What factors determine which type of developments (innovation) in the business model of a complementary traditional alliance partner? : a new perspective on business model innovation

Thesis

!

University of Amsterdam

WHAT FACTORS DETERMINE WHICH TYPE OF DEVELOPMENTS (INNOVATION) IN THE

BUSINESS MODEL OF A COMPLEMENTARY TRADITIONAL ALLIANCE PARTNER?

A NEW PERSPECTIVE ON BUSINESS MODEL INNOVATION

Author:

Friso Luinenburg 


Student number:

10899642


Date of submission final version: 5th of August 2017


Thesis supervisor:

Prof. Dr. J. Strikwerda


Executive Programme in Management Studies – Strategy Track


University of Amsterdam 


Abstract

The concept of business model innovation remains an under-researched topic. Economic theory so

far has failed to define a micro-economic theory of the firm. In economic theory, the firm still is a

black box, but it needs to be opened. That is why experts generally agree that business model

innovation from different perspectives is an important issue for further research (Wirtz, et al.,

2016). One perspective on business model innovation, is to make use of the knowledge and

capabilities of digital complementary alliance partners in order to innovate the business model.

However, in this process other forces like the cognitive factors of leaders and the developments in

information technology are also involved. This study investigates what these factors are and how

they innovate the business model. To develop a better understanding of business model innovation,

findings of the multiple case studies reveal that combining the knowledge and the dynamic

capabilities within a complementary alliance, positively facilitates business model innovation. The

study also shows that current theory is lacking a practical interpretation of how the process of

business model innovation actually works. The study indicates that business model innovation is a

comprehensive process; every innovation in one part touches on all aspects of the business,

respectively the organization. The cognitive factors of leaders are key for successful business model

innovation. However, the results show that not all executives have the cognitive ability to see that

changing internal and external processes are needed for successful cooperation with the

complementary alliance partner in order to innovate the business model. Moreover, complementary

alliance partners that have the capabilities to adopt new information technologies are able to

enhance the process of business model innovation.

Keywords: Complementary alliances, business model innovation, dynamic capabilities, knowledge

based view, integrative thinking, dominant logic, information technology

Table of contents

1.0 Introduction

6

1.1. Research question & sub questions

9

2.0 Literature review

11

2.1 Defining the business model

11

2.1.1 The 9 elements of the business model

12

2.1.2 Defining business model innovation

17

2.2 The theoretical lens

17

2.3 The role of the complementary alliance in business model innovation

23

2.3.1 Defining strategic alliances

23

2.3.2 Levels of complementarity in alliances

25

2.4. The role cognitive factors of leaders in business model innovation

29

2.5 The role of developments in information technology for business model innovation. 32

2.6 Conceptual Model

35

3.0 Methodology

37

3.1 Research design

37

3.2 Research Setting

40

3.3 Data collection

45

3.4 Data analysis

49

3.5 Quality criteria

51

4.0 Results

54

5.0 Discussion

62

5.1 Theoretical implications

62

5.2 Answer of the main research question

65

5.3 Managerial implications

67

5.4 Limitations & Future research

68

6.0 Conclusions

69

7.0 References

71

List of figures

List of tables

Figure 1: The Canvas Business Model (Osterwalder 2014)

13

Figure 2: The Value Chain (Porter, 1985)

26

Figure 3: Conceptual model

36

Figure 4: A streamlined codes-to-theory model for qualitative inquiry (Saldaña, 2015)

50

Table 1: Respondent and interview characteristics

47

Table 2: Archival data

48

Table 3. Overview of quality criteria

53

1.0 Introduction

More and more executives become aware that product and process innovations alone are not

sufficient to compete in the fast moving digital economy. As a result of the current shift of a

tangible asset based economy to an intangible asset based economy (known as knowledge

economy), executives recognize there is need for revising the firm’s cause-and-effect relations to

achieve results in relation to her economic environment. In other words, they recognize the

necessity for innovation of their firm’s core logic of doing business, also called its business model

(Teece 2010). This recognition fits in the modern day conception that innovation of the business

model is an essential component for creating a competitive advantage (Johnson et al, 2008;

Magretta, 2002; Amit & Zott, 2012; Economist Intelligence Unit, 2005; Pohle & Chapman, 2006).

Nowadays information is a substantial part of the product or even the product itself. The

interpretation of data and converting it into money flows (data analysis) is becoming a key tool for

creating a competitive advantage in the form of information superiority (Hayes-Roth, 2006;

Strikwerda, 2014). This results in information technology becoming more and more important. In

order to make the digital transition, traditional firms set up strategic alliances with digital firms. In

this way, these partner firms are complementary to each other in knowledge and capabilities. The

idea that strategic alliances are recognized as a significant way to innovate business models is

widely accepted within research (Dyer & Singh 1998, Chesbrough 2006, Chesbrough & Schwartz

2007, Prahalad & Krishan, 2008) Pohle & Chapman, 2006).

However, the cohesion of these underlying factors that influence the developments of the business

model in complementary alliances are still based on unclear perceptions. This study investigates

what these factors are and how these factors determine innovation in the business model.

Although the general term business model has been a subject in academic discussions for over fifty

years now (but mostly as a process concept with ICT-architecture), it has been receiving serious

attention since the boom of the new economy at the beginning of this millennium with The

Business Model Ontology by Osterwalder (2004) and through the book Strategy Maps by Kaplan &

Norton (2004). The Business Model links the intangible and tangible assets in value-creating

activities. It is a representation of cause-and-effect linkage of the firm, it describes how intangibles

are mobilized and combined with other assets to create value creating customer value propositions.

Business model innovation today is a standard operating procedure in business. Still, the field of

research on business model innovation is relatively untouched.

The reason why theory of business model innovation is still based on unclear perception is because

economic theory so far failed to define a micro-economic theory of the firm. In economic theory the

firm still is a black box, but it needs to be opened. The firm as a black box has to do with the fact

that most economic literature is based on the tangible assets based firm, in which knowledge

exploitation happens through embedding knowledge in discrete economic goods, the boundaries of

the system of value creation coincide with the boundaries of the firm (Strikwerda, 2014).

