and Hussey (2010), reduction is a way to filter and reorganize the data to make it easier to identify results and draw conclusions. However, the reduction was done after all interviews had been completed. Such an approach is preferable since it is hard to know what data is actually relevant before being familiar with the whole data set (Collis & Hussey, 2010). After removing redundant data, it was necessary to restructure the data to make it fit with the theoretical foundations. Finally, the restructured data was compared and analysed in relation to the theory. Conclusions could then be drawn and verified, and the research questions could be answered.

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2.1.3 Interview structure and respondents

The interview framework was based on the theoretical foundations in order to ensure a strong link between theory and empirics. The interview template has however had a quite dynamic character; when new and important insights were gained, the framework was carefully reviewed and alterations were made when deemed necessary. Such a procedure also served as a continuous validation of the theoretical foundations. The final interview framework illustrated in Figure 1 covered five basic themes; (1) how mobile payments are changing the traditional payment landscape, (2) stakeholder roles in the new mobile payment ecosystem, (3) business models and strategies for mobile payments, (4) managing innovation in the payment market, and (5) the struggle between competing solutions. Themes 1, 2 and 5 were of a rather general nature whereas themes 3 and 4 were concerned with more company-‐specific factors such as employed business models, provider and merchant strategies, and how innovation is managed internally. The exact questions were altered depending on the respondent’s role as either provider or merchant. Example questions can be seen in Appendix A: Interview framework.

FIGURE 1: GENERAL INTERVIEW FRAMEWORK

Since the primary focus of this study has been on merchants and providers of mobile payment systems, five interviews were conducted with providers and one interview was conducted with a major merchant. Additionally, one interview was conducted with the Swedish Trade Federation, the employers’ organisation for the entire Swedish trade and commerce sector, to gain better insights into how other merchants may reason. Below follows an overview of the respondents and their respective organizations. Providers are presented first, followed by merchants and finally the Swedish Trade Federation.

1. A changing payment market

2. Roles in the ecosystem

3. Business models and mobile payment

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WyWallet

Date for interview 2013-‐02-‐19

Company / Owner 4T Sverige AB (Joint Venture: Telia, Telenor, Tele2 and 3)

Respondent Ingrid Lindström

Position Managing Director

WyWallet is a mobile payment application introduced by the four dominating MNOs Telia, Telenor, Tele2, and 3. The solution is available to all Swedish residents and can be used with iOS, Android, or any other platform supporting Java. With WyWallet, consumers can make both C2C and C2B transactions and it works much like a real wallet; consumers must deposit money before it can be used.

Klarna

Date for interview 2013-‐02-‐14 Company / Owner Klarna AB

Respondent Claes Tellman

Position Head of Communications

Klarna is a leading Swedish e-‐commerce company and they have been offering online payment solutions since 2005. Klarna has developed a mobile version of their platform Klarna Checkout. Online commerce is the target and there are currently no plans to extend this functionality to include the physical POS market.

SEQR

Date for interview 2013-‐02-‐20

Company / Owner Seamless Distribution AB

Respondent Emil Wikström

Position Managing Director SEQR

SEQR is an independent mobile payment application by the Swedish company Seamless Distribution AB. SEQR was introduced in the first quarter of 2012 and is currently used by both small and large merchants, the largest being food retailer Axfood. The solution enables both consumer-‐to-‐business (C2B) and consumer-‐to-‐consumer (C2C) payments.

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Swish

Note: For Swish, two interviews were held: one with Swedbank and one with SEB.

Date for interviews 1: 2013-‐02-‐19, 2: 2013-‐02-‐21

Company / Owner Joint venture: Danske Bank, Handelsbanken, _{Länsförsäkringar,
Nordea,
SEB,
Swedbank} Respondents 1: Jesper Ahrgren (Swedbank), 2: Jan Forsell (SEB) Position 1: Business Developer, 2: Business Developer

Swish is a mobile payment application for C2C payments introduced by a majority of the largest banks in the Swedish market: Danske Bank, Handelsbanken, Länsförsäkringar, Nordea, SEB, and Swedbank. The application was launched in December 2012 and is available to all private customers of the above-‐mentioned banks. Customers can make real-‐time transfers between bank accounts, even if they have different banks.

