Special Project: Executive Summary

Scenario Building for the Development of a Near Field Communication-enabled Phone-based Mobile Payment System in the Philippines

Executive Summary

The internet and mobile cellular communications are perhaps the two greatest technological innovations in human history. Together, they have given birth to “mobile internet” and transformed the mobile phone from a purely communications device to a truly multi-function device. Thus, setting the stage for the “Mobile Revolution”.

The “Mobile Revolution” has enabled users to conduct, through their mobile devices, activities they used to be able to do only through their computers, TVs or offline. Among those activities are the conduct of financial transactions or commerce through mobile commerce (MC) and the completion of such transactions through mobile payment (MP). Though MC and MP are fundamentally related, they are distinct. MP has applications that go beyond MC such as in the area of near field communication-enabled mobile payments (NFC-MP).

In the Philippines, NFC-MP represents a massive opportunity, particularly to mobile network operators (MNOs). It has the potential to be a key differentiator, in itself, or together with other value-added services it enables. But besides this massive economic opportunity, NFC-MP also represents a radical shift in the way payments and payment systems work. Aside from the obvious change in customer experience, NFC-MP also threatens to alter, if not supplant, the dominant payment technologies and systems and fundamentally alter the balance of power in these existing payment systems. The economic opportunity and disruptive potential of NFC-MP makes it an appropriate subject of a systematic study in the field of Technology Management (TM).

The strategic issue examined in this paper is the development of an NFC-enabled, phone-based, mobile payment system in the Philippines in 5 years. As with any technological innovation, the development of an NFC-MP system is fraught with uncertainty and complexity. As such, scenario planning was chosen as the paper’s analytical framework.

“Scenario Planning is a purposeful examination of a complete range of futures that could be realized.” It is a technique for addressing the fundamental uncertainty inherent in the future. Unlike forecasts, scenario planning does not intend to predict a specific future. Rather, it constructs alternative future scenarios by taking into consideration the interplay and cumulative impact of numerous, and at times conflicting, variables to a strategically important focal issue (Yoe, 1983).

In the context of this paper, scenario planning was done by, first, identifying the focal issue, which is the development of an NFC-MP system in the Philippines in 5 years, and establishing its strategic importance. Then, an environmental scan was conducted to identify important social, technological, economic and political factors and trends surrounding NFC-MP in the Philippines. From the scan, a set of key variables and critical uncertainties were identified and examined. They were, then, clustered and ranked to establish key driving forces. The clusters established as key driving forces were, then, used as scenario logics to create specific, alternative scenarios. Then, scenario coherence was assessed and finally, the scenarios were assessed in terms of their implications to strategic planning.

A scan of the social environment of NFC-MP revealed that demographics, urbanization, lifestyle and consumer trends point to a potential market for NFC-MP in the Philippines that is attractive both in terms of its sheer size and its characteristics that make it sensitive to the value of NFC-MP.

A scan of the technological environment revealed technological trends such as the mobile revolution (i.e. mobile internet + mobile phone evolution + technology mobilization), convergence (i.e. convergence of telecommunications, media or content-delivery and information technology) and social networking that support the development of NFC-MP. Furthermore, it reveals the availability of core and enabling technologies as well as organizational resources and capabilities to the relevant stakeholders in the development of NFC-MP in Philippines.

A scan of the economic environment revealed robust GDP growth, strong domestic consumption and resilient OFW remittances. It also showed an expanding BPO industry and a performing stock market. Furthermore, it revealed a high-level of confidence on the future prospects of the local economy coming not only from the local business community but also the international business community as seen in successive upgrades from credit rating agencies and pronouncements from well-respected investment banks. All these trends suggest a fundamentally sound economy with high growth potential that can support the development of NFC-MP. Moreover, the massive financial resources of the country’s MNOs coupled with declining profit margins due to a maturing industry and intense competition, particularly in traditional services, indicate a compelling incentive for the development of new revenue streams and growth areas such as NFC-MP.