That’s why experts generally agree that business model innovation from different perspectives is an

important issue for further research (Wirtz, et al., 2016).

One perspective on how innovation of the business model is created, is through the use of

complementary alliance partners. Complementarity is defined by the knowledge or dynamic

capabilities that one of the alliance partners has compared to the knowledge or dynamic capabilities

of the other alliance partner, which together result in new combinational value propositions. In this

way complementarity is displayed through how the alliance partners complement each other in

knowledge and dynamic capabilities. A tangible example is the transformational acquisition of

Digital by Publicis to transform Publicis into a digital marketing firm (Mos Kanter & Bird, 2009).

Chesbrough (2002 & 2006) has delivered great work on innovation of business models by pleading

for “opening” the business model, following the concept of open innovation (originating from

Philips Electronics), which is aimed at reducing risks and making the best use of available

knowledge in the open market. But it mainly focused on unlocking latent value from a technology

with the use of successful alliance business model (Chesbrough & Rosenbloom, 2002; Chesbrough,

2006). Today there is a growing interest in leaders to make use of other companies’ knowledge and

capabilities in order to innovate the business model. In other words, companies are looking for

partners that are complementary to their firms, whereby the complementarity expresses itself by

unlocking new value propositions which could not be created without the collaboration with the

other firm, also known as strategic alliances. 


However the process of business model innovation in a traditional firm through the use of a digital

complementary partner seems to be subjected to different forces compared to the process of

business model innovation in a solitary firm. An important distinctive factor seems to be the typical

governance structure of a strategic alliance. In this open-ended agreement other forces than in a

single business seem to play part on business model innovation. By examining the role of a

complementary alliance partner in business model innovation, this study will open the black box of

the firm further. It tries to find out what type of innovation of these mentioned factors create in the

business model of a traditional alliance partner and how they do it.


Various studies have considered leadership as one of the organizational attributes underlying change

and innovation (Chandler, 1962; Kanter, 1984; Peters and Waterman, 1984; Volberda et al, 2012),

specifically, the cognitive structure of leaders, their capability of integrative thinking and their

capability to re-conceptualize the business (Martin, 2009; Helfat & Peteraf, 2015). Leaders affect

the organizational conditions that create and implement business model innovation (Chesbrough,

2010; Crossan and Apaydin, 2010; Hambrick and Mason, 1984). Because of the prominent role of

leaders within organizations, the cognitive factors of leaders are taken into account in this research.

As information technology is becoming more and more important for businesses and business

model innovation, the developments in information technology will also be taken into account in

this research in order to create a more holistic view.

1.1. Research question & sub questions

To advance the understanding concerning this concept, the following main research question has

been formulated:

Research question

What factors determine which type of developments (innovation) in the business model of

complementary traditional alliance partners?

To answer the research question, several sub-questions are developed. The sub-questions are as

follows:

1) What is business model innovation?

To advance understanding of the terms business model, elements of the business model, and

business model innovation, clear definitions must be established.

2) What is the role of a complementary alliance in business model innovation? 


Prior research on strategic alliance primarily focused on complementarity on the level of the value

chain (Porter, Miller, 1985). Nowadays, we probably could distinguish different complementarities

in strategic alliances in which each has a significant impact on the development of firms’ business

models. In order to understand these developments, clear definitions of what complementary

alliances are, must be established.

Due to the prominent role of leaders within organizations, leaders affect the organizational

conditions that create and implement business model innovation (Crossan and Apaydin, 2010;

Hambrick and Mason, 1984). For this reason it is important to closely examine the role of the

cognitive factors of leaders in relation to business model innovation through a complementary

alliance.

4) What is the role of developments in information technology for business model innovation?

Developments in information technology may create opportunities or pose limitations for

innovating business models. We will try to distinguish the dependencies of these opportunities. 


Following the notion that research should produce relevant and useful insights for practice (Hevner,

March, Park, & Ram, 2004), this thesis will contribute in two ways.

Firstly, a deeper understanding of the prior literature about the role of the executive in the process

of innovating their firm’s business model with the help of a complementary alliance will be

established. Secondly, this thesis will broaden the scope of literature about the relationship between

complementary alliances and business model innovation. It will give a deeper understanding of

what the role of the strategic alliance is in the process of innovating the business model.

This paper is structured as follows. Firstly, a theoretical framework will be established by reviewing

literature on business model innovation in relation to complementary alliances, the cognitive factors

of leaders and the developments in information technology. Propositions will be established based

on the literature study. Subsequently, the methods used to conduct this research will be elaborated

on, including the research design, research setting, data collection and the data analysis. Thirdly, the

results of the case studies will be presented. Finally, a discussion will be provided including both

theoretical and managerial implications as well as limitations associated with this study. In addition,

recommendations will be made for future research.

2.0 Literature review

In this chapter, a theoretical framework is presented which elaborates on the factors that determine

innovation of the business model of a traditional firm in relation to a digital complementary alliance

partner. Firstly, the definition what a business model is in theory, the business model as a tool, and

what business model innovation is, will be provided. Secondly, different theoretical lenses will be

examined. Subsequently, theory about strategic alliances will be explored, discussing the different

levels of complementarity in alliances, which each have a significant impact on the development of

firms’ business models. Fourthly, the role of cognitive factors of leaders will be reviewed. Finally,

the role of developments in information technology will be examined.

2.1 Defining the business model

The term business refers to the activity of buying and selling goods, transforming physical goods,

knowledge and information to produce goods and services, and services through which money is

earned. The term model stands for representation of something. Combining the two would get the

simple understanding of representing the activity of buying and selling goods and services with

which money is earned. This term is too simple to represent the complexity of the business model

of an actual firm. The definition of a business model by Osterwalder (2004) is complex but

complete: ‘A business model is a conceptual tool that contains a set of elements and their

relationships and allows expressing a company’s logic of earning money. It is a description of the

value a company offers to one or several segments of customers and the architecture of the firm and

its network of partners for creating, marketing and delivering this value and relationship capital, in

order to generate profitable and sustainable revenue streams’ (Strikwerda, 2014). This definition fits

in the conviction of Penrose (1959) that a firm should be treated as a unique configuration of

production resources. It was Penrose (1959) who started with opening the black box of the ‘the

firm’ in economic theory. This economic theory applies an internal perspective and argues that the

unique bundle of resources enhances its competitive position. The difference between Penrose and

Osterwalder is that Penroles assumed a self-contained organized firm, whereas Osterwalder

assumes the firm as an open organization of which the boundaries of the business model do not

coincide with the boundaries of the physical assets of the firm, respectively its legal boundaries. 


