AARHUS UNIVERSITY, SCHOOL OF BUSINESS AND SOCIAL SCIENCES
BACHELOR THESIS
Externally Driven Business Model Innovation
The Case of Danske Spil
May 2014
Author
Christian Jantzen (303104)
BSc in Economics and Business Administration
Academic Supervisor
Peter Kesting
Associate Professor
Department of Marketing and Organisation
Characters including tables and figures, excluding blanks:93.105
Abstract
The purpose of this paper is to investigate how Danske Spil changed their business model to overcome the changes following the market liberalisation of 2012. The paper chooses to mainly feature the subsidiary company DLI (Danske Licens Spil), which is the part of the group operating on the free market. Through the appliance of Ostenwalder and Pigneurs (2010) framework the Business Model Canvas, the entities of Danske Spil’s business model are analysed before and after the external changes. Furthermore, the framework of Cavalvante et al. (2011) is applied to determine the nature of the changes. The analysis finds that change has occurred in all areas of the business model. The main changes occurred in the fundamental activities, shifting the focus of the company to be entirely profit-oriented, which in turn influenced the changes in all other areas, thus following the trend of business model revision. The analysis further concludes that the main reasons for a successful transition was the abilities of leaders and the structural changes made prior to the liberalisation. Following the changes a series of challenges also occurred. Here the main challenge were the gap between two groups of employees, where one group is operating on the free market, and the other in a monopoly. Using the findings in the analysis the paper discusses the theoretical fit and prospects for future research in the area. It finds that some theory fit better than other and that researchers in turn should focus on creating literature and theory that can be used to generalise case, thus creating a mean for comparison.
Key words: Business models, business model innovation, business model change, market liberalisation, business model canvas, change management, business model revision, challenges of change.
Table of Contents
1. Introduction
1.1 Background
2. Theory
2.1 What is a Business Model?
2.2 Business Models, Innovation and Change
2.2.1 Business Model Design
2.2.2 Business Model Reconfiguration (BMR)
2.2.3 Visualizing Business Model Innovation
2.3 Conceptualizing and illustrating the business model
2.3.1 The Business Model Canvas
3. Data & Method
3.1 Methods
3.2 Literature
3.3 Data
4. Findings
4.1 The BM Canvas prior to the liberalisation
4.2 The BM Canvas after the liberalisation
4.3 Analysing the canvasses
5. Discussion
5.1 Discussion of the findings
5.2 The theoretical fit
6. Conclusion
6.1 Limitations of the study
6.2 Suggestions for further research
6.3 Acknowledgements
7. References
8. Appendices
1. Introduction
Change is inevitable. This is the reality that all companies are faced with at certain points of their existence. Whether the change is of a radical or milder nature differs, but one thing is for sure; change is inevitable. It is in dealing with these changes that companies show their true character and survival instinct. Because failing to deal with changes in the right way, can ultimately cause a company to fail. Therefore, the process of change is a rather interesting matter, which will be investigated further in this paper.
The paper will revolve around the case of Danske Spil,a Danish sports betting and online casino carrier, who is mostly owned by the Danish state. In 2012 they faced radical changes in their market; however, still they managed to maintain a leading position in their core areas and expand the company to serve a new range of customer demands. The paper will thus be asking the question: How has Danske Spil changed their business model to cope with the changes from 2012? The paper aims to answer this through an investigation of how these changes haveinfluenced the business model (shortened BM from here on) of Danske Spil (shortened DS from here on). Through the appliance of relevant theory the paper will analyse the BM prior to the changes thus creating ground for comparison with the BM today, in order to analyse how external changes has led to internal changes. Through an analysis of both fundamental processes and micro-activities the end product of the research will be an in-depth analysis of what was changed inside the company, what were the challenges, and what was important in the process of change. Furthermore, the paper aims to discuss the theory developed in the area of BM and the change process, through a discussion of how the theory held up through the actual findings of the case.
This case is particularly interesting to study due to a range of factors. It is the story of a small state-owned company which has historically operated as a monopoly in more than 60 years with a strong identity of donating their profits to charity and local associations. Without any real experience of competition and competitors their market is all of a sudden opened up to a big group billion-dollar cooperation hungry to take over the new market, since it is no longer protected by monopoly. The interesting part is now following how the company deals with these radical changes and what consequences this have had inside the company. It may thus paint a picture of what it takes to survive a transition from a monopoly-company to a perfectly competitive company, operating on equal terms with the market competitors.