A scan of the political environment revealed trends conducive to the development of NFC-MP such as the high approval and trust ratings of the current administration and the perception of progress towards good governance. However, it also revealed a lack of strategic and policy leadership from the government particularly in the area of technological capability building as seen from the absence of a cohesive technology and innovation agenda. It suggests that the private sector will have to take the lead in the development of NFC-MP.

From the environment scan, key predictable variables and critical uncertainties were identified and grouped based on common themes and casual relationships into the adoption, capability, collaboration, governance and technology clusters.

The adoption cluster grouped variables that are directly related to user and merchant adoption including those that influence the perceived value of NFC-MP. The capability cluster grouped variables that are directly related to organizational capabilities of the lead players. The collaboration cluster grouped variables that are concerned or directly relevant to the successful collaboration of the various players in the development and deployment of NFC-MP. The governance cluster grouped variables that are related to government participation and support, particularly those that enable the development and adoption of NFC-MP. The technology cluster grouped variables that are directly related to NFC-MP technologies including those that are concerned about the technological characteristics of NFC-MP as well as advantages or benefits derived from these characteristics.

Using the two-axis method, the clusters determined to be the two most important and uncertain, namely, adoption and collaboration, were used as scenario logics to generate four alternative future scenarios: the “pangaea” scenario which corresponds to high collaboration and mass adoption, the “continents” scenario which corresponds to low collaboration and mass adoption, the “archipelagos” scenario which corresponds to high collaboration and niche adoption and lastly, the “islands” scenario which corresponds to low collaboration and niche adoption.

The scenarios provide stakeholders insights on the alternative (but not necessarily mutually exclusive) paths the development of NFC-MP can take and alternative outcomes that can unfold from the relationships and complex interplay of key variables and critical uncertainties. Furthermore, they provide stakeholders a framework upon which they can derive, formulate and test robust strategies for shaping not only the future NFC-MP in the Philippines but also the future of their organizations and the country as a whole.

In conclusion, the scenario planning exercise presented in this paper revealed that the Philippines has a window of opportunity to develop a fully-integrated NFC-MP system in 5 years and establish itself as a technology-leader in this area. Social, economic and technological factors have come together to create an environment where NFC-MP can flourish, its value recognized and its potential unleashed. It is, therefore, imperative for stakeholders to plan for and exploit this nascent opportunity.

It also highlighted the central role of organizational capabilities and the enabling role the government can play in the development of NFC-MP. However, it noted that the lack of a unifying vision and strategic direction in the country’s capability-building, which is traditionally provided by the government, is a key impediment in bringing about the synergy of forces necessary not only for the successful realization of NFC-MP but also for a well-functioning innovation system capable of producing world-leading innovations such as NFC-MP.

Finally, this paper has provided insights on how technology management concepts and frameworks such scenario planning can be used as effective tools for strategic planning and nation building.

Innovation System Concepts

Innovation as a System

Innovation is a complex process (i.e. it is a continuous, cumulative, nonlinear, interactive, path-and context- dependent process of coming up and commercializing an invention). Any complex process involves a series of activities performed by several components that converts inputs to outputs. These components, their activities, relationships and linkages taken together as a whole comprises a system.  As such, innovations can be viewed as always occurring in a system. 

The components of an innovation system are organizations and institutions within the system. Organizations pertain to the actors and players in the system that perform specific activities that affect or contribute to main function of the innovation system which is to produce and diffuse innovations. These organizations include government agencies, universities, firms and other public and private organizations. Institutions pertain to the “rules of game” which affect how organizations perform their activities and relate to each other. These include laws, policies, cultural norms and habits.

Narrow and Broad Definition of National Innovation System

In the narrow definition of NIS, it is limited to the integrated system of economic and institutional agents directly involved in the generation and use of innovation in a national economy such as the R&D system and university system. In the broad definition of NIS, it includes the components of the narrow NIS plus all economic, political and other social institutions affecting learning, searching and exploring activities such as a nation’s financial system, manufacturing system and regulatory system.

