- Email: [email protected]
Categorization and mechanism of platform-type product-service systems in manufacturing
CIRP Annals - Manufacturing Technology 61 (2012) 391–394
Contents lists available at SciVerse ScienceDirect
CIRP Annals - Manufacturing Technology jou rnal homep age : ht t p: // ees .e lse vi er . com /ci r p/ def a ult . asp
Categorization and mechanism of platform-type product-service systems in manufacturing Nariaki Nishino a, Sihui Wang a, Nobuyuki Tsuji b, Kazuro Kageyama a, Kanji Ueda (1)b,c,* a
Department of Technology Management for Innovation, School of Engineering, The University of Tokyo, Tokyo, Japan Research into Artifacts, Center for Engineering, The University of Tokyo, Kashiwa, Japan c National Institute for Advanced Industrial Science and Technology, Tsukuba, Japan b
A R T I C L E I N F O
A B S T R A C T
Keywords: Service Decision making Business model
Manufacturing industries has confronted a changing phase from sales as physical products to provision as ‘servicized’ products. Accordingly, manufacturers must consider a new fusional framework incorporating products and services. This study defines a ‘platform-type product service system’ as a comprehensive business model with a common platform on which service providers, consumers, and manufacturers mutually interact. Such a platform framework offers great potential for manufacturers because it inevitably requires product use. Our study categorizes actual business examples. Then, based on that categorization, we construct theoretical models of several types. Game theoretic analysis clarifies its characteristics and mechanisms. ß 2012 CIRP.
1. Introduction Manufacturing industries are currently faced with a transformation from provision of physical products to servicizing. That movement is related to the following three factors. First is the development of information communication technology, which enables the construction of service platforms through digitalization and networking. Accordingly, networked home electronics have been emerging and the transition to a service economy thereby is accelerated. Second, in vertical value chains, valueadding phases are now shifting from assembling processes to upstream and downstream processes. As Fig. 1 shows, recent trends can be represented as a smiling shape, meaning that upstream processes such as product development and design process or downstream processes such as maintenance and aftersales service are increasingly producing high profitability. The idea, proposed by Stan Shih, the founder of Acer Inc., is designated as a smiling curve. The third factor is change of consumer demand from the act of product possession to act of experience through services. Especially since the 1990s, it is said that consumers’ expenses on services are steadily increasing. In response to those strong trends, manufacturers must consider a new fusional framework incorporating products and services. For example, a platform-type product service system can be a possible strategy that provides a comprehensive business model with a common platform on which service providers, consumers, and manufacturers mutually interact. Recent online music stores and electronic books are applicable for this business type. Such a framework has great potential for manufacturers because such services invariably require products for their use.
* Corresponding author. 0007-8506/$ – see front matter ß 2012 CIRP. http://dx.doi.org/10.1016/j.cirp.2012.03.053
Given such a background, this study gives the categorization and structuring of service models involved with manufacturers, addressing product service systems with a platform. Additionally, we propose three basic models and present theoretical analyses.
2. Related literature 2.1. Research related to services Since advocating ‘Service science’ or ‘Service science, management and engineering (SSME)’ by IBM, many researchers have devoted attention to services, conducting numerous studies to date. Vargo and Lusch [1] proposed the idea of service-dominant logic, which explains the importance of transformation from product-based logic to service-based logic. Especially in the field of production engineering, ‘Service engineering’ has been proposed and studied as well. For example, Arai and Shimomura propose a service CAD system [2,3] and evaluate services using service Quality Function Deployment (QFD) [4]. Moreover, Sakao and Shimomura [5] apply the methodology to accommodation service and renting of home appliances. Recently, an approach using economic experiments with human subjects and agent-based simulation is applied to the issue of service design [6]. Shostack [7,8] has contributed to problems of service design in the early stage, especially devising a technique of service blueprinting. The term ‘product service systems (PSS)’ is defined by Goedkoop et al. [9] as ‘a marketable set of products and services capable of jointly fulfilling a user’s need’. Mont [10] states in his paper that PSS has the potential to minimize the environmental impacts of consumer needs and wants, and conducts studies from an environmental viewpoint.
N. Nishino et al. / CIRP Annals - Manufacturing Technology 61 (2012) 391–394
392
Fig. 1. Smiling curve phenomenon.