Bart

Note: The interview with Swedbank concerned both Bart and Swish.

Date for interview 2013-‐02-‐19 Company / Owner Swedbank

Respondent Jesper Ahrgren

Position Business Developer Mobile Payments

Bart is a mobile payment application developed by Swedbank and enables mobile C2B transactions at POS. A limited trial was conducted in the Stockholm area during late 2012 and the solution will be released to all Swedish consumers during 2013.

Axfood

Date for interview 2013-‐02-‐20 Company / Owner Axfood AB

Respondent John Svensson

Position Business Developer Payments

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Swedish Trade Federation

Date for interview 2013-‐02-‐15 Company / Owner N/a

Respondent Bengt Nilervall

Position Head of Payments

The Swedish Trade Federation is the employers’ organization for retailers, wholesalers and importers. It has 13,000 members spanning from large companies (such as IKEA, ICA, and H&M) to small and medium-‐sized companies. The federation is an active promoter of mobile payments.

2.2 Limitations of the research design

Limitations are concerned with weaknesses or flaws in the research design (Collis & Hussey, 2010) and will here be discussed in terms of validity, reliability and

generalizability.

Validity is the extent to which the research findings correctly reflect the phenomena

under study and is generally high in interpretivistic studies (Collis & Hussey, 2009). To ensure high validity in the conducted study, different measures were taken to ensure that the interviewees fully understood questions and key theoretical concepts in an effort to eliminate the risk for misinterpretations or misunderstandings affecting the results.

Most qualitative, interpretivistic studies however struggle with reliability. One foundation for scientific research is that it should be replicable, but the performed study’s semi-‐structured interviews with open questions would probably not return the same answers if the interviews were to be repeated at a later point in time. To help counterbalance this, examples from the interview framework are presented in Appendix A: Interview framework. Interviewees were allowed to talk freely in an effort to minimize subjectivity, but in order to at the same time promote replicability interviewees were only allowed to talk about pre-‐defined subjects.

Generalizability is concerned with how the results of a study can be extended to other

cases, or to situations other than those investigated. Generalization was not part of this study and is mostly relevant for positivist studies where researchers may want to draw general conclusions and extend the findings from a sample to the population from which the sample was chosen (Collis & Hussey, 2010).

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3 Theory and literature review

This chapter presents applicable theories that subsequently will be used to analyze the empirical data. First, there is a short introduction to the innovation typology. Second, theory is presented on disruptive innovation, business models, business model innovation, and competing technologies. Finally, a review of the existing literature on mobile payments is presented together with the identified research gap.

3.1 Theory

The theory used in this thesis will build on three main pillars: (1) Disruptive innovation, (2) Business model innovation, and the struggle between (3) Competing technologies. In many aspects, the theories are highly interrelated but they will be presented separately to provide a more straightforward basis for analysis. For a more complete overview, there are also two sections on Innovation typology and The concept of business models.

3.1.1 Innovation typology

There is a sea of definitions relating to innovations (Garcia & Calantone, 2003) and analyzing the available typology could easily be the subject of a separate thesis. For that reason, this section should only be seen as a brief, non-‐exhaustive introduction to the innovation typology used in the studied literature.

Architectural innovations change the linkage between core concepts and components of

a product without changing the actual core concepts. The difference between radical innovations and architectural innovations is that radical innovations also changes the core concepts of the product (Henderson & Clark, 1990).

Business model innovation is concerned with changes to the customer value proposition,

profit formula, or key resources and processes. The concept was introduced in the now legendary HBR article “Reinventing Your Business Model” by Christensen et al (2008). See section 3.1.4 for more theory on business model innovation.

Radical innovations employ substantially new technology and offers substantially higher

customer or user benefits relative to existing products, services, or processes (Sorescu, Chandy, & Prabhu, 2003). Radical innovations also result in a new market infrastructure. Incremental innovations on the other hand involve only modest changes to existing products in existing markets (Garcia & Calantone, 2003). The typology radical versus incremental innovation was first used by Abernathy and Utterback (1978) but has been used in many settings since.

Disruptive innovations initially have worse performance than existing products in the

market, but instead introduce new sets of features, performance, and price attributes that attract certain customer segments. Through subsequent development, the innovation may ultimately become competitive also in the mainstream market.

