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Digital Business Strategy and Value Creation: Framing the Dynamic Cycle of
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Article  in  MIS Quarterly · October 2013

DOI: 10.25300/MISQ/2013/37.2.13

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 SPECIAL ISSUE: DIGITAL BUSINESS

DIGITAL BUSINESS STRATEGY AND VALUE CREATION:

FRAMING THE DYNAMIC CYCLE OF CONTROL POINTS1
Margherita Pagani
Marketing Department, Bocconi University, Via Roentgen, 1,
20136 Milan ITALY {margherita.pagani@unibocconi.it}

Within changing value networks, the profits and competitive advantages of participation reside dynamically
at control points that are the positions of greatest value and/or power. The enterprises that hold these positions
have a great deal of control over how the network operates, how the benefits are redistributed, and how this
influences the execution of a digital business strategy. This article is based on a field study that provides
preliminary, yet promising, empirical evidence that sheds light on the dynamic cycle of value creation and
value capture points in digitally enabled networks in response to triggers related to technology and business
strategy. The context used is that of the European and U.S. broadcasting industry. Specifically, the paper
illustrates how incremental innovations may shift value networks from static, vertically integrated networks
to more loosely coupled networks, and how cross-boundary industry disruptions may then, in turn, shift those
to two-sided markets. Based on the analysis, insights and implications for digital business strategy research
and practice are then provided.

Keywords: Control points, incremental innovation, disruptive innovation, digital business strategy, value
network

The Emergence of a Digital The multichannel digital revolution coupled with the develop-
ment of interactive digital technology, virtualization, peer-to-
Ecosystem1
peer networks, cloud computing, Internet of services, and
other IT developments is changing the rules of the game in
In the last few decades, companies have moved away from
many industries through disruptions of business models. The
hierarchical integrated supply chains in favor of fragmented
result is the emergence of a much more complex and dynamic
networks of strategic partnership with external entities (Bitran
ecosystem for growth and innovation (Iansiti and Levien
et al. 2007). This pattern, already visible in many industries
2004). The profits and competitive advantages of participa-
such as automotive, apparel, textiles, electronic manufac-
tion in a given value network reside dynamically within the
turing, and service, is being repeated in digitally enabled net-
chains, accumulating at the positions of greatest value and/or
works where digital technologies are fundamentally reshaping
power (control points). The enterprises that hold these posi-
traditional business processes as modular, distributed, cross-
tions have a great deal of control over how the network oper-
functional, and global processes enable work to be carried out
ates and how the benefits are redistributed (Rülke et al. 2003).
across boundaries of time, distance, and function (Samba-
murthy et al. 2003; Straub and Watson 2001; Wheeler 2002).
Structural contingency theorists (Burns and Stalker 1961;
Lawrence and Lorsch 1967) have long postulated that the
1 environment is an important factor in defining the organiza-
Anandhi Bharadwaj, Omar A. El Sawy, Paul A. Pavlou, and N.
Venkatraman served as the senior editors for this special issue and were tions within it. In particular, they have pointed to rates of
responsible for accepting this paper. change of key environmental factors like technology (Dowling