2.2. Research related to platform strategy In the field of business administration, Cusumano and Gawer [11] refer to a ‘platform’ as an evolving system made of interdependent pieces that can each be innovated upon. Their article described platform leadership in business circumstances. Additionally, Evans et al. [12] explain that a software platform is invisible engines to be the source of great value to consumers. In the earliest stage, Simon also used the term ‘platform’ in his article [13]. Meantime, an economic theoretical model named ‘two-sided market’ was studied by Rochet and Tirole [14], Armstrong [15], Parker and Alstyne [16], Hagiu [17], and others. These studies clarify the theoretical mechanism of business with the core platform framework from the viewpoint of economics. 3. Basic model of platform-type PSS and its categorization
Fig. 2. Basic framework model of platform-type PSS.
components and which cannot work per se. The device manufacturer produces some goods on which the contents works, representing product components. The platform provider provides a sort of a platform which connects the device and the contents: e.g., interfaces for microprocessors, operating systems for PCs, a unified standard, etc. Accordingly, the platform provider issues license to content developers or the device manufacturer. Each player’s decision and product flow are depicted in Fig. 2. 3.3. Actual business and the basic model
3.1. Definition of platform-type PSS The term ‘Service’ is defined in diverse ways in different domains, as described in the previous section. Our study, considering such preceding several definitions and notions, defines the term of ‘Platform-type Product Service Systems’ as follows: Platform-type Product Service Systems is defined as a fusional system comprising product components and service components that are in complementary relation and which create no value with single use, especially having a common platform which makes service components functioning; it is finally provided to customers as an integrated total system.
Regarding physical products and application software/digital content as the device and the content respectively in the basic framework model, actual examples in business can be summarized as presented in Table 1. Computer operating systems are an example of the platform business. Recently, smart phones can be included as well. In addition, home video game businesses are regarded as a traditional example. Online music stores and electronic books are emerging businesses. Those actual examples are structured and organized as shown in Fig. 3, based on the basic framework. 3.4. Categorization of platform-type PSS
Herein, it is noteworthy that the complementary relation means a product cannot independently produce any value to users without the platform and service components; it represents complementarity between a product and service. 3.2. Modeling the basic framework Our study constructs a basic model, addressing the home electronics industry. We assume that the model includes players of four kinds: content developers, the platform provider, the device manufacturer, and consumers. Content developers and consumers are plural while the others are singular. In this model, the content developers produce some content that constitutes service
From those discussions above, if details might be omitted, then we can summarize the actual examples into the three base cases portrayed in Fig. 4. In Case 1, content developers and the device manufacturer respectively provide their own products; the platform provider merely issues licenses to both. This case corresponds to the types of computer OS and home video games. In Case 2, the platform provider purchases devices from the manufacturer and sells them to consumers, incorporating the platform into the devices. The types of mobile phones/smart phones are applicable to Case 2. Case 3 is that of ordinary appliances with an embedded system. In the next section, we provide a theoretical analysis with respect to each case.
Table 1 Actual examples of businesses using a platform. Platform provider
Device producer
Content developer
Platform for content distribution
Personal computer Home video game Mobile phone service Smart phone
Microsoft, Apple, Linux Nintendo, SCE, Microsoft Each telecom company Apple, Google, RIM, Nokia, Microsoft
In-house/PC vendors In-house, OEM Mobile phone vendors In-house/OEM
In-house/Third-party In-house/Third-party Third-party Third-party
Online music store Electronic book Traditional home appliances
Apple, Sony, NTT Docomo, KDDI In-house/Cell phone vendors Amazon, Sony, Sharp, KDDI In-house/Device vendors Each electronics company has their own platform.
N/A Each original platform Each original platform Original OS is provided by each Each original platform Each original platform N/A
Music companies Publishing companies In-house development and built-in
N. Nishino et al. / CIRP Annals - Manufacturing Technology 61 (2012) 391–394
Case 1
Case 2
393
Case 3
Fig. 4. Three base cases.