1.1 Background
Following the years after WW2, DS was formed in 1949 by the Danish government. Back then the company was named Dansk Tipstjeneste, and all their profits where donated to local society, such as sport clubs etc. The company has had a strong corporate identity as a company whose existence was purely for doing good, manifested in their slogan “For joy and benefit”. Up until 2012 DS had a monopoly in the Danish market, and their main activities was to run the national lottery as well as related games such as sports betting and lottery coupons. This meant that no other carriers had access to the market, and they could not market or sell their products in the market. All this changed when the Danish government decided to liberalise part of the market on 01.01.2012. This now means that every company who buys a license in the Danish market can compete on equal grounds, upon paying a state fee of 16% of their revenue.The liberalisation concerned part of the market, such as sports betting and online casinos whereas the national lottery is still protected by a monopoly. DS responded to the liberalisationby dividing the group into three companies; Elite Gaming which is a company operating on the market of physical gaming machines, Danske Lotteri Spil(DLO) which is the part of the company still operating on the monopoly protected part of the market - here all profits are donated to local associations, andDanske Licens Spil (DLI) representing the last part of the group. DLI is the company that will bedealt with in this paper; they operate on the liberalised part of the market. The liberalisation is an opportunity for DS since their competitors used to have an advantage with lower taxes (Danes could still access their products online), whereas now they compete more equally. However, it also means that other companies now can market and promote themselves in the Danish market, meaning that they can actively compete for market share with DS (Lind Nielsen).
2. Theory
This part of the paper will be presenting the existing relevant literature inside the field of business models and business model change. It will introduce the concept of business models itself, and present different views upon what a business model is. The paper will then take a deeper look at models used to describe and analyse a BM, and argue why some are preferred over others. I am also going to be dealing with the notion of BM change to see what parts of literature can be applied to the specific case of Danske Spil. Since the field is still quite small and emerging it should be possible to paint a rather complete picture of the existing research conducted.
2.1 What is a Business Model?
In terms of academic interest the term Business Model can be said to be a very recent phenomena. In the period up until 1995 there were virtually no articles published on the matter. But searching for articles published after 1995 will show that the interest in BM’s has exploded over the last 20 years time (C. Zott, Amit, & Massa, 2011). I decided to test this claim myself, using EBSCO Business Source Complete, and this confirmed previous results. Using the key word “Business Model”, but limiting publication years to 1994 and before gave me 1,588 results. From 1995 to present EBSCO presented me with 30,672 publications and therefore it is safe to say that the interest in this research area has exploded during the last 20 years.
Although popularized around 1995, Teece(2010) points out that BM’s have been a part of economic behaviour since pre-classical terms, thus arguing that it is not necessarily a new term. In relation to this it is argued by Massa & Tucci (2013) that up until the mid 1990s firms operated with a much more industrial view in mind. They acknowledge that firms have always operated after a BM and even though some have been innovative, it is only since the mid 1990s that BM innovation has moved with such a pace, that ithas the power to transform industries and thus attract the interest of scholars and practitioners. Today, BM’s actually create means for competition and companies create and deliver value through a strong and unique BM as seen in for instance Apple and Amazon.
One of the earliest authors to define a BM is Timmers (1998) who argues; The business model is “an architecture of the product, service and information flows, including a description of the various business actors and their roles; a description of the potential benefits for the various business actors; a description of the sources of revenues” (p. 2). The definition clearly strives to perceive all elements of what a BM contains, however, the definition can be hard to work with due to the predefined nature of it. Although Amit & Zott’s(2001) definition focuses on the value creation through business opportunities, it has certain similarities with the definition by Timmers through the emphasis on structure and content. They argue that a BM is “a set of structure, content and governance of transactions that is created to help businesses exploit opportunities” (p. 511).
Chesbrough & Rosenbloom(Chesbrough & Rosenbloom, 2002) link the technical potential to the realization of economic value. They argue that the two are connected by a heuristic logic and it is this that defines the BM.Although acknowledging the importance of value creation, they do not point to specific factors that are included in the BM like Timmers for instance.Magretta(2002), takes a somewhat different and more abstract stance whenpresenting his paper “Why business models matter”. In here, he states that a BM should answer Peter Druckner’s four questions: “1) Who is the customer? 2) And what does the customer value? 3) How do we make money in this business? 4) What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?”(p. 4). Again no specific factors are mentioned.The next two definitions can be said to be very specific in addressing what factors are included in a BM, and they can thus be said to eliminate some of the abstraction created in the two definitions above. Morris et al. (Morris, Schindehutte, & Allen, 2005) do this through a description of the BM as how a set of decision variables is dealt with in order to create a competitive advantage. They address six fundamental components: Value proposition, customer, internal processes/competencies, external positioning, economic model, and personal/investor factors. Johnson, Christensen & Kagermann (2008) also mention specific factors that create a BM. Their definition involves “4 interlocking elements, which when taken together creates and delivers value” (p. 52). These are customer value proposition, profit formula, key resources, and key processes. It is through defining the different factors included in a BM that research is moving closer to a practical appliance of BM theory, such that practitioners have real-life tools that can be applied to their companies and the context which they operate within.