The Business Model links, just like the concept of the Strategy Map of Kaplan and Norton (2004),

the intangible and tangible assets in value creating activities. It is a representation of

cause-and-effect linkage of the firm, it describes how intangibles are mobilized and combined with other

assets to create value creating customer value propositions, especially through processes, not

through structure. Specifically, it illustrates the processes for transforming intangible assets into

tangible customers and financial outcomes, providing executives with a framework for describing

and managing strategy in a knowledge economy. It expresses that intangible assets, human capital,

information capital, and organization capital, contrary to tangible assets like machines, buildings,

and patents, cannot be valued at a standalone basis, and do not create value at a standalone basis.

Sometimes strategy and business models are interpreted as synonyms, but there is a clear

difference. Strategy is about identifying profitable positions in the market, capturing these with

competitive products or services and defending this against competitors (Porter, 1981). Increasingly,

firms need capabilities outside the legal boundaries of the firm for these competitive products or

services. Or, as Kaplan and Norton (1992) stated, strategy is about defining a set of goals and

objectives, whereas the business model is the blueprint for a strategy which will be implemented by

organizational structures, processes and systems. In this way, strategy and business models are

about similar issues but on a different business level (Osterwalder & Pigneur, 2014).

2.1.1 The 9 elements of the business model

In this research the Canvas Model of Osterwalder (2014) is used to explain the details of a business

model, although some slight adjustments and specific emphasis have been adapted.

We use the Canvas Model because it is a widely excepted representation tool for business models.

The Canvas Model has 9 elements, also known as building blocks. Together these building blocks

provide a coherent view of the business’ key drivers. Each building block will be explained in order

to have a clear understanding what each part of the business model means.

Figure 1: The Canvas Business

Model (Osterwalder 2014)

Customer Segments 


The Customer Segments element defines the different groups of people or organizations an

enterprise aims to reach and serve (Porter’s profitable market positions). A business model may

define one or several large or small Customer Segments. Based on the organization’s conscious

decision about which segments to serve and which segments to ignore, a business model can be

carefully designed around the understanding of specific customer needs.

Value Propositions

The most important block is the Value Proposition. The Value Propositions Building Block

describes the bundle of products and services that create value for a specific Customer Segment.

The Value Proposition is the reason why customers turn to one company over another. It solves a

customer problem or satisfies a customer need. It describes the job to be done.

In the work of Osterwalder, the importance of this building block compared to the other blocks is

not emphasized enough. Essential in business model thinking is that companies need to organize

their processes independent of the structure of their organizations, because in the economic theory

of knowledge governance (Foss & Michailova, 2009), processes should be organized to recombine

(in a fast and easy way) tacit knowledge from different departments of the organization. Interaction

between knowledge workers needs to be facilitated in order to create the value proposition. Key is

that companies should first focus on their value proposition, followed by the integration and

organizing of their key resources and processes. These are structured in a unique way to create that

value proposition (Johnson, Christensen, & Kagermann, 2008).

Channels

The Channels Building Block describes how a company communicates with and reaches its

Customer Segments to deliver a Value Proposition. Communication, distribution, and sales

Channels comprise a company's interface with customers. Channels are customer touch points that

play an important role in the customer experience.

Customer Relationships

The Customer Relationships Building Block describes the types of relationships a company

establishes with specific Customer Segments. Relationships can range from personal to automated,

the internet, but it may include communities or co-creation. Customer relationships may be driven

by the following motivations: Customer acquisition, Customer retention, up-selling and creating

customers.

Revenue Streams


The Revenue Streams Building Block represents the cash a company generates from each Customer

Segment. If customers comprise the heart of a business model, Revenue Streams are its arteries. A

company must ask itself, for what value proposition/solution is each Customer Segment truly

willing to pay? Successfully answering that question allows the firm to generate one or more

Revenue Streams from each Customer Segment. Each Revenue Stream may have different pricing

mechanisms also known as the revenue model, such as fixed list prices, bargaining, auctioning,

market dependent, volume dependent, or yield management. According to Slywotzky et al. (1999)

the block “ Revenue Streams” could be divided into the revenue model and the profit model. The

revenue model is about the type of revenue like pay per click, per billable hour or per transaction.

The Profit model is about the way revenue is created, like the multiplier profit model (credit card

companies), customer lock in (cheap razors & expensive blades) and asset intensity (airplane

companies).

Key Resources

The Key Resources Building Block describes the most important assets required to make a business

model work. Every business model requires Key Resources. These resources allow an enterprise to

create and offer a Value Proposition, reach markets, maintain relationships with Customer

Segments, and earn revenues. Different Key Resources are needed depending on the type of

business model. A microchip manufacturer requires capital-intensive production facilities, whereas

a microchip designer focuses more on human resources. Key resources can be physical, financial,

intellectual, or human.

Key Processes

Originally, in the version of Osterwalder (2014) of the business model, the block is described as

Key Activities. As described in the block Value Proposition, Key Processes is a better description. 


The Key Processes Building Block describes the most important processes a company must do to

make its business model work. Every value proposition calls for a number of Key Processes, which

need to be organized end-to-end, as accountable entities in the system of internal governance

(Strikwerda, 2017). Key Processes are the most important actions a company must take to operate

successfully. Like Key Resources, they are required to create and offer a Value Proposition, reach

markets, maintain Customer Relationships, and earn revenues. And like Key Resources, Key

Processes differ depending on business model type. For software maker Microsoft, Key Processes

include software development. For consultancy McKinsey, Key Processes include helping to learn

the client solve problems.