fundamental mechanisms of ‘Platform-type Product Service Systems’. First, let us define some parameters and the rule of the indices. Pij and wij , respectively, signify the product price and wholesale price. Herein, i stands for the player who sets the price and j is the player whom player i offers: i, j 2 {dm, pp, cd, C}, where dm, pp, cd, and C, respectively, represent the device manufacturer, platform provider, content developer, and consumers. Device manufacturer The device manufacturer produces and sells devices. When being licensed from the platform provider, the manufacturer must pay a license fee. The manufacturer’s profit is shown below. 8 > ðPC Ldm cÞ cF ðCase 1Þ > < dm cÞD c (1) P dm ¼ ðwdm ðCase 2Þ F pp > > : C dm 3Þ ðCase ðPdm w p p cÞD cF Therein, Ldm and D stands for the license fee and consumers’ demand for the devices; c and cF, respectively, denote the variable cost and fixed cost for production. Platform provider The platform provider licenses other decision-makers. However, in Case 2, the provider sells devices to consumers by purchasing them from the device manufacturer. In Case 3, the provider sells to the device manufacturer the set of some contents and its platform as a total system to be embedded. The profit is described as follows. 8 cd > ðL S þ Ldm ÞD f ðCase 1Þ > < ÞD f (2) P p p ¼ ðPCp p þ Lcd S wdm ðCase 2Þ pp > > : dm cd 3Þ ðCase w p pD w p pS f In those equations, Lcd is the license fee to content developers; S denotes the supply quantity of contents from content developers; and f is the initial cost to construct the platform. Content developers Related to content developers, different developers in this model sell their own content. For simplicity, each content developer produces only one kind of content. As such, content
Fig. 3. Examples of platform-type businesses.
4. Theoretical analysis 4.1. Mathematical formulation of each decision-maker The mathematical formulae in this study, considering some related works [15,16], are modeled by simplifying along with realistic situations. Thereby, our theoretic analyses can elucidate
Fig. 5. Theoretical equilibrium states by the condition of k and c.
N. Nishino et al. / CIRP Annals - Manufacturing Technology 61 (2012) 391–394
394
4.3. Implications from theoretical analysis
developer i’s profit is defined as expressed below. ( cd C C ðPcd; ðCases 1 and 2Þ i L ÞDi f i P cd; i ¼ cd ðCase 3Þ wcd L fi pp
(3)
C Therein, Pcd; i stands for the content price set by content developer i, and fi is the fixed cost. We assume that they have no variable cost because content such as software can be duplicated easily at almost no expense. This setting implicitly dictates increasing returns to scale. Consumers
When a consumer purchases content and the device separately, consumer i’s utility is described as U i ¼ vi
X DCi C C þ vðSÞ Pcd; j Pdm S C
ðCases 1 and 2Þ
(4)
j: f j 2 Di
where vi stands for the reservation price, meaning consumer i’s possible payment at most; v(S) is the indirect network externality effect, which depends on the total number of contents provided by content developers S; DCi stands for the number of contents purchased by consumer i. In this formula, the first term means that reservation price is decreasing, depending C on the ratio of the purchased number; Pcd; j stands for price for content j.
Fig. 5 shows the state of product diffusion at the theoretical equilibrium in each case. In Cases 1 and 2, all consumers purchase devices (D = 1) and all contents are supplied into market (S = 1), independent of the conditions of k and c. In contrast, such a complete diffusion is not realized with any condition of k and c in Case 3. Therefore, it is desirable that the device and its contents are provided separately. From the viewpoint of manufacturers, it suggests that a separating technology between a device and content might be required. The theoretical equilibrium shows that in all cases the device manufacturer’s profit can be negative unless the network effect parameter k is sufficiently large. Therefore, network externalities, which are the effect that the consumer’s utility is increasing depending on the number of the same users, are significant for the device manufacturer. In fact, manufacturers generally cannot control the effects by themselves, but the platform provider can control them somewhat, which implies that manufacturers should take charge of constructing the platform. Therefore, manufacturers should actively take initiative in platform competitions. Taking electric books as an example, it implies that device manufacturers themselves should foster the construction of a platform such as ebook formats in order to increase the profit. 5. Conclusion
Meanwhile, consumer i’s utility when purchasing a product with an embedded system such as that in Case 3 is defined simply as C U i ¼ vi þ vðSÞ Pdm
ðCase 3Þ
(5)
where S signifies the number of contents embedded into the products. If many contents are incorporated into the device, then the utility increases according to that number. 4.2. Game theoretic analysis Assuming that vi and fi are uniformly distributed in [0,1] and 0 c 1, and assuming that each decision-maker takes rational actions, we can derive the Nash equilibrium in a game theoretic manner. 4.2.1. Cases 1 and 2 In cases 1 and 2, the same theoretical equilibria are obtained.