MIS Quarterly Vol. 37 No. 2, pp. 617-632/June 2013 617

Pagani/Digital Business Strategy and Value Creation
and McGee 1994) and marketing choices (Claycomb et al.
2000) as driving the optimum structure of organizations
operating within these environments. For them, however, the
environment is considered as a static exogenous variable
moderating organizational structure and successful perfor-
mance. Technology and innovation theorists (Abernathy and
Utterback 1978) and affiliated organizational theorists
(Anderson and Tushman 1990; Henderson and Clark 1990)
have taken steps to advance structural contingency theory by
endogenizing technological evolution and its effect on organi-
zational evolution. Despite the increasing interest in the
topic, there does not appear to be a common understanding of
the effect of technological evolution on the structure and
dynamics of control points in a digitally enabled value
network.
The present paper provides preliminary, yet promising, empi-
rical evidence that sheds light on the dynamic cycle of value
creation and value capture points in digitally-enabled net-
works as a result of the emergence of incremental innovation
and cross-boundary industry disruptions. We consider in this
paper the shifts within the broadcasting industry as a result of
the ICT revolution. It is worthwhile to mention that other
variables such as regulation, bargaining power of stakeholder,
or new players from outside the traditional ecosystem may
affect the evolution into one of the three types of network
structure.
In this paper, we analyze three value networks—a vertically
integrated one, a loosely coupled one, and one based on a
multisided platform—and break them down into their func-
tional components to examine the ownership and organization
of these components, which are critical in controlling the
dynamics of core and edge competencies of players. We then
analyze how components change in response to triggers
related to a digital business strategy. To accomplish this task,
we construct a view of the value network as a configuration
of control points, which comprises the various service trans-
actions involved in implementing the functional components
required to deliver a service offering. We call these configu-
rations control point constellations (CPCs). Control points
are analyzed in this paper in terms of how, and to what extent,
they create and capture value, and in what forms.
Below, we focus on how industry, firm, and resource-related
variables interact and affect firm outcomes in term of value
creation and value appropriation. In doing so, the paper
(1) focuses on the properties of real-world networks, (2) takes
the view that networks are not static but evolve in time
according to various dynamical rules, and (3) aims to under-
stand networks not just as topological objects, but also as the
framework upon which distributed dynamic systems are built.
618 MIS Quarterly Vol. 37 No. 2/June 2013
The plan of this paper is as follows. We begin by sum-
marizing the results of a literature search for value network
and value creation articles published in leading IS, strategic
management, and operations research journals. Next, we
offer opinions and supportive arguments on how digital eco-
systems evolve and what their dynamics are in order to
provide insights into defining the control points that influence
the execution of a digital business strategy within changing
value networks. We conclude by summarizing findings and
describing the implications of these findings and insights to
research and practice.
Reconfiguring for Value Creation
Within the strategic management literature, several scholars
have studied the concept of value and the sustainable compe-
titive advantage (Brandenburger and Stuart 1996; Mol et al.
2005; Porter 1985). Bowman and Ambrosini (2000) define
value creation as the contribution to the utility of the final
good or service to end users and distinguish it from value
capture defined as the difference between revenue and cost
retained by the firm. Mol et al. (2005) conceptualize a pas-
sage through the multiple value-adding stages, which even-
tually accumulates into an overall value proposition. In their
model, each stage contributes a particular proportion of the
overall value created, but value capture by each contributor
depends on the participants’ relative bargaining power (Bran-
denburger and Nalebuff 1997; Brandenburger and Stuart
1996; Porter 1980; Teece 1986). Of course, this process may
not always be as sequential as this description suggests, but
no viable product or service will materialize unless a collec-
tion of these value-contributing parties can settle on a division
of spoils that keeps each party willing to participate.
In this paper, we agree with the new logic of value presented
by Normann and Ramirez (1993), which breaks down the
distinction between products and services and combines them
into activity-based “offerings” from which customers can
create value for themselves. According to the authors, as
potential offerings grow more complex, so do the relation-
ships necessary to create them. As a result, a company’s
strategic task becomes the ongoing reconfiguration and inte-
gration of its competencies and customers. This literature
starts with value creation by coalitions of different economic
actors. Subsequent work in this strand has tended to focus on
the conditions that govern the ability of different parties to
capture value (Lippman and Rumelt 2003; MacDonald and
Ryall 2004) and the drivers of value creation (Adner 2006;
Adner and Zemsky 2006).