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products (Christensen, 1997). Mobile payments can be seen as such an underperforming, disruptive technology currently unable to satisfy consumer demands in the main payment market (Ondrus & Pigneur, 2006). See section 3.1.2 for more theory on disruptive innovation.

Discontinuous innovations require consumers to establish different behavioral patterns

than those used for non-‐discontinuous innovations. Discontinuous innovations are sometimes also referred to as radical innovations (Utterback, 1996).

3.1.2 Disruptive innovation

The concept of “disruptive technologies” was coined by Bower and Christensen (1995) in a Harvard Business Review article where the authors outline strategies for how managers of leading companies should assess new technologies and manage disruptive changes in the market. The theory should be mostly credited to the latter author who later extended the theory (Christensen, 1997) where he discussed the full implications for managers in relation to disruptive technological change.

The central question for Christensen (1997) is how managers of leading companies (companies that have been admired and studied by other managers) fail to identify disruptive innovations and instead steer their companies towards destruction. Innovations can be classified as either sustaining or disruptive:

Sustaining innovations are aimed at improving the performance of existing products. Performance is in turn defined as the performance valued by mainstream customers in major markets. Most technological improvements have historically been of a sustaining nature.

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FIGURE 2: PERFORMANCE IMPACT OF SUSTAINING VERSUS DISRUPTIVE INNOVATIONS

SOURCE: CHRISTENSEN (1997)

The main findings of Christensen’s (1997) original work can be summarized in seven points. First, there might not be a fit between the pace of progress offered by technology and the progress of market demand. This implies that a disruptive innovation may seem unwanted today but perfectly address the needs of tomorrow’s consumers. Second, managing innovation is closely linked to theories on resource allocation: it is very hard for an organization to effectively allocate funding and manpower in order to promote the right innovations. Third, the considerations needed for taking a disruptive innovation to market differs from those of a sustaining innovation. Many companies will try to force disruptive technologies to fit the needs of current mainstream customers, which will lead to failure. Fourth, the capabilities of most organizations are far more specific than most managers believe hence making the organization incapable of handling unfamiliar scenarios. Fifth, there is a scarcity of information available to support large investments in disruptive technology. Sixth, companies should mix strategies to stay competitive. It is not sufficient to stick with either being a leader or a follower. Seventh, the largest barriers to entry and mobility are that disruptive technologies seldom make sense and large companies have difficulties doing things that do not fit their established value creation model.

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Danneels (2004) argue that despite the fact that Christensen’s work has been widely acclaimed and heavily referenced, there is a fundamental issue with the core definition of “disruptive technology”; the definition has become loose and it is rather unclear what actually constitutes disruptive innovation. In fact, Christensen never provides any rigorous criteria for when a technology is to be considered disruptive (Danneels, 2004; Markides, 2006).

Markides (2006) also criticizes Christensen’s model by questioning the seemingly widespread assumption that the model can be used to explain all sorts of disruptive innovations. Instead, he suggests that there is a fundamental difference between a disruptive technological innovation, a disruptive product innovation, and a disruptive

business model innovation. The characteristics of the latter category will be further

explored in section 3.1.4 (Business model innovation).

Another deficiency of Christensen’s original model is the assumption that the new technology will grow to dominate the market. Instead, Markides (2006) argue that this is not always the case. However, their different positions are best explained by the fact that Christensen’s original theories were solely focused on technological innovations where total market dominance of new innovations is far more likely than it is for new business models.

3.1.3 The concept of business models

There are many definitions available of what a business model is, but generally they are concerned with “how an organization creates, delivers, and captures value” (Osterwalder & Pigneur, 2010, p. 14). The concept of business models cannot be credited to any single author or authors. Business models are part of strategy theory which has been studied for decades including the early developments by Chandler (1962), Ansoff (1965) and Andrews (1971). Bearing in mind that there is no coherent definition of a business model, the 9-‐fold Business Model Canvas concept developed by Osterwalder and Pigneur (2010) and presented in Table 1 below will be used throughout this thesis to allow for a consistent analysis. The concept covers four main areas: the (1) customers, the offer or (2) customer value proposition, the (3)

infrastructure, and (4) financial aspects. The components outlined in this model are

similar to those of other key business model concepts such as Christensen et al. (2008) and Chesbrough et al. (2002).