Key Partnerships

The Key Partnerships Building Block describes the network of suppliers and partners that make the

business model work. Companies forge partnerships for many reasons, and partnerships are

becoming a cornerstone of many business models. Companies create alliances to optimize their

business models, reduce risk, or acquire resources.

Cost Structure

The Cost Structure describes all costs incurred to operate a business model. This building block

describes the most important costs incurred while operating under a particular business model.

Creating and delivering value, maintaining Customer Relationships, and generating revenue all

incur costs. Some business models are more cost-driven than others. (Osterwalder, 2014)

2.1.2 Defining business model innovation

In research literature, the definition of what business model innovation is about, is best described by

Teece (2010). It is about changing the firm’s core logic of doing business. Changing the firm’s

business model literally involves changing the paradigm by which it goes to the market. In this way,

business model innovation is a holistic or comprehensive aspect: it touches on all aspects of the

business, respectively the organization. As illustrated before, business model innovation is

positively associated as a source of competitive advantage (Bader-Fuller and Morgen, 2010; Teece,

2010; Chesbrough, 2010; Osterwalder & Pigneur, 2014), obviously only on the condition that it

produces a competitive customer value proposition or solution that is defendable against

competitors and substitutes (Porter 1985). That is why, in the economic theory, innovation is a new

product or process (business model) that sets a new standard in the market and which in terms of

efficiency is a breakthrough from the existing boundaries of the production function. Therefore,

something is not an innovation simply because it is new.

2.2 The theoretical lens

Research on this subject could be examined from different perspectives. Relevant concepts about

how competitive advantage is created and what the rationales are why firms form complementary

alliances in order to create business model innovation is necessary. That is why the following views

are discussed: the resource-based view, the dynamic capabilities view, the knowledge based view

and the relational view.

The resource-based view

The resource-based view (RBV) builds on the assumptions that strategic resources are

heterogeneously dispersed across firms, and that these difference are stable over time, which results

in that they cannot be transferred easily between firms (Barney 1991). This theory applies an

internal perspective and argues that a firm is a unique bundle of resources which may enhance its

competitive position. Resources may only be a source of sustained competitive advantage if they

are valuable, rare, non-imitable, and sustainable (Barney, 1991). Resources include all assets,

capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a

firm that enable the firm to conceive of and implement strategies that improve its efficiency and

effectiveness (Daft, 1983). In the language of traditional strategic analysis, firm resources are

strengths that firms can use to conceive of and implement their strategies (Learned, Christensen,

Andrews, & Guth, 1969; Porter 1981). The four characteristics which create sustained competitive

advantage imply that resources are immobile and difficult to move across firm boundaries. This

suggests that these unique resources are not accessible through market exchanges. This is

contradictory to the modern day society where bundles of knowledge are (freely) accessible on the

Internet and the ongoing decreasing cost of transport. 


Still, the RBV suggest that strategic alliances form a viable strategy to enhance the collective

strengths of both partners expressed by their relevant valuable resources. In essence, alliances are

formed to take advantage of the joint power of the partners. The alliance provides opportunities for

partners to create value for their resources (Das & Teng, 2000).

The dynamic capabilities view

The dynamic capabilities view (DCV) extends the resource-based view (RBV). The rationale of

this scholar is that the RBV of the firm has not adequately explained how and why certain firms

have competitive advantage in situations of rapid and unpredictable change. In these markets, where

the competitive landscape is shifting, the dynamic capabilities by which firm managers ‘integrate,

build and reconfigure internal and external competencies to address rapidly changing environments’

(Teece et al., 1997) become the source of competitive advantage, instead of the resources itself. The

manipulation of knowledge resources, in particular, is especially critical in such markets (Grant,

1996; Kogut, 1996).

The dynamic capabilities are defined as processes embedded in firms, that use

resources-specifically the processes to integrate, reconfigure gain, and release resources to match and create

market change. Dynamic capabilities consist of specific strategic and organizational processes like

product development and strategic decision-making, including setting up strategic alliances in order

to create value for firms within dynamic markets by manipulating resources into new value creating

strategies. The long-term competitive advantage lies in the resource configurations that managers

build using dynamic capabilities (Eisenhart and Martin, 2000).

In relation to business model development, a strategic alliance partner has, according to the DCV,

the potential for a focal firm to combine and manipulate new resource combinations, which creates

competitive advantage.

The knowledge based view

Another theoretical lens that could give insight on business model innovation is the knowledge

based view (KBV). Interest in a knowledge-based approach to the theory of the firm has been

closely linked to the recognition of the fundamental economic changes known as the “New

Economy”. Although knowledge as a productive resource was already being discussed in scientific

literature in the fifties of the 20

_{century by writers such as Hayek (1947), Polanyi (1962), Arrow}

(1962), and March and Simon (1958) (Grant, 2006), the KBV is not exactly a theory of the firm in

any formal sense. It is more like a set of ideas about the existence and role of the firm. Obviously,

the KBV massively emphasizes on the role of knowledge. The KBV makes the following

assumptions concerning the nature of knowledge and its part in production (Grant & Baden-Fuller,

2004):

1) Knowledge is the overwhelmingly important productive resource in terms of market value and

the primary source of Ricardian rents (Grant, 1996; Machlup, 1980).

2) Different types of knowledge vary in their transferability: explicit knowledge can be articulated

and easily communicated between individuals and organizations; tacit knowledge (skills,

know-how, and contextual knowledge) manifests only in its application - transferring it from one

individual to another is costly and slow (Kogut and Zander, 1992; Nonaka, 1994). 


Traditional business administration is implicitly based on codified knowledge. In the modern

economy there is a growing role of knowledge that is personal and non-codifiable, and therefore

not transferable. This implies that such knowledge workers need to interact, including

knowledge workers from different firms to solve problems and to innovate. This interaction

needs to be facilitated by the Internet and social media, but it also needs a specific social setting

(Jensen, 2001).