We find it useful to frame the challenge as the need to engi-
neer a value chain simultaneously with the engineering of the
products/services and processes for providing value. In this
respect, we build on the “three-dimensional concurrent engi-
neering” framework (Fine 1998), which adds value chain
engineering to augment the traditional two-dimensional con-
current engineering of products and processes (Fleischer and
Liker 1997; Nevins and Whitney 1989; Ulrich and Eppinger
1994). We define a value network as one in which a cluster
of economic actors collaborates to deliver value to the end
consumer and where each actor takes some responsibility for
the success or failure of the network (Barnes 2002; Bitran et
al. 2003; Pigneur 2000; Sabat 2002). We distinguish five
types of actors: consumers, service providers, tier 1 and 2
enablers, and auxiliary enablers (Basole and Rouse 2008).
Their key strategic task is the reconfiguration of roles and
relationships among this constellation (Normann and Ramirez
1993) of actors in order to mobilize the creation of value in
new forms and by new players. Partnership management
capabilities (Dyer and Singh 1998) will have to be a core
competence that new business actors must possess (Pigneur
2000).
When an incremental innovation appears improving upon
something that already exists or reconfiguring an existing
form or technology to serve some other purposes (Christensen
1997), significant value can be created assessing the value of
relevant knowledge residing at different points in the network
and arranging its transfer to other points in the network where
it is needed (Doz 1996; Gulati 1999). This implies exploiting
resources that are made available through the network rela-
tionships (Gulati and Singh 1998; Inkpen and Dinur 1998;
Kale et al. 2000; Khanna et al. 1998).
As products and services increasingly have embedded digital
technologies, it is becoming more difficult to disentangle
business processes from their underlying IT infrastructures
(e.g., El Sawy 2003). Digital platforms are enabling cross-
boundary industry disruptions (Christensen 1997), thus in-
ducing new forms of business strategies (e.g., Burgelman and
Grove 2007). Consequently, theoretical structures for stra-
tegy making in nonlinear dynamic environments are also
emerging (Pavlou and El Sawy 2010). Digital business
strategies call for coordination across firms along product,
process, and service domains, thereby creating more complex
and dynamic ecosystems (Adner 2006; Iansiti and Levien
2004; Moore 1996) for growth and innovation. The whole
value network is underpinned by a particular value creating
logic and its application results in particular strategic pos-
tures. Adopting a network perspective (Burt 2004; Gulati
1995; Kogut and Walker 2001; Marsden and Podolny 1990)
provides an alternative perspective that is more suited to “new
economy” organizations, particularly those where both the
Pagani/Digital Business Strategy and Value Creation
supply and demand chain are digitized (Peppard and Rylander
2006).
Scholars working in a parallel stream have studied in
engineering terms the concepts of architectural modularity in
order to define more precisely the conditions under which
suppliers and customers of products and services might need
to engage a in structured versus unstructured technological
dialogue (Baldwin and Clark 2000; Chesbrough and
Kusunoki 2001; Christensen 1997; Henderson and Clark
1990; Ulrich and Eppinger 1994).
Despite increasing interest in the topic, there does not appear
to be a common understanding of the effect of technological
evolution on the structure and dynamics of control points in
a digitally enabled value network. We depart from this litera-
ture by explicitly linking the dynamics of value creation and
their implications for value capture to the structure of inter-
dependence in a firm’s ecosystem following the emergence of
an incremental and disruptive innovation. We find it useful
to frame the dynamic cycle of value creation and value
capture points, defined in this manuscript as control point
constellations, with the business double helix model (Fine
1998, 2000). This model asserts that when the industry struc-
ture is vertical and the product architecture is integral, the
forces of disintegration push toward a horizontal and modular
configuration. These forces include (1) the relentless entry of
niche competitors, (2) the challenge of keeping ahead of the
competition across the many dimensions of technology and
markets required by an integral system, and (3) the bureau-
cratic and organizational rigidities. These forces typically
weaken the vertical giant and create pressure toward disinte-
gration to a more horizontal, modular structure (Staudenmayer
et al. 2005).
On the other hand, when an industry has a horizontal struc-
ture, another set of forces push toward more vertical inte-
gration and integral product architectures. These forces
include (1) technical advances in one subsystem that can give
market power to its owner, (2) market power in one sub-
system that encourages bundling with other subsystems to
increase control and add more value, and (3) market power in
one subsystem that encourages engineering integration with
other subsystems to develop proprietary integral solutions.
Premise of this Study
This study seeks to illustrate how incremental innovations
may shift value networks from static, vertically integrated
networks, to more loosely coupled networks, and how “dis-
ruptive” innovations may then in turn shift them to two-sided
MIS Quarterly Vol. 37 No. 2/June 2013 619
Pagani/Digital Business Strategy and Value Creation
markets. The study intends to provide insights into defining
the control points that influence the execution of a digital
business strategy within changing value networks.
Our opinion is that, in order to succeed over the long haul,
firms within value networks have to periodically reorient
themselves by adopting new strategies and structures that are
necessary to accommodate changing environmental condi-
tions. These shifts, occurring through incremental or discon-
tinuous changes, have different impacts on the structure of
control points in the value networks. Our propositions, built
inductively from empirical analysis of digitally enabled net-
works, are as follows:
1. A closed, vertically integrated model of CPC structure
emerges in tiers of the market where customers are
underserved by the functionality or performance avail-
able from products in the market.
2. When the market is less demanding of functionality and
an incremental innovation appears that improves upon
something that already exists or reconfigures an existing
form or technology to serve some other purposes, a
horizontally stratified or disintegrated CPC structure is
the dominant business model.
3. When the dominant business model in a tier of the
market shifts from vertical integration to horizontal strati-
fication, the ability to achieve above-average profitability
tends to transfer to companies that build an infrastructure
(platform) that creates value by reducing distribution,
transaction, and search costs incurred when different
subsystems interact with one another.
4. When performance gaps emerge in markets due to cross
boundary industry disruptions, the pendulum of CPC
structure is likely to swing back toward vertically inte-
grated CPCs structures.
Our primary purpose in offering this paper is to invite other
scholars to empirically test these hypotheses and thereby con-
tinue to build deeper understanding of the dynamics of value
creation and value capture in digital business networks, thus
providing a better understanding of digital business strategy.
Field Study and Context of the
Broadcasting Industry
The methodology adopted in this study includes a system
identification process called black-box modeling (Norgaard
et al. 2000) and follows a three-phase process: (1) experiment
620 MIS Quarterly Vol. 37 No. 2/June 2013
(empirical results emerging from case studies), (2) selection
of the model structure, and (3) model estimation and valida-
tion. We use as an empirical setting the broadcasting industry
in Europe and the United States in the period 2000–2008. We
selected this industry as it transitioned through three distinct
technology generations (analog TV, digital TV, and multi-
sided digital platforms) resulting from the emergence of an
incremental innovation and cross-boundary industry
disruptions.
We used both primary and secondary data sources for this
study. We began by developing a detailed historical under-
standing of the broadcasting industry during a 10-month field
study. We conducted multiple interviews with 45 industry
experts from 15 leading companies in Europe and the United
States. The interviewees came from a variety of positions
within the ecosystem: content providers, semiconductor and
electronic suppliers, broadcasters, software, terminal pro-
viders, platform aggregators, and telecommunications.
The interviews were semi-structured and lasted two hours on
average. We used the information from the interviews to
develop an understanding of the ecosystem challenges that
governed the emergence of the different technology genera-
tions. We consolidated this information in a document and
discussed it during a meeting attended by all the interviewees.
We incorporated all comments emerging from the first
meeting and discussed the final document in a second meeting
six months later. All of the experts agreed with our final
characterization.
We searched every issue of New TV Strategies and Broadcast
and Production (leading industry journals whose mission is
to cover the key trends and issues that confront the industry)
from 2000 to 2008 for articles relating to broadcasting inno-
vation challenges. Using this source, we created measures
(discussed below) that characterize the extent of challenges in
the core and edge capabilities for each of the technology
generations. Finally, longitudinal data were collected on a
sample of 792 firms across the supply chain of broadcasting
industry (15% content providers, 15% semiconductor and
electronic suppliers, 13% broadcasters, 17% software, 14%
terminal providers, 12% platform aggregators, 14% tele-
communications) in Europe and the United States between
April 2000 and May 2008. We constructed a unique data set
to test our arguments. Using an observational method
(Bernard and Killworth 1979; Bernard et al. 1980, 1982;
Killworth and Bernard 1976), we collected detailed archival
market data from websites, newspapers, and the leading
industry consulting firms. The information recorded for each
company (every year) was the specific horizontal functions
controlled and secondary capabilities acquired in other func-
tions along the value chain.