TABLE 1: NINE BUSINESS MODEL COMPONENTS

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4 Customer relationship The types of relationships a company establishes with specific _{Customer
Segments} 5 Revenue streams The cash a company generates from each Customer Segment 6 Key resources The most important assets required to make a business model _work 7 Key activities The most important things a company must do to make its _{business
model
work} 8 Key partnerships The network of suppliers and partners that make the business _{model
work} 9 Cost structure All costs incurred to operate a business model

Note. Adapted from Business Model Generation (pp. 20-‐40), by A. Osterwalder and Y. Pigneur,

2010, New York City, NY: John Wiley & Sons.

Porter (2001) has criticized the definition of business models for being “murky at best” (p. 13), arguing that the concept is unclear and that it risks leading managers into faulty thinking. Whatever the actual implications for managers may be, the concept is frequently referred to in the literature on mobile payments (Au & Kauffman, 2008; Bourreau & Verdier, 2010; Camponovo & Pigneur, 2003; Lao & Liu, 2011; Lim, 2008; Ondrus & Pigneur, 2005; Pousttchi, Schiessler, & Wiedemann, 2008).

3.1.4 Business model innovation

As already mentioned, there is a fundamental difference between the innovation of products, technology and business models. Not only do they ascend in different ways, but they also have different effects on established players thus requiring different strategies for affected companies. It is important to note that business model innovators do not introduce new products or services; they merely change the way they are provided to the customer (Markides, 2006). This is also the case of mobile payments. Paying for goods and services is definitely not a new phenomenon, but they way the service is provided to the consumer via a mobile device instead of hard cash or a plastic card – that is indeed something new.

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entrants. There are very few examples of established players that have been successful in introducing new business models in existing markets (Christensen et al., 2008). Despite this apparent problem, Christensen et al. (2008) argue that almost all managers agree that their businesses are in need of business model changes in order to stay competitive, but in reality only 10% of total innovation investments are made in the area of business model innovation.

So, why is business model innovation so hard to pull off in reality? Start by combining the fact that new business models mainly attract customers outside of a company’s main markets and that new business models often require different and conflicting value chains from what the company has established, and it is not surprising that incumbents often lack the initial motivation to adopt or respond to new and disruptive business models (Markides, 2006). Similarly, Christensen et al. (2008) argue that the main reason why companies fail to innovate their business models is that new ideas often look unattractive from the outside. Markides (2006) has a similar view and suggests that it does not make economical sense for many incumbents to respond to disruptive innovations. Instead, they have several other possibilities to grow their businesses, e.g. international expansion, investments in adjacent markets etc. However, as the new business models eventually improve and start to deliver value comparable or better than the value delivered to customers in the old market, customers will start to switch from the old to the new market. At this point, it is inevitable for incumbents to react to the disruptive forces. Many companies are also afraid of alienating existing relationships with distributors and other stakeholders in their value network. For example, when airline companies decide to start selling tickets on their own websites, they risk alienating existing relationships with their travel agents (Markides, 2006). The slow but brutal collapse of Eastman Kodak serves as a classic schoolbook example of what might happen when companies fail to innovate their business models. Kodak wasn’t blind to disruptive forces. In fact, they invested heavily in emerging technologies early on, but they did so only by extensions to their existing business model. Also, they started their wind-‐down of their core business way to late; when other players started to innovate, their film business was still growing resulting in a lack of urgency to change (Anthony, 2012).

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the ability to do so is low, the company should either attack back in an attempt to destroy the innovation or embrace it fully and completely abandon its old business. If both the motivation and the ability to respond are high, the company should adopt the new innovation and incorporate it into the existing business.

When a company do decide to innovate their business model, Christensen et al. (2008) suggest a three-‐step approach for successful business model innovation. First, the company should not think about business models at all. Instead, they should focus on satisfying customer needs and their desire to get a job done. Second, the company should then carve out a plan on how to deliver this value to the potential customers while making a profit. Third, the company should take this new plan and compare it to the existing business model to see what has to change. When this is done, the company can assess how to adapt the organization to allow for a successful development of the new innovation.