3) Knowledge is subject to economies of scale and scope. Since the costs of replicating knowledge

tend to be lower than the costs of the original discovery of creation of the knowledge, it is

subject to economies of scale. To the extent that knowledge is not specific to the production of a

single product, economies of scale imply economies of scope. The extent of economies of scale

and scope vary considerably between different types of knowledge. They are especially great for

explicit knowledge and information in particular, which is ‘costly to produce, but cheap to

reproduce’ (Shapiro and Varian, 1998). Tacit knowledge tends to be costly to replicate, but these

costs are lower than those incurred in its original creation (Winter, 1995).

4) Knowledge is created by individual human beings and to be efficient in knowledge creation and

storage, individuals need to specialize (Simon, 1991).

5) Producing a good or service typically requires the application of many types of knowledge

(Kogut and Zander, 1992).

6) Especially in the case of new demands by customers applying existing knowledge to answer that

demand, new knowledge is created (whereas in the traditional economy the input of resources in

the production process implies the depletion of these resources (Aghion & Howitt, 1999)).

These assumptions are about exploration, development and exploitation of knowledge. The

competitive advantage of firms lies in the efficiency and effectiveness of integrating and utilizing

this knowledge (Grant & Baden-Fuller 2004). Alliances are, according to KBV, a great way to

integrate new knowledge, especially when the range and diversity of knowledge increases in the

production process. Efficiency of integration is maximized through separate firms specializing in

different areas of knowledge and linked by strategic alliances (Grant & Baden-Fuller, 2004).

Given economies of scale and scope in knowledge, utilizing knowledge assets to their full capacity

represents a key challenge to the firm. These economies of scale and scope are reinforced by the

fact that, unlike most other resources, knowledge expands rather than depreciates when it is used.

According to the KBV, in the circumstances of major congruity between the product domain of a

firm and its knowledge domain, the greater its propensity to form alliances with other firms in order

to utilize that knowledge for creating new products (Grant & Baden-Fuller, 2004).

A main tool for combining personal knowledge is to facilitate interactions between knowledge

workers from different departments and divisions through projects and processes. These area

governance mechanisms seem to facilitate combinatorial innovation with the use of complementary

knowledge based on interaction between knowledge workers (Foss & Michailova, 2009). For this

research this implies that such processes and projects need to be extended to third parties, in which

knowledge workers cooperate through interactions, not through transactions. This would implicate

that from the standpoint of the KBV, business model innovation with a complementary alliance

partner is about integrating different types of knowledge of both firms and finding an effective way

for utilizing new knowledge combinations to its full capacity, especially in the case that the

knowledge domain of the alliance partners fare exceed their product domains.

This theoretical lens probably fits best in the growing connected and digitalized economy, which in

terms of resources is dominated by its dependence upon knowledge and is more focused on

intangibles rather than tangibles (Stewart, 1997; Edvinsson & Malone, 1997).

The relational view

The relational view (RV) suggests that a firm’s critical resources may span firm boundaries and may

be embedded in inter-firm resources and routines. In this way the RV suggests that business model

development by definition is dependent of her inter-firm linkages. The RV suggests that strategic

alliances generate competitive advantage only as they move away from the attributes of market

relationships (contracts). The goal of such an alliance is to create relational rents. Relational rents

are defined as a supernormal profit, jointly generated in an exchange relationship that cannot be

generated by either firm in isolation and can only be created through the joint idiosyncratic

contributions of the specific alliance partners. Relational rents are possible on the condition that

strategic partners combine, exchange, or invest in idiosyncratic assets, knowledge, and resources/

capabilities, and/or they employ effective governance mechanisms that lower transaction costs or

permit the realization of rents through the synergistic combination of assets, knowledge, or

capabilities (Dyer & Singh, 1998). This collaboration has the potential to result in a new core logic

of doing business which could create critical resources which are embedded between the

complementary alliance partners. 


The conditions, when relational rents are possible, (Dyer & Singh, 1998) are quite broad. Still, it

could be interpreted that combining the elements of knowledge of strategic partners, facilitated by

the current digital possibilities, could result in business model innovation. 


Combinatorial innovation is about creating new products or services by combining existing

modules with embedded digital capabilities (Yoo et al. 2012). These new combinations could be

initiated by other business or even online communities (Faraj et al. 2011; Lessig 2008). At the

moment of combining these skills and knowledge, relational rents originate.

For this research this would implicate that, on the condition that the complementary alliance is able

to combine, the capabilities and the elements of knowledge of a traditional firm with the capabilities

and the elements of knowledge of a digital firm would result in business model innovation.

Examination of the mentioned different theoretical lenses indicate that alliances have positive

influences on business model innovation because of combining the knowledge and dynamic

capabilities of alliance partners.

Proposition I

Business model innovation is positively facilitated by combining the knowledge and dynamic

capabilities from multiple digital and traditional alliance partners, compared to single business

business-model innovation.

2.3 The role of the complementary alliance in business model innovation

Firstly, the definition what a strategic alliance is will be established, followed by the underlying

value-creating logics of the strategic alliance. Finally, the different types of complementarities in

strategic alliances will be identified; each has a different impact on business model innovation.

2.3.1 Defining strategic alliances

A strategic alliance is defined by Gomes-Casseres (1996) as any governance structure involving an

"incomplete" or open-ended agreement between separate firms and in which each partner has

limited control. A strategic alliance is always deeper than an arm’s length transaction, and always

falls short of a full merger between the partners. Because the partners remain separate firms, there is

no automatic convergence in their interests and actions. As a result, to deal with unforeseen

contingencies that arise in incomplete contracts, the partners need to make decisions jointly.

In this way, alliances are characterized by a great uncertainty and ambiguity. At the same time, the

manner in which value is created- and the way in which partners capture it, is not preordained.

Besides that, the partner relationship also evolves in ways that are hard to predict. That is why

managing the alliance relationship over time is usually more important than crafting the initial

formal design. Successful alliances are able to deal with this sort of dynamism, collaboration, and

mutual learning characteristics (Doz & Hamel, 1998).