The content validity was proven by consulting multiple
sources (interviews and documents). Internal validity was
tested by constructing a detailed research framework ahead of
time. External validity was limited, since it was an explora-
tory study. Reliability was based on a detailed case study
protocol that documented the selection procedures, analysis,
and summary database.
We controlled for a number of firm- and industry-level
effects. Henderson and Clark (1990) identified important
differences between incumbents and entrants during tech-
nology transitions in the broadcasting industry. We control
for this effect using the variable incumbent, which takes a
value of one if a firm also was present in an earlier technology
generation. We included one industry-level control repre-
sented by the number of firms, which controls for the compe-
titive density in the generation in a given year.
Three Types of Control
Point Constellations
In this section, we first examine three types of CPCs emerging
from the case studies analyzed and the longitudinal data
(Figure 1): (1) closed vertically integrated model, which
defines the short-term static properties of industry structure;
(2) loosely coupled coalition model, which implies the
emergence of an incremental innovation; and (3) multisided
platforms which define the midterm dynamic—but non-
evolutionary—process of competition characterized by the
emergence of cross-boundary industry disruptions.
We then illustrate transition from one CPC type to another by
examining the changes experienced by control points in
response to triggers related to technology and business
strategy. We model the mechanisms through which incre-
mental and cross-boundary industry disruptions change the
structure of value networks and provide support for the
double helix model (Fine 1998) while adapting it to a digital
business environment.
Type 1: Closed Vertically Integrated Model
Prior to the disintegration and fragmentation of supply chains,
media companies were responsible for coordinating their own
value chains, and the control of core activities was strictly
centralized through vertical alliances determined by the need
of the single company to develop along the vertical dimension
of the value chain (Figure 1a).
Pagani/Digital Business Strategy and Value Creation
Media companies in the United States and Europe (1980–
1985 phase) adopted strategies aimed at obtaining scale
economies within mutual horizontal core businesses (focali-
zation strategies) and expanded their activities to adjacent
markets through cooperation strategies and alliances (vertical
and horizontal strategies). Based on the case studies ana-
lyzed, the following forces were found to drive vertical and
horizontal alliances:
1. Risks linked to the uncertain demand and the rapid
market change. (For example, the short-lived alliances of
TCI with Microsoft or Kirch, Bertelsmann with BSkyB
for the creation of a digital satellite platform in
Germany.)
2. Market positioning and access to new capabilities (For
example, the alliance of Bertelsmann with America
Online to form AOL Europe enabled the group to
increase network technical capability and supply Internet
services. BBC developed Internet services and online
information with ICL, which supplies the informatics
capabilities required to run the service. The merger of
Bell Cablemedia, NYNEX CableComms, and Videotron
with Mercury Communications Ltd. originated Cable and
Wireless Communications and the expansion of service
providers Internet UUNet through acquisition of Unipalm
PIPEX in the United Kingdom and France.)
3. User control possibilities and the increase in the share of
profits deriving from the sale of products and services.
(For example, Disney Corporation obtained access to
many distribution channels by taking over ABC and
Capital Cities in 1995, thereby accessing terrestrial and
cable TV channels. BSkyB developed new opportunities
of distributing new interactive services with BT,
potentially gaining access to the BT installation base.
Similar advantages drove Bertelsmann to cooperate with
Deutsche Telekom in Germany.)
4. Shifting to value chain areas with a higher added value.
(Mobile service providers such as Cellnet and Orange in
the United Kingdom tended to shift in the supply of
Internet services with UUNET. Microsoft and NBC
created the joint venture MSNBC, which enables NBC to
add value to its basic TV activities through Internet and
Microsoft to become a content supplier.)
5. Facing the competition of companies in connected mar-
kets. (For example, the investments by U.S. Regional
Bell Operating Companies in cable TV aimed at
preventing competition in cable companies entering the
telecommunication market.)
MIS Quarterly Vol. 37 No. 2/June 2013 621
Pagani/Digital Business Strategy and Value Creation