P dm ¼ k c 3 cF ;
P p p ¼ 2 f;
P cd ¼ 12;
CS ¼ 12
Herein, P dm and P p p , respectively, signify the device producer’s profit and the platform provider’s profit. P cd stands for the total P surplus of all content developers: P cd ¼ i P cd; i . In addition, CS P represents the consumers’ surplus, meaning that CS = i Ui. 4.2.2. Case 3 In Case 3, three states are obtained, depending on conditions of k and c. (i)
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
cþ1þ
c2 þ2cþ9 2
P cd ¼ k
2
ðcþ1Þ2 2
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
c1þ
P
pp
c2 2cþ9 2
k < cþ1þ
k
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
c2 2cþ9 2
P cd ¼ k
2
2
f;
; CS ¼ 12
¼ kck2 f; P 2
(iii) k < c1þ
ck2 4Þ
ðk 2Þ
2ð2k2 Þ
(ii)
2
k : P dm ¼ 1 cF ; P p p ¼ ðcþ1Þðk2
ðc1Þ2 2
2ð2k2 Þ
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
c2 þ2cþ9 2
cd
: P dm ¼ ðk
¼ 12; CS ¼
2
2
þkck2Þ 4k2
2
: P dm ¼ cF ; P p p ¼ ð4k
; CS ¼ 0
cF ;
2
ðk2 þckþk2Þ 8k2
Þðc1Þ2
ð2k2 Þ
2
f;
This study addresses issues related to PSS, particularly focusing on platform-type business. First, we categorize several actual businesses. Then, based on the categorization, we constructed theoretical models of several types. Game theoretic analyses clarified its characteristics and mechanisms. Results show a relation between cost and network effect parameters, implying that the effect of network externalities is important for manufacturers. In addition, the theoretical model clarifies that manufacturers should construct their platform. This approach is expected to be useful for the coming new manufacturing era. References [1] Vargo SL, Lusch RF (2004) Evolving to a New Dominant Logic for Marketing. The Journal of Marketing 68(1):1–17. [2] Arai T, Shimomura Y (2004) Proposal of Service CAD System – A Tool for Service Engineering. CIRP Annals – Manufacturing Technology 53(1):397–400. [3] Arai T, Shimomura Y (2005) Service CAD System – Evaluation and Quantification. CIRP Annals – Manufacturing Technology 54(1):463–466. [4] Shimomura Y, Hara T, Arai T (2009) A Service Evaluation Method Using Mathematical Methodologies. CIRP Annals – Manufacturing Technology 57(1):437– 440. [5] Sakao T, Shimomura Y (2007) Service Engineering: A Novel Engineering Discipline for Producers to Increase Value Combining Service and Product. Journal of Cleaner Production 15(6):590–604. [6] Nishino N, Ueda K, Sato Y (2010) Modeling of Decision Making in Membership Services as Public Goods Problems. CIRP Annals – Manufacturing Technology 59(1):473–476. [7] Shostack LG (1982) How to Design a Service. European Journal of Marketing 16(1):49–63. [8] Shostack LG (1984) Design Services that Deliver. Harvard Business Review 62(1):133–139. [9] Goedkoop MJ, van Halen CJG, te Riele HRM, Rommens PJM (1999) Product Service Systems, Ecological and Economic Basis, Pricewaterhouse Coopers N.V./ Pi!MC, Storrm C.S., PRe´ Consultants. [10] Mont OK (2002) Clarifying the Concept of Product – Service System. Journal of Cleaner Production 10(3):237–245. [11] Cusumano AM, Gawer A (2002) The Elements of Platform Leadership. MIT Sloan Management Review 43(3):51–58. [12] Evans DS, Hagiu A, Schmalensee R (2006) Invisible Engines: How Software Platforms Drive Innovation and Transform Industries, The MIT Press. [13] Simon HA (1962) The Architecture of Complexity. Proceedings of the American Philosophical Society 106:467–482. [14] Rochet JC, Tirole J (2003) Platform Competition in Two-Sided Markets. Journal of the European Economic Association 1(4):990–1029. [15] Armstrong M (2006) Competition in Two-Sided Markets. RAND Journal of Economics 37(3):668–691. [16] Parker GG, Alstyne MV (2005) Two-Sided Network Effects: A Theory of Information Product Design. Management Science 51(10):1494–1504. [17] Hagiu A (2004) Two-Sided Platforms: Pricing and Social Efficiency, RIETI Discussion Paper Series.
