Smart cities are one of the dominant manifestations of digitization with a multimillion dollar potential, where cities and companies alike are looking for ways to create and capture value. Technology-driven companies are key to making smart cities a reality, but their current product-centric business models do not meet the changing needs anymore. Based on an in-depth study at Philips Lighting of four smart city cases across a period of five years, our article illustrates four distinct business models that enable incumbent organizations to enter this smart city market. We develop and contrast the four types of business models on individual and joint value creation and value capture dimensions and show how each business model can be of value to an incumbent, depending on the project and ecosystem. We illustrate these business models with insights from Philips Lighting’s transition from public lighting to smart cities and provide specific implementation suggestions for incumbent companies.

Introduction

Rome was not built in a day, and neither are smart cities. By 2050, nearly 70% of the world’s population will live in urban areas (UNESA, 2015), creating both challenges and opportunities for municipalities and industries, leading to a widespread debate about the future of cities. Digital technology functions as a catalyst for urban transformation promising more efficient, livable, “smart” cities that improve the quality of life for citizens and visitors by leveraging smart services, systems, and solutions (The Economist, 2016). Frost & Sullivan estimate that the smart city market will be worth $1.6 trillion by 2020 with a wealth of locations claiming their status as smart cities, collaborating closely with industry experts and knowledge institutions (Frost & Sullivan, 2014; Snow et al., 2016). The rules of the game are changing, many new technology players from different disciplines are active in the smart city market. These companies range from new entrants to established players, which include such well-known names as Cisco, IBM, Huawei, Philips and Accenture. Although municipalities and businesses both seek to be at the forefront of these exciting developments, success in this cutting-edge domain is no small feat. The path towards the future of smart cities is uncertain, as we do not yet know what an actual smart city looks like, beyond the mere pilot projects currently implemented. It has been argued that new technology in itself has limited value and that designing products and services around that technology does not guarantee firm success, competitive advantage, or societal value (Chesbrough, 2007). Business model innovation, on the other hand, can enable an organization to fully realize the commercial potential of a technological innovation and can lead to corporate transformation and renewal (Johnson et al., 2008; Zott et al., 2011; Zott and Amit, 2007). The general principle behind business models is based on representing connections between different actors or activities in order to create and capture value for all (i.e., customers, suppliers, complementors, partners and others) (Chesbrough, 2007; Doganova and Eyquem-Renault, 2009; Zott et al., 2011). Essentially, established companies entering the smart city market are looking for new business models, i.e. new ways to create and capture value (Amit and Zott, 2001, 2015; Osiyevskyy and Dewald, 2015; Sorescu et al., 2011).