(a) Closed Vertically Integrated Model

(b) Loosely Coupled Coalitions

(c) Multisided Platform

Figure 1. Three Types of Control Point Constellations

Value creation. For this value system configuration model we
distinguish four main sequential primary activity categories:
(1) content creation, (2) multimedia packaging and services,
(3) network and infrastructure equipment provision, and
(4) telecommunication service provision (Figure 2). The ten-
dency to integrate these main activities is driven by the need
to achieve independence, control the content access in order
to guarantee access to the most interesting and innovative
contents (i.e., contractual agreements, primarily between TV
channels and film production companies), and acquire access
control on the target user.
Value capture. As the industry structure is vertical and tend
to integrate the main functions the value capture is controlled
by key players (mainly media companies) integrated in all of
the four main sequential primary activity categories.
Type 2: Loosely Coupled Coalition Model
We examine next the emergence of digital broadcasting
systems as an incremental innovation. Digital broadcasting
systems enable the delivery of more TV channels and the high

622 MIS Quarterly Vol. 37 No. 2/June 2013


Figure 2. Value Network of the Analog Broadcasting Offering (Closed Vertically Integrated Model)
definition (HDTV) format, as well as interactive services such
as EPG, VOD, and interactive advertising. Previous studies
show that the value network changes as a function of a
technological shock (Knoben et al. 2006).
In this phase of evolution of the industry, the emerging inter-
active digital television marketplace is more complex, with
competing platforms and technologies (satellite, cable,
terrestrial, IP) providing different capabilities and oppor-
tunities. The TV value chain is increasingly being decon-
structed, leading to the development of a complex and rapidly
evolving value network (Pagani 2003). We look in depth at
the changes occurring in the TV value chain, that is, the
digital terrestrial, cable, and satellite systems in the United
States and 10 countries in Europe. For each country, we
mapped the main players. Figure 3 uses the example of Italy.
In this changed context, we can distinguish the emergence of
firms (digital delivery platforms) that possess more promi-
nence and power gained through a central position in the
Pagani/Digital Business Strategy and Value Creation
value network structure, and that use their prominence to
perform a leadership role in pulling together the dispersed
resources and capabilities of network members (digital TV
channels, application service providers, network providers).
These firms can be labeled as hub firms (Brass and Burkhardt
1993; Wasserman and Galaskiewicz 1994) and are repre-
sented by digital delivery platforms.
We define network orchestration as the set of deliberate, pur-
poseful actions undertaken by the hub firm (digital delivery
platform) as it seeks to create value and capture value from
the network. This type of value network may be viewed as
“loosely coupled coalitions” (Provan 1983), where loose
coupling is a situation in which elements are responsive, but
retain evidence of separateness and identity (Weick 1976).
The supply chain now appears more disintegrated and open.
Traditional broadcasters, who in the previous stage developed
primary skills in the phases of packaging and signal transmis-
sion (network provision), now develop contractual links with
MIS Quarterly Vol. 37 No. 2/June 2013 623
Pagani/Digital Business Strategy and Value Creation
Figure 3. Digital TV in Italy
other players in the market (application service providers,
network providers etc.). TV channels and delivery platforms
compete to capture the attention of the viewer and the value
is provided by the most compelling content and useful inter-
active service. Figure 4 illustrates the location of the biggest
players along the value chain and the relations among them.
Digital TV offers attractive opportunities to players who by
tradition were foreign to the broadcasting world, particularly
to companies operating in the field of telecommunications
(i.e., France Télécom, Telecom Italia, Telefònica, BT, AT&T)
and informatics (i.e., Microsoft). Such companies are
interested in exploiting digital TV primarily as it pertains to
interactive services and the interconnection, software, and
hardware demands arising from them—either alone or in
combination with traditional television contents.
Value creation. Once the digital TV market matures, the
retention of viewers will be determined by the quality and
range of content and services provided by the operator.
Service providers that secure attractive content services at an
early stage will have an advantage in attracting and retaining
subscribers. As the number of TV channels increase due to
624 MIS Quarterly Vol. 37 No. 2/June 2013
digital technology, value creation control points tend to
increase. Network providers (i.e., traditional delivery plat-
forms such as cable, satellite, OTA or newer telco IPTV and
wireless services) offer a walled garden of content acquired
and aggregated into various consumer packages.
Value capture. With reference to the flow of revenues among
the different operators we found that network operators have
an advantage in gaining revenue. Their condition of “bottle-
neck,” through which all of the content that appears on tele-
vision must pass, provides a steady revenue stream for pay-
TV services while interactive-TV applications are being
developed. Service providers collect their revenues directly
from final users through their services. Revenues are then
distributed among the other upstream stages of the value
chain. Broadcasters gather relevant additional revenues from
indirect sources, such as advertising, which represents a
fundamental part of the revenue model. Within telecoms, the
percentage of call revenues funded by advertisers (through
free phone, national call rate, and local rate numbers) con-
tinues to rise. As advertising is the central revenue stream in
the broadcasting and telecom business model, it is extremely
important for capturing the value generated in the ecosystem.