Contents lists available at SciVerse ScienceDirect
CIRP Annals - Manufacturing Technology jou rnal homep age : ht t p: // ees .e lse vi er . com /ci r p/ def a ult . asp
Categorization and mechanism of platform-type product-service systems in manufacturing Nariaki Nishino a, Sihui Wang a, Nobuyuki Tsuji b, Kazuro Kageyama a, Kanji Ueda (1)b,c,* a
Department of Technology Management for Innovation, School of Engineering, The University of Tokyo, Tokyo, Japan Research into Artifacts, Center for Engineering, The University of Tokyo, Kashiwa, Japan c National Institute for Advanced Industrial Science and Technology, Tsukuba, Japan b
A R T I C L E I N F O
A B S T R A C T
Keywords: Service Decision making Business model
Manufacturing industries has confronted a changing phase from sales as physical products to provision as ‘servicized’ products. Accordingly, manufacturers must consider a new fusional framework incorporating products and services. This study defines a ‘platform-type product service system’ as a comprehensive business model with a common platform on which service providers, consumers, and manufacturers mutually interact. Such a platform framework offers great potential for manufacturers because it inevitably requires product use. Our study categorizes actual business examples. Then, based on that categorization, we construct theoretical models of several types. Game theoretic analysis clarifies its characteristics and mechanisms. ß 2012 CIRP.
1. Introduction Manufacturing industries are currently faced with a transformation from provision of physical products to servicizing. That movement is related to the following three factors. First is the development of information communication technology, which enables the construction of service platforms through digitalization and networking. Accordingly, networked home electronics have been emerging and the transition to a service economy thereby is accelerated. Second, in vertical value chains, valueadding phases are now shifting from assembling processes to upstream and downstream processes. As Fig. 1 shows, recent trends can be represented as a smiling shape, meaning that upstream processes such as product development and design process or downstream processes such as maintenance and aftersales service are increasingly producing high profitability. The idea, proposed by Stan Shih, the founder of Acer Inc., is designated as a smiling curve. The third factor is change of consumer demand from the act of product possession to act of experience through services. Especially since the 1990s, it is said that consumers’ expenses on services are steadily increasing. In response to those strong trends, manufacturers must consider a new fusional framework incorporating products and services. For example, a platform-type product service system can be a possible strategy that provides a comprehensive business model with a common platform on which service providers, consumers, and manufacturers mutually interact. Recent online music stores and electronic books are applicable for this business type. Such a framework has great potential for manufacturers because such services invariably require products for their use.
* Corresponding author. 0007-8506/$ – see front matter ß 2012 CIRP. http://dx.doi.org/10.1016/j.cirp.2012.03.053
Given such a background, this study gives the categorization and structuring of service models involved with manufacturers, addressing product service systems with a platform. Additionally, we propose three basic models and present theoretical analyses.
2. Related literature 2.1. Research related to services Since advocating ‘Service science’ or ‘Service science, management and engineering (SSME)’ by IBM, many researchers have devoted attention to services, conducting numerous studies to date. Vargo and Lusch [1] proposed the idea of service-dominant logic, which explains the importance of transformation from product-based logic to service-based logic. Especially in the field of production engineering, ‘Service engineering’ has been proposed and studied as well. For example, Arai and Shimomura propose a service CAD system [2,3] and evaluate services using service Quality Function Deployment (QFD) [4]. Moreover, Sakao and Shimomura [5] apply the methodology to accommodation service and renting of home appliances. Recently, an approach using economic experiments with human subjects and agent-based simulation is applied to the issue of service design [6]. Shostack [7,8] has contributed to problems of service design in the early stage, especially devising a technique of service blueprinting. The term ‘product service systems (PSS)’ is defined by Goedkoop et al. [9] as ‘a marketable set of products and services capable of jointly fulfilling a user’s need’. Mont [10] states in his paper that PSS has the potential to minimize the environmental impacts of consumer needs and wants, and conducts studies from an environmental viewpoint.
N. Nishino et al. / CIRP Annals - Manufacturing Technology 61 (2012) 391–394
392
Fig. 1. Smiling curve phenomenon.