Although all alliances share these basic attributes, they come in a myriad of different structural

forms and levels of complementarity. Joint R&D programs, co-marketing programs, and partial

equity investments are all alliances. Even the relationship between a buyer and supplier of an

intermediate product may represent an alliance, provided that the contract between the two is in

some substantial sense open-ended (Gomes-Casseres, 1996).


Nowadays companies which are looking for new market opportunities in the form of new solutions

for customers or new answers to poorly met needs use complementary alliances to build nodal

positions in coalitions aimed at creating new markets. Alliances are used for creating new

opportunities by combining skills and resources for accelerating the process of building new

competencies instead of through internal efforts (Doz & Hamel, 1998).

The underlying value-creating logics of these purposes are:

Co-option

Co-option turns potential competitors into allies and providers of the complementary goods and

services that allow new businesses to develop. Potential rivals are effectively neutralized as threats

by bringing them into the alliance and firms with complementary goods to contribute, creating

network economies in favor of the coalition.

Co-specialization. 


Co-specialization is the synergistic value creation that results from combining the previously

separate resources, positions, skills and knowledge sources. Partners contribute unique and

differentiated resources to the success of their alliances and alliances create value when those

resources are co-specialized, that is, they become substantially more valuable when bundled

together in joint effort than when kept separate.

Learning and internalization. 


Alliances may also be an avenue for learning and internalizing new skills, in particular those that

are tacit, collective, and embedded. When these skills can be learned form a partner, internalized,

and exploited beyond the boundaries of the alliance itself, they become all the more valuable (Doz

& Hamel, 1998).

2.3.2 Levels of complementarity in alliances

As strategic alliances come in different forms, the complementarity for each participating firm is

different. In this research, complementarity is defined by the knowledge or dynamic capabilities

that one of the alliance partners has compared to the knowledge or dynamic capabilities of the other

alliance partner, which together result in new combinational value propositions. In this way,

complementarity is displayed through how the alliance partners complement each other in

knowledge and dynamic capabilities. Nowadays we could distinguish the following levels of

complementarity whereby each type of complementarity of alliance have a different impact on

innovating the business model:

1) Complementarity along the value chain

The first strategic alliance theory was based on the value chain. The value chain disaggregates a

firm into its strategically relevant activities in order to understand the behavior of cost and the

existing and potential sources of differentiation (Porter, 2001). Missing a strategically relevant

activity in a firm would be solved by setting up an alliance. For example, if a firm is able to produce

a distinct type of product but it does not have a sales network in a foreign country, the firm would

set up an alliance with another firm that does have a sales network in that country.

Figure 2: The Value Chain (Porter,

1985)

In relation to business model innovation, this type of complementarity alliance innovates the

business model on the elements of customer segments, key resources and channels. It uses the

internally missing key process and channel of the alliance partner to reach for new customer

segments.

2) Complementarity based on architecture and modularization 


Modularity is way of organizing the development, engineering, manufacturing and assembly of

complex products efficiently. This type of alliance is much seen in the IT industry and the

automobile industry. A modular system is composed of units (or modules) that are designed

independently but still function as an integrated whole (Kodama, 2004). Companies create modular

synergies when they manage resources independently and pool only the results for greater profits.

(The synergies are modular because modularly interdependent resources generate them). For

example, when an airline and a hotel chain plan a collaboration that will allow hotel guests to earn

frequent flyer miles, they wish to club the consumer’s choice of airline and hotel, so that both

benefit from the hotel guests’ decisions (Dyer, Kale & Singh, 2004). This type of alliance is also

characteristic for the computer industry. Around 1980 the computer industry was extremely

vertically integrated. Each computer firm built their own platform, software and hardware.

However, the industry shifted to a horizontal competition and used other companies’ components

and open source software in order to create new value propositions (Kodama, 2004).

Distinctive for well working modular alliances is that they have two objectives: firstly, gaining an

increased visibility of actions and visibility of knowledge networks across alliance partners.

Secondly, alliance partners are motivated to take actions that improve visibility. The use of

centralized information technology is crucial in this process, because it helps to coordinate problem

solving between alliance partners with “one single truth” of the information (Kortha & Srikanth,

2013). As advocated by Baldwin and Clark (2000), modular architecture could provide the

following benefits: expanding the range of complexity addressable, extending the scope of

addressable business risks by parallel development and production or outsourcing and shortening

various lead times by parallel development and production or outsourcing (Chuma, 2006).

In this way, alliances based on modularization could innovate business models by combining

knowledge in an effective way in order to develop new processes and products, which results in

new value propositions.

3) Complementarity based on the use of a platform

Another type of complementarity is based on the use of the platform of the alliance partner. The

term ‘platform’ has been adopted by the industrial economists that use the term to characterize

products, services, firms or institutions that mediate transactions between two or more groups of

agents (Rocket & Tirole, 2003, Baldwin & Woodard, 2009, Evans & Schmalensee, 2016).

Osterwalder (2014) uses the term of multi-sided platforms (Hagiu, 2006). Essentially the platform

creates value by facilitating interactions between different groups (business to business, business to

consumer and consumer to consumer). In this way, a digital platform is very useful for cooperation

between educated employees of different companies. For example, it facilitates communication,

social interaction, development and feedback (Zuboff & Maxmin, 2002)

The value of the platform increases when more users are making use of it. This is known as the

network-effect. Prime examples are Amazon, iTunes and the webshop Bol.com. Nowadays,

Bol.com is one of the biggest online web shops of the Netherlands (Schutijser, 2016). The company

originated as an online store which used their web shop and logistic system only for selling their

own purchased goods. Nowadays, other companies are able to use the power of the web shop and

the logistic system of Bol.com to increase their revenue. At the same time, Bol.com is able to

decrease its cost structure because more users are contributing to the infrastructure. In this way

complementarity based on the use of a platform enables traditional firms to scale up to a large

public for relatively low cost. It increases revenue with the use of the new digital channel and

highly developed processes of Bol.com.