Figure 4. Value Network of the Digital TV Market (Loosely Coupled Coalitions)
Type 3: Multisided Platforms
Next, we examine the collision of multiple disruptions that
influence computing (as devices are more personal), networks
(connectivity is ubiquitous), value chain clockspeed (value
capture is fleeting), content control, regulatory, consumer and
IP protection, consumer experience, software distribution,
social networking, storage and time shifting, and content pro-
duction (webcams). These cross-boundary industry disrup-
tions lead to the emergence of new business models (Google
TV, Brightcove, Hulu, Joost), new interactive services, and
radical changes in the traditional viewing habits, meeting new
needs. We call this model (depicted in Figure 1c) the multi-
sided platform.
The emergence of the multisided platform (Eisenmann et al.
2006; Geoffrey and Van Alstyne 2005; Parker and Van
Alstyne 2005) represents a new form of market structure and
can be seen as a consequence of the disruptive innovation
related to the emergence of new services and new business
models. It exists wherever a company brings together two or
more distinct groups of customers (sides) that need each other
Pagani/Digital Business Strategy and Value Creation
in some way, and where the company builds an infrastructure
(platform) that creates value by reducing distribution, trans-
action, and search costs incurred when these groups interact
with one another (Eisenmann et al. 2006).
Value creation. In this model we distinguish three main
players: (1) end user peers, (2) transport peers (network), and
(3) platforms/aggregators.
End user peers are able to interact (real-time communication
or asymmetric), be part of a social network (i.e., Facebook,
some gaming environments), consume content (push versus
pull—i.e., downloads, broadcast, on demand), publish content
(as individual end users or for-profit), and advertise. The
transport peers (ISPs, carriers) provide the “pipes” that enable
utility/consumption and are concerned with ROI.
These two players are linked by platforms/aggregators, which
provide environments that support end-user utility, usually
using transport networks. Examples analyzed are eBay (or
Yahoo! Auctions, etc.) bringing together buyers and sellers;
Google with content providers, consumers, and advertisers;
MIS Quarterly Vol. 37 No. 2/June 2013 625
Pagani/Digital Business Strategy and Value Creation
Figure 5. Multisided Platform Model
Visa, American Express, or other payment systems bringing
together merchants and consumers; Sony PlayStation with
users, game developers, and middleware providers; Apple
iTunes/iPod with music labels (content publishers) and con-
sumers; and DoCoMo i-mode bringing together online content
providers, application developers, handset makers, and
consumers.
Multisided platforms (MSPs) can vary from having two sides
(eBay, Visa), three sides (Windows, Google), four sides (i-
mode, Brightcove), or potentially even more. However, the
more sides, the higher the degree of complexity and the
greater the strategic challenge of balancing the interests of all
sides (other things being equal). The choice of which sides to
target can have an immense impact on the structure and the
success of an MSP business.
MSPs create value by generating indirect network effects
between the multiple sides they serve. iTunes becomes more
valuable to music labels as more and more consumers buy
into that platform by purchasing iPods. As more merchants
opt to take Visa, the Visa card becomes more valuable for
consumers and vice versa.
Governance patterns vary from MSP to MSP. Some plat-
forms retain a high degree of control over actions by all sides
of their platform, because they conclude that centralized
626 MIS Quarterly Vol. 37 No. 2/June 2013
control is necessary for the platform to function and because
they have the market power to do so. Apple, for example, in
almost all cases mandated a single, across-the-board pricing
structure on the iTunes music store. Other MSP companies
allow participants broad latitude in their platform activity,
setting minimum rules that will enable and encourage the
platform to function smoothly and profitably. Thus, eBay lets
sellers decide minimum bid amounts, auction duration, and so
on. Microsoft places no restrictions over who can sell
applications for Windows and how.
Value capture. In multisided networks, cost and revenue are
on each side. The platform incurs costs in serving all of the
groups and can collect revenue from each, although one side
is often subsidized. In cases like eBay or Visa, one side pays
to play (sellers, merchants), and the other doesn’t (buyers,
consumers)—although the latter may pay indirectly. Craigs-
list is open on both the sides. With Windows, Microsoft
derives its revenues from licensing fees charged to users,
whereas application developers do not pay anything and are
in fact subsidized through various forms of development sup-
port. By contrast, with Xbox, Microsoft derives the bulk of
its revenues from royalties charged to game developers, while
selling the consoles to users at or below cost. Their business
model can be not-for-profit (i.e., Gnutella, BitTorrent) or for
profit (Google, eBay, Facebook, Akamai, Skype, or corpor-
ations, universities, etc.).