2.2. Research related to platform strategy In the field of business administration, Cusumano and Gawer [11] refer to a ‘platform’ as an evolving system made of interdependent pieces that can each be innovated upon. Their article described platform leadership in business circumstances. Additionally, Evans et al. [12] explain that a software platform is invisible engines to be the source of great value to consumers. In the earliest stage, Simon also used the term ‘platform’ in his article [13]. Meantime, an economic theoretical model named ‘two-sided market’ was studied by Rochet and Tirole [14], Armstrong [15], Parker and Alstyne [16], Hagiu [17], and others. These studies clarify the theoretical mechanism of business with the core platform framework from the viewpoint of economics. 3. Basic model of platform-type PSS and its categorization
Fig. 2. Basic framework model of platform-type PSS.
components and which cannot work per se. The device manufacturer produces some goods on which the contents works, representing product components. The platform provider provides a sort of a platform which connects the device and the contents: e.g., interfaces for microprocessors, operating systems for PCs, a unified standard, etc. Accordingly, the platform provider issues license to content developers or the device manufacturer. Each player’s decision and product flow are depicted in Fig. 2. 3.3. Actual business and the basic model
3.1. Definition of platform-type PSS The term ‘Service’ is defined in diverse ways in different domains, as described in the previous section. Our study, considering such preceding several definitions and notions, defines the term of ‘Platform-type Product Service Systems’ as follows: Platform-type Product Service Systems is defined as a fusional system comprising product components and service components that are in complementary relation and which create no value with single use, especially having a common platform which makes service components functioning; it is finally provided to customers as an integrated total system.
Regarding physical products and application software/digital content as the device and the content respectively in the basic framework model, actual examples in business can be summarized as presented in Table 1. Computer operating systems are an example of the platform business. Recently, smart phones can be included as well. In addition, home video game businesses are regarded as a traditional example. Online music stores and electronic books are emerging businesses. Those actual examples are structured and organized as shown in Fig. 3, based on the basic framework. 3.4. Categorization of platform-type PSS
Herein, it is noteworthy that the complementary relation means a product cannot independently produce any value to users without the platform and service components; it represents complementarity between a product and service. 3.2. Modeling the basic framework Our study constructs a basic model, addressing the home electronics industry. We assume that the model includes players of four kinds: content developers, the platform provider, the device manufacturer, and consumers. Content developers and consumers are plural while the others are singular. In this model, the content developers produce some content that constitutes service
From those discussions above, if details might be omitted, then we can summarize the actual examples into the three base cases portrayed in Fig. 4. In Case 1, content developers and the device manufacturer respectively provide their own products; the platform provider merely issues licenses to both. This case corresponds to the types of computer OS and home video games. In Case 2, the platform provider purchases devices from the manufacturer and sells them to consumers, incorporating the platform into the devices. The types of mobile phones/smart phones are applicable to Case 2. Case 3 is that of ordinary appliances with an embedded system. In the next section, we provide a theoretical analysis with respect to each case.
Table 1 Actual examples of businesses using a platform. Platform provider
Device producer
Content developer
Platform for content distribution
Personal computer Home video game Mobile phone service Smart phone
Microsoft, Apple, Linux Nintendo, SCE, Microsoft Each telecom company Apple, Google, RIM, Nokia, Microsoft
In-house/PC vendors In-house, OEM Mobile phone vendors In-house/OEM
In-house/Third-party In-house/Third-party Third-party Third-party
Online music store Electronic book Traditional home appliances
Apple, Sony, NTT Docomo, KDDI In-house/Cell phone vendors Amazon, Sony, Sharp, KDDI In-house/Device vendors Each electronics company has their own platform.
N/A Each original platform Each original platform Original OS is provided by each Each original platform Each original platform N/A
Music companies Publishing companies In-house development and built-in
N. Nishino et al. / CIRP Annals - Manufacturing Technology 61 (2012) 391–394
Case 1
Case 2
393
Case 3
Fig. 4. Three base cases.