4) Complementarity based on new players and conceptual changes on the industrial level

Traditional industrial barriers are crumbling. This process is intensified by the digitalization of our

society. In this process, traditional players and new players, from different industries, are creating

conceptual changes in the industrial landscape. An extraordinary example is the partnership of

Google and VivaKi, a digital agency that is part of the Publicis Groupe. Publicis is a multinational

in traditional communication and advertisement. The key resource of Publicis Groupe is their

creative and experienced human capital, which creates communication programs and advertisement.

The key resource of Google is its search platform and its technological knowledge. The

complementarity of this alliance expresses itself by creating the distinguishing advertisement

(Publicis) for the right customers (Google). In this way, each company can focus on their own

capabilities. Google can focus on technology, while Publicis focuses on content.

Examination of the literature shows that each type of complementarity of alliance has a different

impact on innovating the business model.

Proposition II

The nature of the complementarity in an alliance defines/limits the nature of the business model

innovation with the involved partners.

2.4. The role cognitive factors of leaders in business model innovation

Leaders have been shown to impact organizational outcomes such as performance (Haleblian and

Finkelstein, 1993) and choice (Finkelstein, 1992). Various studies have considered leadership as one

of the organizational attributes underlying change and innovation (Chandler, 1962; Kanter, 1984;

Peters and Waterman, 1984) (Vaccaro, Jansen, Van den Bosch and Volberda, 2012). The reason for

this is that leaders within organizations affect the organizational conditions that create and

implement innovation (Crossan and Apaydin, 2010; Hambrick and Mason, 1984). This suggests that

leaders also have an important role in business model innovation. Executives within the top

management team may not necessarily directly implement and operate new business models,

however, their role is instrumental in conceptualizing the business, creating an organizational

context conducive to experimentation with and introduction of new processes, practices, or

structures (Chandler, 1962; Kanter, 1984; Peters and Waterman, 1984; Vaccaro, Jansen, Van den

Bosch and Volberda, 2012). Although the subject of leadership is extensively examined in the

literature, the definition of what leadership is exactly is still a somewhat empty phrase (Pfeffer,

2015).

That is why leadership here is operationalized in three factors:

•

Cognitive structure

•

_{The capability of re-conceptualizing its business, business model and thus the organization}

The ability of the executive to conceptualize the business correctly and imagine the right business

solutions is probably a key factor in innovating the business model. The executive needs to be able

to interpret correctly the subtle changes in the external environment, because they often require not

so subtle changes in the business model (Montouri, 2000).

In numerous business cases costly mistakes were made as a result of a strong, incorrectly and

outdated dominant logic of the executive. The dominant logic is defined as the mindset of the

business and the administrative tools to accomplish goals and make decisions in that business. It is

stored as a cognitive map among the dominant coalition of the firm. It is expressed as a learned,

problem-solving behavior which is applicable in the situation where an executive should decide to

innovate the business model (Prahalad & Bettis, 1986 & Prahalad & Bettis, 1996). When the

dominant logic of the executive is strong, the executive will probably be less impressionable by

external changes in the business environment.

If the executive is not able to re-conceptualize his dominant logic of the business, this result in

using practices that seem to have worked in the past but aren’t fit for the new situation. At the same

time a strong and incorrectly dominant logic keeps false assumptions or even wrongly deeply held

firm ideologies in place, which prevents setting up a complementary alliance since the executive is

not able to see the relevance. In this way, this prevents business model innovation. At the same

time, a weak, dominant logic of the executive results in a richer absorption of information of the

business environment, which permits business model experimentation, which eventually might

result in business model innovation. (Pfeffer & Sutton, 2006, Strikwerda, 2014).

As the dominant logic is about the current conceptualization and necessary tools for the business,

other cognitive factors could perhaps also influence the process of recognizing changes in the

business environment by the executive. One of those cognitive factors is the ability to be

conceptually complex (Montouri, 2000). In order to interpret the changes in the external

environment correctly, executives need to be conceptually complex. They should be able to gather

various kinds of information and differentiate between what is relevant and irrelevant. They should

be able to use multiple concepts and perspectives to develop ideas of new cause/effect relationships

which they could use to develop multiple alternatives to innovate their business model (Montouri,

2000). Conceptual complexity is often linked with a strongly developed integrative way of thinking.

This is the ability to constructively face the tension of opposing ideas and, instead of choosing one

at the expense of the other, generate a creative resolution of the tension in the form of a new idea

that contains elements of the opposing ideas but is superior to each (Martin, 2009). Outdated

processes and products that created value in the past need to be adapted to the current needs of

customers and the overall external environment. This suggests that integrative thinking is a

necessary ability to see the opportunities that the complementary alliance partner offers for

innovation of the business model.

Another cognitive factor that probably could influence business model innovation in the case of

partnerships and alliances is described by Gadiesh & Gilbert (1998). They described the

conceptualization of the business by the profit pool lens. The profit pool could be defined as the

total profits earned in an industry at all points along the industry’s value chain (Gadiesh & Gilbert,

1998). These untapped sources of profit could be in areas where barriers to competition exist or in

areas that have simply been overlooked by competitors. A prime example is the car renting

industry. The profit margin on renting cars is quite low, but the profit margin on the accessories of

the car is high. When a customer has rented a car they become, in effect, a captive of the company

from which the customer is renting the car (Gadiesh & Gilbert, 1998). This suggests that executives

with this ability are able to look past their own company’s borders and business models in order to

spot untapped sources of profit. The question of course is how the shared created value between

partners will be distributed. To start with this requires the concept of the profit pool.

Summarized cognitive factors: strongly developed conceptual complexity, the ability to think

integratively, having an insight into the profit pool, and a weak current dominant logic of the

executive enable experimentation with the business model. New cause/effect relationships with the

use of the complementary alliance partner can be tested in practice. This implicates that if the

executive has the cognitive abilities to correctly conceptualize his business, this enables

collaboration with a digital complementary alliance partner, which could result in business model

innovation. This means that the cognitive factors of leaders are an independent factor for business

model innovation.

Proposition III

Cognitive structure, the degree of integrative thinking and the level of complexity of concepts with

the CEOs involved in an alliance are independent factors in business model innovations.