Framing the Dynamic Cycle of CPCs
Finally, we analyze the changes experienced by control points
in response to triggers related to technology and business stra-
tegy and compare the three evolving value network structures
in terms of value creation logic, primary activity categories,
main interactivity relationship logic, primary activity inter-
dependence, and key cost and value drivers. Table 1 sum-
marizes our analysis and description.
What we find most critical is the change in the value creation
and value capture logic. The closed vertically integrated
model is characterized by the presence of giant, strongly con-
nected components that create and capture value. The busi-
ness value system structure is characterized by interlinked
chains. In the loosely coupled coalitions, resulting from the
emergence of an incremental innovation, different players
along the value chain create value through a pooled, sequen-
tial, and reciprocal primary activity interdependence. Value
is captured by referred hubs and redistributed. In the multi-
sided platform type, resulting from cross-boundary industry
disruptions, a main infrastructure brings together two or more
groups and creates value by reducing distribution, transaction,
and search costs.
Figure 6 frames the dynamic cycle of CPCs and the mech-
anisms through which incremental and cross-boundary
industry disruptions change the structure of value networks.
Findings support the business double helix model (Fine 1998)
in the digital environment and show that when the industry
structure is vertical and the product architecture is integral,
the forces of disintegration and the emergence of an incre-
mental innovation push toward a horizontal and modular
configuration. On the other hand, when an industry has a
horizontal structure, another set of forces, named cross-
boundary industry disruptions, push toward more vertical
integration and integral product architectures.
Implications and Insights for Digital
Business Strategy and Research
The study analyzes the structure and dynamics of value con-
figuration in a technology-enabled industry in order to pro-
vide insights into identifying and defining the control points
that influence the execution of a digital business strategy
within changing value networks. Our study makes a number
of contributions. First, it illustrates how incremental innova-
tions may shift value networks from static, vertically inte-
grated networks to more loosely coupled networks, and how
Pagani/Digital Business Strategy and Value Creation
cross-boundary industry “disruptions” may in turn shift them
to multisided markets.
We use the business double helix (Fine 1998) to explain how
digital ecosystems evolve and their dynamics. We identify
three main types of network structures. Two of them are
linear systems, while the third is characterized by non-
linearity.
In this evolving pattern, the parts can display complex non-
linear dynamics, and their implications can be quite stunning,
as they often imply an effective disconnection between the
well-defined behavior of the components and the global out-
come that one observes. What this means is that the precise
knowledge about the plans and strategies of individuals in the
market would not suffice to understand the behavior of the
market.
We have drawn a number of insights for the evolution of
digital ecosystems and showed how digital business strategy
shifts. These insights also provide two implications for both
research and practice.
Transform Organizational Intelligence
into a New Relational Intelligence
This study shows that in order to survive in an increasingly
uncertain and complex environment, the firm has to transform
its organizational intelligence into a new relational intelli-
gence, enacting an open communication process with its
stakeholders.
The closed vertically integrated model (type 1) is no longer
the best organizational architecture because it is designed to
centralize the organizational intelligence, not to maximize it.
In the loosely coupled coalition (type 2), it is much more
valuable to play in an orchestra than to be an outstanding
soloist as part of a value creation ecosystem (Adner 2006;
Adner and Kapoor 2010). Value creation is the output of a
process that encourages creativity and diversity, yet does not
allow the players to go out of tune completely. In the third
type of digital networked world, where everyone and every-
thing is connected (multisided platforms), economic value be-
haves very differently than it does in the traditional, bounded
world. These three types of value networks show different
ownership and organization of functional components, which
are critical in controlling the dynamics of core and edge
competencies of players. Understanding these three types and
their transition allows companies to better recognize how
components change in response to triggers related to a digital
business strategy.
MIS Quarterly Vol. 37 No. 2/June 2013 627
Pagani/Digital Business Strategy and Value Creation

Table 1. Overview of Alternative Control Point Constellation Models

Closed Vertically Integrated
Model Loosely Coupled Coalitions Multisided Platform
Value creation Presence of giant strongly Focus on a specific phase of Bringing together two or more
logic connected components the value chain managing rela- distinct groups of customers,
tions with partners along the building an infrastructure that
value chain creates value by reducing distri-
bution, transaction, and search
costs.
Value capture Value is captured by the giant • Network operators have an In multisided networks cost and
logic advantage revenue are on each side. The
• Service providers collect platform incurs costs in serving
revenues directly from final all the groups and can collect
users and distribute them revenue from each, although
among the other upstream one side is often subsidized.
stages of the value chain
• Broadcasters gather relevant
additional revenues from
indirect sources
Primary activity • Content provision • Content provision • Network promotion
categories • Packaging • Content and interactive • Service provisioning
• Network provision service packaging • Infrastructure operation
• Conditional access • Network provision
• Managing relationships with
customers and partners
Main interactivity Sequential Symmetric/asymmetric Simultaneous, parallel
relationship logic interactivity
Primary activity • Pooled • Pooled • Pooled
interdependence • Sequential • Sequential • Reciprocal
• Reciprocal
Key cost drivers • Scale • Scale
• Capacity utilization • Capacity utilization
Key value drivers • Market positioning and access • Scale • Capacity utilization
to new capabilities
• Possibility of user channel
control
• Shifting to value chain areas
with higher added value
• Facing competition of com-
panies in connected sectors
• High costs of new digital
technologies
Business value • Interlinked chains • Referred hubs • Layered and interconnected
system structure networks

From Content Gatekeeper to through which value is created and who captures this value.
Customer Gatekeeper We have been able to distinguish five layers of value.