Looking at more recent definitions of the BM (2010 and onwards), Casadesus-Masanell & Ricart (2010) are short and concise, when describing a BM as: “a reflection of a firm’s realized strategy”. Along the line with Magretta their definition is somewhat more abstract and less applicable for businesses as a single tool, but can be used in coherence with other theoretical frameworks. Finally going back to Teece (2010) who argues that a BM articulates different factors such as the logic and the data that make up a value proposition for the customer, but also represents a cost and revenue structure of the company that delivers this value to the customer. The definition thus links the notion of value proposition with internal processes of a company, thus emphasising that the ultimate focus should be the customer.
Since the paper will be revolving around the term BM, it is very appropriate to pick out one definition that will describe what is meant upon using the term. This is done in order to avoid ambiguity about what is meant with the term. As shown above defining a BM is not a simple task. Although there seems to be an overall coherence between the definitions, some of the definitions are different in their meaning and focus points, and it is therefore important to pick one that can create coherence and meaning with the rest of the theoretical framework. This paper will not be using any of the definitions above, however, it will use a definition evolved from the theory above.
Zott and Amit (2010)evolved their 2001 definition off a BM and it is this definition that will be used as a point of reference inside this paper. Their definition of a BM is: “a system of interdependent activities that transcends the focal firm and spans its boundaries” (2010: 216).The reason for choosing this definition is two-fold; First of all, it acknowledges that a BM is not just a single system that should be seen upon as a whole. The emphasis on interdependent activities will help create coherence with the rest of the theory used for this framework. Secondly, it is still a rather open definition. It does not try to define the specific entities thus maintaining an open scope open for individual interpretation.
Some of the other definitions would have fitted the somewhat same needs however; they lack the complete two-sided focus. For instance, Teece (2010), Morris et al. (2005) & Johnson et al. (2008) all put an emphasis on the fact that business models have different entities that make up a whole, but it is when trying to define these that they fall through. Upon doing this, they close down the scope and the openness thus limiting the definition. This would damage the coherence with the rest of the theoretical framework and is therefore not ideal for this paper. Others, like Magretta (2002) and Casadesus-Masanell & Ricart (2010) have a definition which is simply too open thus failing to be accurate about what a BM actually is and therefore again lacking coherence with the theoretical framework of this paper.
2.2Business Models, Innovation and Change
The term innovation has been used to describe many different phenomena and has been popularized a lot during the last years. Therefore, it is necessary to specify what is meant when using the definition in this relation, different angles on the term inside the field and in general present the existing theory already made in the field. Massa & Tucci have to be acknowledged for their 2013 work on a literature review which sums up the literature created, very clearly and in a brilliant way.
Like mentioned above the term innovation can lead us on to many pathways inside the field. Mainly the term can be said to describe two different phenomena; 1) the entrepreneurialnovel BM in which a BM is developed from the start of a setup or 2) when changing an existing BM to fit either new challenges or to gain competitive advantages (Massa & Tucci, 2013). Since this case is dealing with DS who is an established company that already had a BM up and running, the main focus of this theoretical review will lay on the second term. Massa & Tucci (2013) distinguish between the concepts by using the terms business model design (BMD) and business model reconfiguration (BMR), which are terms this paper will also be using for convenience. BMD refers to novel start-up BM’s and BMR refers to changing existing BM’s.
2.2.1Business Model Design
The reason for still briefly including BMD is that there may be some relevance for the case to collect from this particular framework. We will thus look at some of the most significant definitions and proposals.Amit & Zott (Amit, R., & Zott, C., 2001) describes BMD as an entrepreneurial activity in which you design the content, structure and governance of the interaction and the transactions that a firm performs together with its exchange partners, and it is through this that value is created. BMD is concerned with more classical entrepreneurial activities like creating an organisation, internal/external recognition of opportunities and connecting with the market (Bhave, 1994). In a later article Zott & Amit(2007)argue that the ladder is an important part in connection with BMD in that “a BM elucidates how an organization is linked to external stakeholders, and how it engages in economic exchanges with them to create value for all exchange partners” (p.181). Furthermore,McGrath (McGrath, 2010) elaborates on this by arguing that BMD is mostly concerned with classical entrepreneurial choices such as organizational design however, it is also about designing a boundary system, so that a product or service can be offered to a market. Both authors thus argue that BMD can mostly be seen as an entrepreneurial activity, establishing new companies.