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acquiring company should not integrate the acquired company into the existing organization. On the contrary, if resources were the main reason for the acquisition, it makes sense to integrate it into the existing organization and leverage existing capabilities (Christensen & Overdorf, 2000).

Business model innovation can disrupt competition and create spectacular growth opportunities without requiring the company to fundamentally change the business model (Christensen et al., 2008). However, managers must carefully assess what the new customers actually value and what changes the organization is capable of making (Christensen & Overdorf, 2000). Christensen et al. (2008) conclude that the most transformative companies are the ones that take a new technology and wrap it into a successful business model, rather than trying to beat competition by exclusivity in terms of discovery and commercialization.

3.1.5 Competing technologies and dominant design

Theory on evolutionary economics suggests that the dynamics behind competing technologies can be seen as twofold: a variation and a selection process (Nelson & Winter, 1982). The variation process is concerned with creating many alternatives to the current dominant design and the selection process is concerned with how different choices, small or big, by rationale or chance, lead to the emergence of a dominant design (Anderson & Tushman, 1990). A dominant design is defined as a “specific path, along an industry’s design hierarchy, which establishes dominance among competing design paths” (Utterback & Suárez, 1995, p. 416). The concept is illustrated in Figure 3 below. Dominant design is related to the concept of standards, but Utterback and Suárez (1995) argue that standards are more narrowly defined as the battle between technical alternatives. Some authors however tend to use a wider definition of standards, resulting in a potential overlap between the two concepts. For this thesis, the dominant design typology is more suitable than standards since it allows other business model related factors such as strategic maneuvers and network externalities to be incorporated in the analysis.

FIGURE 3: DESIGN HIERARCHIES AND DOMINANT DESIGN

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Economies of scale are seldom present before a dominant design emerges since many different products will be produced by a large number of small-‐scale producers. Once the dominant design emerges, this is likely to change; firms that master the development of products building on the new dominant design will experience rapid growth killing those firms that betted on other solutions (Utterback & Suárez, 1995). There are however cases were economies of scale do indeed play a vital role for the emergence of a dominant design. When network externalities have a positive impact on adoption, the perceived consumer value of a product becomes higher when more consumers adopt the product (Katz & Shapiro, 1986) hence creating economies of scale already at an early stage (Utterback & Suárez, 1995). This is especially true for mobile payment systems; the more merchants that adopt a specific mobile payment system, the more consumers will be willing to adopt it and when more consumers start using the network, the value for merchants will increase hence resulting in a domino like effect (Au & Kauffman, 2008; Mallat, 2007).

Before a dominant designs emerges, there will be plenty of competing variations on the market (Nelson & Winter, 1982; Utterback & Suárez, 1995). The different variations can be seen as trials of various features, much like experiments, where the performance measures differs widely. During the subsequent selection process, the scope of features will be narrowed (Nelson & Winter, 1982), and it is normal that the now dominant features stems from different products and companies. The number of competitors will also decrease until stabilized around a limited number of large firms (Utterback & Suárez, 1995). Anderson and Tushman (1990) extends this reasoning by proposing a cyclical model for technological change. In this model, the dominant design phase is followed by a period of sustaining or incremental innovation until a second disruption occurs which in turn leads to a new dominant design and a repetition of the cycle. Arthur (1989) adds to the literature by arguing that the selection process is heavily affected by random “historical events” (p. 126) that, if combined with positive economies of scale, can create lock-‐in of inferior technologies. It is therefore difficult to predict how a certain industry will develop, both in theory and in practice. Some managerial implications are also outlined by Utterback and Suárez (1995) who conclude that it is preferable for a company to enter a market several years before the emergence of a dominant design. In doing so, companies will have enough time to experiment with different product attributes. However, the authors only found limited support to their assumption that entering a market several years after the emergence of a dominant effect would be associated with a greater risk of failure.

3.2 Past research on mobile payment systems

Disruptive innovation in the Swedish payment market: A supply-side perspective

Disruptive innovation in the Swedish

payment market: A supply-side

perspective

PATRIK TIDEBRANT

Disruptive innovation in the Swedish

payment market: A supply-side perspective

Patrik Tidebrant

TABLE OF CONTENTS

List of figures

List of tables

List of abbreviations

Acknowledgements

1 Introduction

2 Methodology

3 Theory and literature review