By comparing the three value constellation models, we
observe a gradual shift in the critical role of a firm in a value
network from being a content gatekeeper to becoming a
customer gatekeeper. If we want to understand who controls
the network, we need to explore in depth this evolving path
• Value in Customer Access: This revolves around
becoming a customer gatekeeper. Most economic value
will be created at the periphery/ends of networks. At the
core, the end most distant from users that possesses only
generic scale-intensive functions will consolidate. At the

628 MIS Quarterly Vol. 37 No. 2/June 2013


Figure 6. The Adapted Double Helix Model
end closest to users, highly customized connections that
generate value with customers will be made.
• Value in Common Infrastructure: Elements of infra-
structure can be brought together and operated as
utilities.
• Value in Modularity: Devices, software, organizational
capabilities, and business processes will increasingly be
restructured as well-defined, self contained modules that
can be quickly and seamlessly connected with other
modules. Value will lie in creating modules that can be
plugged into as many different value chains as possible.
Companies and individuals will want to distribute their
capabilities as broadly as possible rather than protect
them as proprietary assets.
• Value in Content Access: Findings show that for the
purpose of achieving and holding onto long-lasting com-
petitive positions, a critical success factor is also the
gradual control of content in order to become a content
gatekeeper.
Pagani/Digital Business Strategy and Value Creation
• Value in Orchestration: As modularization takes hold,
the ability to coordinate among the modules will become
the most valuable business skill.
Concluding Thoughts
This paper broaches a key, unexplored issue in value network
management, with implications for researchers in network
theory, IS, strategy, knowledge management, alliances, and
international business. Our main contribution is a novel way
to study the control point constellations (value creation and
value capture points) topology and the influence of incre-
mental innovations and cross-boundary industry disruptions
on them. The proposed conceptual framework captures con-
cisely the highly skewed distributions of the value configura-
tion models. We support the double helix model and discover
three models that characterize the control point constellations
of the multimedia industry.
Finally, what distinguishes the research described in this
article from previous work is that traditional approaches to
MIS Quarterly Vol. 37 No. 2/June 2013 629
Pagani/Digital Business Strategy and Value Creation
networks have tended to overlook or oversimplify the rela-
tionship between the structural properties of a network system
and its behavior. Which outcomes occur, how frequently they
occur, and with what consequences, are all questions that can
only be resolved by thinking jointly about structure and
dynamics and the relationship between the two. That is how
we can clearly identify and define the control points that
influence the execution of a digital business strategy within
changing value networks.
Acknowledgments
The author is very grateful to Professor Charles Fine at MIT Sloan
School of Management for his valuable suggestions and comments
which laid the foundations of this study.
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About the Author
Margherita Pagani is an assistant professor of Marketing at
Bocconi University (Milan), and a senior faculty member at Lorange
Institute of Business (Zurich). She was visiting scientist at MIT’s
Sloan School of Management (2008 and 2003). She has published
several books (in the United States, Korea, and Italy), two
encyclopedias, and articles in leading international journals such as
International Journal of Electronic Commerce, Information &
Management, Journal of Interactive Marketing, Journal of Business
Research, Psychology & Marketing, Technology Analysis and
Strategic Management, Technological Forecasting and Social
Change, and a variety of other publications. For her research
activity and publications in the mobile marketing field, she won the
2009 Mobile Marketing Association Global Award “Academic of
the Year.”

Appendix
Data Analysis
We used panel data for our empirical analysis. Each panel corresponds to a firm in a given technology generation. The use of panel data helps
to control for potential sources of unobserved heterogeneity and enables us to test how the benefits of vertical integration change over time
during the course of a given generation. In our analysis, core and edge capabilities are the key explanatory variables, but they do not exhibit
intertemporal variation for a firm within a given generation. For this reason, we used a random-effects model (Baltagi 2005). We controlled
for unobserved differences across firms by including firm dummies in a firm-generation panel (Wooldridge 2002). We also included year
dummies to control for unobserved year-specific effects. We estimated the following equation:

yigt = β0 + Xigtb + Dil + Tt d + aig+uigt (1)

where yigt is firm i’s market share in a generation g in year t ; Xigt is the vector of independent and control variables; Di is the vector of dummies
for each firm; Tt is the vector of dummies for each year; aig is the unobserved heterogeneity for a firm in a generation that is assumed to be
uncorrelated with the explanatory variables; and uigt is the error term.

Selection of the Model Structure. In phase 2 (selection of the model structure), we introduced a graph-generating model aimed at representing
the evolution of control point constellations using a node-and-arc representation. In this approach, from graph theoretic notation, nodes
represent actors (companies) while arcs represent relationships, or ties, between actors in the network (Moody et al. 2005; Newman 2003).
This approach has been shown to be particularly effective in describing the structure and dynamics of socioeconomic networks (Brandes et
al. 2001) and we adopted it to visualize our ideas. Following Botafogo and Schneiderman (1991) and Pirolli et al. (1996), we augmented graph
theoretic analysis to include document content resulting in a rich understanding of domain structure and a taxonomy of the roles played. We
then incorporated an element of time evolution in the network structure and offered a plausible explanation in terms of growth dynamics of
the digital-enabled network.

Model Estimation and Validation. In order to estimate the model (phase 3), we discussed the emerging structure during two meetings with
practitioners and academics.

632 MIS Quarterly Vol. 37 No. 2/June 2013

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