2.5 The role of developments in information technology for business model innovation.

Information in the industrial era was only a residual factor in the production function. In the 21

century, information has become a production factor and tool, and a key resource. In the past,

information referred to a product and processing of the information was central. Nowadays

information is a substantial part of the product or is even the product itself and the interpretation of

data and converting it to money flows (data-analysis) is central for creating value propositions

(Varian, Farrell & Shapiro, 2004; Strikwerda, 2011, 2014).

This development correlates with the fact that more and more, companies recognize the value of

intangible assets (Arrow, 1974, 1985), which is why the modern day firm is actively using

information as a tool for creating competitive advantage. Actively using information is possible in

numerous ways, like examining the clicks and behavior of consumers with data analytics or even

predicting consumer behavior with the use of different types of (external) data also known as data

science.

The declining cost of information creates new options for business model innovation. For example,

a focused company is no longer limited in scale in the way it used to be. Horizontal expansion has

historically been constrained by so called decreasing returns to scale. Decreasing returns were

caused by, for instance, the cost of communications, the cost of collecting and managing

information, and the cost of negotiating or completing transactions. As those costs tumble

downwards, companies can grow beyond the limits of those traditional constraints, like the

company Amazon. A focused company can become global and very large before running into

decreasing returns to scale. There is no limit to how focused an entity can get, or how thin a sliver

of the value chain can be carved out and turned into a global company (De Kuijper, 2009). The

declining cost of information also allows for horizontal coordination of suppliers and manufacturers

in the development, engineering, manufacturing, and assembly of complex products. Whereas in the

past the manufacturers specified parts “built to print”, today parts and subassembly are specified

“built to performance”, leaving the design and engineering to the third party suppliers, thus making

the best use of knowledge of these suppliers, thus creating extensive and intensive knowledge

complementarities (Kotha & Srikanth, 2013). For organizations recognizing, understanding and

integrating recent developments in information technology seems to be a crucial factor to

understanding the new digital business environment in order to innovate the business model. These

process of integrating these new capabilities are related and dependent on the cognitive factors of

executives in the organization. The executive should have a correct conceptualization of the impact

of these information technology’s developments on the business environment and should be able to

evade from his dominant logic in order to create the organizational context conducive for business

model innovation. This implicates that the executive should make sure that (new) capabilities to

interpret information technology developments are installed in the focal traditional firm or could be

used from the digital complementary alliance partner.

As it seems to be a crucial factor to integrate relevant developments in information technology in

the organization, capabilities regarding to information technology should have some level of

maturity. In other words, the current capabilities of the firm or the alliance partner should be a solid

foundation where the new IT developments could integrate in. This foundation consists of current

processes, IT infrastructure, financial infrastructure, and tacit knowledge of employees and

hierarchical structure. If this is not the case, new business models could not be developed and

introduced. For example, in the work of Hwang & Christensen (2008) it is described that the

healthcare industry has such old-fashioned financial and IT infrastructure that it prevents the

development of new business models.

The strategic alliance partner could be complementary to the traditional firm regarding these

capabilities. Still, it would be wise to build some level of information technology capability into the

traditional firm itself, as the world is becoming more and more digital.

Proposition IV

Adopting the new options for organizing created by information technology could enhance business

model innovation if the focal firm or the complementary alliance partner has the capabilities to

integrate these developments.

2.6 Conceptual Model

Based on the examination of the literature, the following conceptual model is established. The

cognitive ability of the CEO to re-conceptualize its business seems to be the crucial factor that

drives business model innovation. It is the executive who is able to create an organizational context

conducive to experimentation with and introduction of new processes, practices, or structures

(Chandler, 1962; Kanter, 1984; Peters and Waterman, 1984; Vaccaro, Jansen, Van den Bosch and

Volberda, 2012). It is the executive who sets in motion new combinations of knowledge and

dynamic capabilities through complementary alliances in order to innovate business models. The

type of development in the business model is dependent on the type of complementarity of the

alliance.


The process of re-conceptualization is influenced by the cognitive structure, the degree of

integrative thinking and the level of complexity of concepts of the executive. 


Integrating developments in information technology seems to be a crucial factor for the modern day

competitive company. Traditional firms that are able to integrate these developments, possibly with

the help of a digital complementary partner, could enhance the process of business model

innovation. As these developments in the information technology are equally accessible for all

companies, this is a control variable. However, the ability of the executive to recognize the value of

information developments for the business seems crucial for business model innovation.

Figure 3: Conceptual model

Information

technologically

developments

(control variable)

Cognitive

Factors of Leaders

(independent

variable))

Innovation of

the business model

(dependent

variable)

Complementary

Digital Alliance

Partner

(moderating

variable)

3.0 Methodology

This chapter will outline the methods used for conducting this research. Firstly, the research design

will be discussed, followed by a description of the research setting. Lastly, the data collection

strategy, data analysis and the quality criteria associated with research will be reviewed.

3.1 Research design

Research philosophy 


This study adopts an interpretive research philosophy. Interpretivism relates to the study of social

phenomena in their natural environment. It advocates the necessity to understand the difference

between humans in their role as social actors in their natural environment. For business and

management research, the interpretivist perspective is very relevant (Saunders & Lewis, 2011).

Interpretivists hold the view that the social world cannot be understood by applying research

principles adopted from the natural sciences and propose that social sciences require a different

research philosophy. The basic principles of interpretivism are (Blumberg et al, 2005): 


-

the social world is constructed and is given meaning subjectively by people


-

the researcher is part of what is observed


-

research is driven by interests.

Specifically for business model innovation in the context of the knowledge economy/information

economy/ learning economy, interpretivism is relevant because the required business model

innovation requires non-technical innovation (Hollen, Van Den Bosch, & Volberda, 2013). The

socially constructed world of the traditional firm as defined by the institutions of the second

industrial revolution needs to be reinvented. Some firms already have done this, but it seems that

doing this depends on executives willing to see the world in a different way, willing to question

traditional constructs like the divisional organization, and willing to wade into complexity (Lafley