fundamental mechanisms of ‘Platform-type Product Service Systems’. First, let us define some parameters and the rule of the indices. Pij and wij , respectively, signify the product price and wholesale price. Herein, i stands for the player who sets the price and j is the player whom player i offers: i, j 2 {dm, pp, cd, C}, where dm, pp, cd, and C, respectively, represent the device manufacturer, platform provider, content developer, and consumers. Device manufacturer The device manufacturer produces and sells devices. When being licensed from the platform provider, the manufacturer must pay a license fee. The manufacturer’s profit is shown below. 8 > ðPC Ldm cÞ cF ðCase 1Þ > < dm cÞD c (1) P dm ¼ ðwdm ðCase 2Þ F pp > > : C dm 3Þ ðCase ðPdm w p p cÞD cF Therein, Ldm and D stands for the license fee and consumers’ demand for the devices; c and cF, respectively, denote the variable cost and fixed cost for production. Platform provider The platform provider licenses other decision-makers. However, in Case 2, the provider sells devices to consumers by purchasing them from the device manufacturer. In Case 3, the provider sells to the device manufacturer the set of some contents and its platform as a total system to be embedded. The profit is described as follows. 8 cd > ðL S þ Ldm ÞD f ðCase 1Þ > < ÞD f (2) P p p ¼ ðPCp p þ Lcd S wdm ðCase 2Þ pp > > : dm cd 3Þ ðCase w p pD w p pS f In those equations, Lcd is the license fee to content developers; S denotes the supply quantity of contents from content developers; and f is the initial cost to construct the platform. Content developers Related to content developers, different developers in this model sell their own content. For simplicity, each content developer produces only one kind of content. As such, content
Fig. 3. Examples of platform-type businesses.
4. Theoretical analysis 4.1. Mathematical formulation of each decision-maker The mathematical formulae in this study, considering some related works [15,16], are modeled by simplifying along with realistic situations. Thereby, our theoretic analyses can elucidate
Fig. 5. Theoretical equilibrium states by the condition of k and c.
N. Nishino et al. / CIRP Annals - Manufacturing Technology 61 (2012) 391–394
394
4.3. Implications from theoretical analysis
developer i’s profit is defined as expressed below. ( cd C C ðPcd; ðCases 1 and 2Þ i L ÞDi f i P cd; i ¼ cd ðCase 3Þ wcd L fi pp
(3)
C Therein, Pcd; i stands for the content price set by content developer i, and fi is the fixed cost. We assume that they have no variable cost because content such as software can be duplicated easily at almost no expense. This setting implicitly dictates increasing returns to scale. Consumers
When a consumer purchases content and the device separately, consumer i’s utility is described as U i ¼ vi
X DCi C C þ vðSÞ Pcd; j Pdm S C
ðCases 1 and 2Þ
(4)
j: f j 2 Di
where vi stands for the reservation price, meaning consumer i’s possible payment at most; v(S) is the indirect network externality effect, which depends on the total number of contents provided by content developers S; DCi stands for the number of contents purchased by consumer i. In this formula, the first term means that reservation price is decreasing, depending C on the ratio of the purchased number; Pcd; j stands for price for content j.
Fig. 5 shows the state of product diffusion at the theoretical equilibrium in each case. In Cases 1 and 2, all consumers purchase devices (D = 1) and all contents are supplied into market (S = 1), independent of the conditions of k and c. In contrast, such a complete diffusion is not realized with any condition of k and c in Case 3. Therefore, it is desirable that the device and its contents are provided separately. From the viewpoint of manufacturers, it suggests that a separating technology between a device and content might be required. The theoretical equilibrium shows that in all cases the device manufacturer’s profit can be negative unless the network effect parameter k is sufficiently large. Therefore, network externalities, which are the effect that the consumer’s utility is increasing depending on the number of the same users, are significant for the device manufacturer. In fact, manufacturers generally cannot control the effects by themselves, but the platform provider can control them somewhat, which implies that manufacturers should take charge of constructing the platform. Therefore, manufacturers should actively take initiative in platform competitions. Taking electric books as an example, it implies that device manufacturers themselves should foster the construction of a platform such as ebook formats in order to increase the profit. 5. Conclusion
Meanwhile, consumer i’s utility when purchasing a product with an embedded system such as that in Case 3 is defined simply as C U i ¼ vi þ vðSÞ Pdm
ðCase 3Þ
(5)
where S signifies the number of contents embedded into the products. If many contents are incorporated into the device, then the utility increases according to that number. 4.2. Game theoretic analysis Assuming that vi and fi are uniformly distributed in [0,1] and 0 c 1, and assuming that each decision-maker takes rational actions, we can derive the Nash equilibrium in a game theoretic manner. 4.2.1. Cases 1 and 2 In cases 1 and 2, the same theoretical equilibria are obtained.