Institutions in a National Innovation System

An NIS is composed of institutions, actors and their relationships. Institutions in an NIS pertain to the “rules of game” which affects how actors perform their activities and relates to other actors. These include laws, policies, cultural norms and habits. Actors in an NIS pertain organizations that perform specific activities that affect or contribute to the generation and diffusion of innovations. Examples of NIS institutions in the Philippines are the recently passed law on technology transfer, the law that created and governs the University of the Philippines and the “technoliberalist mentality” of its government leaders. Examples of NIS actors in the Philippines are the University of the Philippines, ASTI and the Development Bank of the Philippines.  

Activities in an Innovation System

What Edqvist calls as “activities” are factors that contribute or influence the “functions” of an innovation system. They are performed by actors in the innovation systems and either support or impede the generation, diffusion and use of innovations. 

As such, activities are “sub-functions” and are synonymous to the so-called determinants of innovation processes. 

Among Edqvist’s list of activities, I think DOST is already addressing competence building and to some extent creating and changing organizations and institutions. DOST has several scholarship programs aimed at competence building particularly developing and training future scientists and engineers. It also has undertaken incentive programs and projects aimed at promoting innovation and entrepreneurship (though they have not been very successful due to the non-holistic nature of DOST’s strategy).  However, I think the rest of activities in Edqvist’s list is not being addressed by DOST particularly those in the demand-side. This is demonstrated by the nation’s very weak demand condition (i.e. little demand for local tech., addiction to imported tech., and lack of effort to learn and improve imported tech.) and almost non-existent linkages (i.e. very few vertical tech. transfers, very few commercialization projects and very weak academe-govt-industry collaboration). In particular, the activities that DOST must address include formation of new product markets, articulation of quality requirements of new products and networking through markets and other mechanisms, including interactive learning.

Government's Role in a National Innovation System

The role of the government in a national innovation system is to provide leadership and guidance. Specifically, this means articulating a vision, a set of national priorities and desirable outcomes through strategic scanning and foresight (leadership/direction). This also implies formulation of rules and programs to deliver the outcomes including “market design” (execution) as well as regular monitoring of outcomes and their impact (review).

For a government to be effective in performing its roles, it is necessary to have an inter-departmental or interministerial National Innovation Center. This is because a national innovation system has many actors, institutions and activities that fall under and/or cut across bureaucratic or departmental boundaries (which is a direct consequence of the nature of innovation) and therefore, its effective governance requires a central agency or brain that can coordinate, direct and ensure the development and execution of a holistic and cohesive strategy. In particular, this agency can provide a “helicopter view” of the overall innovation ecology, develop consensus and support around strategic directions, ensure that a “whole government” perspective on innovation is utilized to inform decision making as well as achieve coordination without centralization. 

Weakness in the Governance of the Philippines' National Innovation System

The principal weakness in the governance of the Philippine innovation system is the lack of a holistic innovation strategy, which is in turn due to a lack of unified vision for the nation’s technological capabilities in the future, which in turn is due to the lack of appreciation and understanding on the importance of technological learning and capability building to economic development and nation building in general, which is in turn due to the technoliberalist culture or mindset of the government and its leaders. This is manifested in the nation’s weak S&T resources and capabilities, continuing scientific and technological dependence, weak effective demand for local S&T and low level of public and private support for S&T which together forms a vicious circle that will continue to trap the Philippines in the absence of a conscious, directed and deliberate effort to break from it.

Relationship between an Agricultural Value Chain and an Agricultural Innovation System

An agricultural value chain pertains to the series of value-creating activities involve in creating a particular or a group of agricultural products or commodities, as well as the vertically-linked firms that performs these activities. While an agricultural innovation system pertains to network of and dynamics/interactions among organizations and institutions involved in generating, diffusing and utilizing agricultural innovations. In other words, the organizing principle behind the latter is innovation, while for the former, it is production (or product-creation). 

An agricultural value chain is related to an agricultural innovation in two fundamental ways: first, the firms involved in performing value-chain activities are also actors in the agricultural innovation system and second, the process of performing value-activities provide opportunities for innovation and adopting innovations improve value-chain activities. Among others, this implies that while performing value-chain activities, the firms whether intended or not are participating in the production, diffusion and utilization of innovations.

