Business Model Approach to Public Service Innovation

Abstract

The operating environment of the public sector has undergone a fundamental shift towards a more competitive nature. As these changes accelerate, they are exerting considerable pressure on the government in terms of rising costs and ever-increasing need for innovative service offerings. In order to shed light on these contemporary challenges, this chapter will review and analyse a number of innovative service delivery modes observed in practice, including joint ventures with the private and not-for-profit sectors, public private partnerships, contracting out, franchising, and the use of social bonds and collaborative services. By presenting a new ‘business model’ designed specifically for decision makers in the public sector, this chapter will equip the readers with the means to better understand and manage public service innovations in the increasingly challenging environment.

Appendix 1

1.1 Overview of the Ten Existing Business Model Frameworks

Zott and Amit (2010) conceptualise a firm’s business model as an Activity System. In this view, the business model is seen as a system of interdependent activities and links (i.e. transactions) that transcend the focal firm and spans its boundaries. An activity in the firm’s business model can be viewed as the engagement of human, physical and/or capital resources of any party relevant to the business model—the focal firm, end customers, vendors and so on—to serve a specific purpose toward the fulfilment of an overall objective.

Interdependencies among activities are created by entrepreneurs or managers, drawing on design elements and themes. The concept of design element covers the selection of activities (content), how the activities are linked (structure) and who performs the activities (governance). On the other hand, the design theme of the business model can be new ways of doing things (novelty), switching costs (lock-in), bundling (complementarities) and/or reduction in transaction costs (efficiency). The authors distinguish between a business model and a revenue model, with the latter complementing the former.

Gordjin and Akkermans (2001) propose the e-3 Value Methodology, a model of a network of enterprises creating, distributing and consuming objects of economic value. The model has the following elements:

• Actor: An actor is an economically independent entity;

• Value object: A value object is a service, good, money or experience which is of economic value to an actor;

• Value port: An actor uses a value port to provide or request value objects to or from other actors;

• Value interface: Actors have one or more value interfaces, grouping value ports and showing economic reciprocity;

• Value exchange: A value exchange connects two value ports;

• Market segment: A market segment breaks actors into segments of actors that assign economic value to objects equally;

• Value activity: An actor performs one or more value activity, which is assumed to yield a profit;

• Dependency path: A path consists of consumer needs, connections, dependency elements, and boundaries. A consumer need is satisfied by exchanging value objects.

Demil and Lecocq (2010) propose the RCOV model. A RCOV firm builds its business model by making various choices to sustain operational margin (i.e. difference between revenues and costs). These choices encompass resources and competencies, the internal and external organisation of the business, and the firm’s value proposition to its customers. More specifically, the resources are both physical and human, and competencies are the abilities and knowledge of managers. The organisation encompasses the choice of the firm’s internal operations (or value chain) and its relations with external stakeholders (suppliers, customers, competitors, regulators etc.). The value propositions are the products and services delivered to customers, and how they are marketed. In general, a firm’s organisation will drive its costs, while its value proposition will determine the revenues. The RCOV can be seen as the most appropriate business model in supporting managerial decision making in the public sector. This is partly due to its focus on maintaining operational margin, as well as its adaptive approach towards shifts in the firm’s external environments and internal elements.

Hedman and Kalling (2003) propose the Business Model Concept that consists of the following components:

• 1. Customers;

• 2. Competitors;

• 3. Offering;

• 4. Activities and Organisation;

• 5. Resources;

• 6. Factor (capital and labour) and Production Inputs;

• 7. A longitudinal process component to cover the dynamics of the business model over time and the cognitive and cultural constraints faced by the managers.

The dynamic element of the business model is important, as the firm needs to modify the existing model to adapt to company growth and expanded offerings. Impact from internal and/or external changes may be initially reflected on one part of the model. However, any modification to one part of the model will affect other parts, therefore the dynamic is described as a longitudinal process.

Morris et al. (2005) propose an Entrepreneur’s Business Model with three levels of decision making termed ‘foundation’, ‘proprietary’ and ‘rules’. The foundation level involves making general decisions about what the business is and is not. The proprietary level of the model involves innovation unique to the venture. The rules level determines how the foundation and proprietary elements are reflected in ongoing strategic actions. At each level, six decision areas are considered:

• 1. How do we create value?

• 2. Who do we create value for?

• 3. What is our source of competencies?

• 4. How do we competitively position ourselves?

• 5. How we make money?

• 6. What are our time, scope, and size ambitions?

A process of experimentation may be required before the right Entrepreneur’s model emerges.

Yunus et al. (2010) explain the Social Business Model as being close to social entrepreneurship, where the primary purpose of the business is to serve society and become self-sustaining. Stakeholder value maximisation is the goal, rather than profit maximisation, and they emphasise the need to define the social profit expected from the business. The focus of the model is on co-operation and collaboration—rather than on competition—and reducing bureaucracy.

Kim and Mauborgne (2000) propose the Business Model Guide, a series of questions designed to open up the way that managers think about production, distribution, capabilities and pricing. The questions are as follows:

• What is the cost target?

• Who can we partner with?

• Which price model should we use?

The authors suggest that the price of the product or service (what they call the ‘cost target’) should be determined by strategic considerations. For example, if we set a price that is cheaper than our competitors, we must work backwards to re-engineer the product or service in order to reduce costs and market it at the nominated price. Instead of trying to fulfil all aspects of the design, manufacture and distribution of the product or service, the authors suggest consideration be given to focussing on one or two key capabilities, and partnering with other organisations to provide the missing capabilities. Finally, they propose alternatives to selling the product or service, including rental, time-share, slice-share or exchanging it for an equity interest in the customer’s business.

Wirtz and Lihotzky (2003) have suggested the 4C Internet Business Model Typology, comprising four basic internet business model types: Content, Commerce, Context and Connection. A firm specialising in the content-orientated business model generates revenue through online content. The commerce-orientated business model relates to trade transactions using electronic media. Context business models relate to the aggregation and structuring of information existing on the internet, whereas connection business models relate to the network infrastructure. They recommend a variety of strategies that can be used to retain customers, and the strategies differ depending on the business model. For example, trust building as a retention strategy works best for commerce business models.

Lumpkin and Dees (2004) conceptualise the Internet Business Model as the primary model by which the internet adds value. They identify four activities that have been enhanced by internet capabilities—search, evaluation, problem solving and transaction. These activities are supported by three different types of content—customer feedback, expertise and entertainment programming. Finally, they identify seven business models used by internet firms—commissioning, advertising, mark-up, production, referral, subscription and fee for service.

Osteralder (2004) proposes the Business Model Ontology with the following building blocks:

• 1. Value proposition: overall view of products and services;

• 2. Target customer: the segments of customers being offered value;

• 3. Distribution Channel: the various means by which the organisation keeps in contact with its customers;

• 4. Relationship: the established links between the organisation and its customer segments;

• 5. Value Configuration: the arrangement of activities and resources;

• 6. Capability: the ability to execute a repeatable pattern of actions in order to create value for the customer;

• 7. Partner network: partnerships with other organisations necessary to provide the service;

• 8. Cost Structure: the cost of the means employed in the model;

• 9. Revenue Model: the way the organisation generates income.