P dm ¼ k c 3 cF ;
P p p ¼ 2 f;
P cd ¼ 12;
CS ¼ 12
Herein, P dm and P p p , respectively, signify the device producer’s profit and the platform provider’s profit. P cd stands for the total P surplus of all content developers: P cd ¼ i P cd; i . In addition, CS P represents the consumers’ surplus, meaning that CS = i Ui. 4.2.2. Case 3 In Case 3, three states are obtained, depending on conditions of k and c. (i)
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
cþ1þ
c2 þ2cþ9 2
P cd ¼ k
2
ðcþ1Þ2 2
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
c1þ
P
pp
c2 2cþ9 2
k < cþ1þ
k
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
c2 2cþ9 2
P cd ¼ k
2
2
f;
; CS ¼ 12
¼ kck2 f; P 2
(iii) k < c1þ
ck2 4Þ
ðk 2Þ
2ð2k2 Þ
(ii)
2
k : P dm ¼ 1 cF ; P p p ¼ ðcþ1Þðk2
ðc1Þ2 2
2ð2k2 Þ
pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
c2 þ2cþ9 2
cd
: P dm ¼ ðk
¼ 12; CS ¼
2
2
þkck2Þ 4k2
2
: P dm ¼ cF ; P p p ¼ ð4k
; CS ¼ 0
cF ;
2
ðk2 þckþk2Þ 8k2
Þðc1Þ2
ð2k2 Þ
2
f;
This study addresses issues related to PSS, particularly focusing on platform-type business. First, we categorize several actual businesses. Then, based on the categorization, we constructed theoretical models of several types. Game theoretic analyses clarified its characteristics and mechanisms. Results show a relation between cost and network effect parameters, implying that the effect of network externalities is important for manufacturers. In addition, the theoretical model clarifies that manufacturers should construct their platform. This approach is expected to be useful for the coming new manufacturing era. References [1] Vargo SL, Lusch RF (2004) Evolving to a New Dominant Logic for Marketing. The Journal of Marketing 68(1):1–17. [2] Arai T, Shimomura Y (2004) Proposal of Service CAD System – A Tool for Service Engineering. CIRP Annals – Manufacturing Technology 53(1):397–400. [3] Arai T, Shimomura Y (2005) Service CAD System – Evaluation and Quantification. CIRP Annals – Manufacturing Technology 54(1):463–466. [4] Shimomura Y, Hara T, Arai T (2009) A Service Evaluation Method Using Mathematical Methodologies. CIRP Annals – Manufacturing Technology 57(1):437– 440. [5] Sakao T, Shimomura Y (2007) Service Engineering: A Novel Engineering Discipline for Producers to Increase Value Combining Service and Product. Journal of Cleaner Production 15(6):590–604. [6] Nishino N, Ueda K, Sato Y (2010) Modeling of Decision Making in Membership Services as Public Goods Problems. CIRP Annals – Manufacturing Technology 59(1):473–476. [7] Shostack LG (1982) How to Design a Service. European Journal of Marketing 16(1):49–63. [8] Shostack LG (1984) Design Services that Deliver. Harvard Business Review 62(1):133–139. [9] Goedkoop MJ, van Halen CJG, te Riele HRM, Rommens PJM (1999) Product Service Systems, Ecological and Economic Basis, Pricewaterhouse Coopers N.V./ Pi!MC, Storrm C.S., PRe´ Consultants. [10] Mont OK (2002) Clarifying the Concept of Product – Service System. Journal of Cleaner Production 10(3):237–245. [11] Cusumano AM, Gawer A (2002) The Elements of Platform Leadership. MIT Sloan Management Review 43(3):51–58. [12] Evans DS, Hagiu A, Schmalensee R (2006) Invisible Engines: How Software Platforms Drive Innovation and Transform Industries, The MIT Press. [13] Simon HA (1962) The Architecture of Complexity. Proceedings of the American Philosophical Society 106:467–482. [14] Rochet JC, Tirole J (2003) Platform Competition in Two-Sided Markets. Journal of the European Economic Association 1(4):990–1029. [15] Armstrong M (2006) Competition in Two-Sided Markets. RAND Journal of Economics 37(3):668–691. [16] Parker GG, Alstyne MV (2005) Two-Sided Network Effects: A Theory of Information Product Design. Management Science 51(10):1494–1504. [17] Hagiu A (2004) Two-Sided Platforms: Pricing and Social Efficiency, RIETI Discussion Paper Series.