An agricultural biotechnology innovation system is a network of interacting organizations and institutions that generates, diffuse and utilize agricultural innovations in the field of biotechnology. It can be thought of as the intersection between an agricultural innovations system (i.e. an IS with the agriculture sector as its domain) and biotechnological innovation system (i.e. an IS focused on biotechnology).

Industrial District vs Industrial Cluster 

An industrial district is composed of geographically-concentrated production systems involving and traditionally dominated by SMEs that produce closely and vertically-related products. On the other hand, an industrial cluster, while also usually characterized by geographic localization, is a network of interdependent organizations and institutions that interact formally and informally to the produce, use and diffuse innovation within a given industry or field of knowledge, competences and technologies. In other words, innovation is an important and necessary dimension in an industrial cluster such that an innovative industrial district can be considered an innovative industrial cluster while a non-innovative industrial district may be considered an informal cluster. 

Therefore, the Meycauayan jewelry industry is an industrial district but not an industrial cluster since it lacks the dynamic character of an industrial cluster when it comes to innovation and innovation-related activities.

To transform the Meycauayan agglomeration into a globally competitive innovation cluster, it would be necessary to formulate and implement a cohesive, holistic and focused strategy. It should include an assessment of the current state of the district (e.g. through SWOT analysis), a comparative study between the district and similar high-performing districts in the world (e.g. benchmarking, technology assessment) and capability-building (e.g. technology acquisition). It should also include the implementation of an industrial policy that will support, generate demand and provide incentives to the firms in the district.  

An industrial cluster is not necessarily a regional or local system of innovation because geographic localization or proximity, though a common and advantageous characteristic of most clusters, is no longer a necessity in today’s globalized world such that certain type of clusters like international and virtual clusters can cross local, regional and even national borders. 

Industrial Park vs Technology Park

The key distinction between an industrial park and a science or technology park is the focus and goal of their innovation and innovation-related activities. For the former, it is the creation and improvement of products (and technologies, in so far as they are related to a product) within a particular industry while for the latter it the creation and improvement of technology (or a set of related technologies) and scientific knowledge within a particular field or domain. 

The U.P.-Ayala Technohub is a business park because it is composed mostly of independent BPO companies that are primarily concerned with the performance of business-related activities and lacks the innovative natures of most firms found in technology and industrial parks as well as the linkages and interaction between those firms and other organizations such as universities. 

Creating an Industrial Cluster

If I were tasked to create and develop an industrial cluster, the first step that I would take is to create a central agency that would direct and coordinate the creation of the cluster. The agency will be task to formulate a cohesive, holistic and focused as well as provide specific policy recommendations. I anticipate that strategy would involve the identification of a strategic industry or industries where the activities of the industrial cluster will be focused on as well as identification of potential geographic locations. It would also involve the assessment of the identified industries and locations and the selection of a specific industry and location based on assessed strengths (i.e. competences, resources) and opportunities. It will also involve capability-building measures (e.g. trainings, technology acquisition) as well as implementation of policies that will support, generate demand and provide incentives for existing firms and encourage the creation of new firms in the cluster. It is also important that all these are done in partnership with the industry or the private sector.

Creating a Technology Park

If I were tasked to create a technology park, I would follow a similar direction as outlined in the previous paragraph. But if for the creation of an industry cluster, the identification of existing agglomeration of firms within an industry is an important consideration, the important consideration for the creation of a technology park is the identification of existing sources of scientific and technological knowledge such universities (U.P., Ateneo, etc.) and research institutes. That is, the park will have to built around and in partnership with such organizations (though it does not have to be the existing location of this organizations i.e. they can be invited to locate in another location). Another important ingredient is the presence of organizations and institutions that will create a conducive environment for technology entrepreneurship such venture firms, laws that will make creation of new businesses simpler, easier and straight-forward, research grants, tax incentives etc.

As suggested in the previous paragraphs, the role of the government is provide strategic and policy direction as well as creating an environment conducive to innovation and technology entrepreneurship. In particular, the national government is specially suited to do the former (strategic and policy direction) while the local government, in coordination with the national government can do the latter (conducive environment). The creation of an aesthetically (clean, environment-friendly) and functionally (schools for children, utilities, police departments) pleasing location are included in the former.