Business model innovation:
key driver of high performance in turbulent industries?
Master's Thesis Business Studies
Student Name: Sander Kool Student ID: 10654674
Supervisor: Dr. Dipl.-Wirt.-Ing. Sebastian Kortmann University: University of Amsterdam
Course: Master's Thesis Business Studies - Strategy Track Course ID: 6314M0207Y
Abstract
This study explores whether business model innovation enhances firm performance. The emergent business model literature, emphasizing the business model's potential to create and deliver value, still lacks numerous studies that quantify the relationship between business model innovation and firm performance. This study also aims, through survey methodology, to address the influence of industry turbulence on the process of pursuing successful business model innovation, which is often neglected in recent business model studies. The data analysis reveals that consistent innovation of the business model leads to higher associated firm performance in the form of market share growth. The results concerning the role of industry turbulence do not imply a moderation effect on the relationship between business model innovation and firm performance at a business-unit level.
Keywords
Business models - Business model innovation - Firm performance - Industry turbulence - Market share growth
Preface
This master thesis is written as a part of the master Business Studies at the University of Amsterdam. The thesis is the result of my research into literature and an analysis of collected data on business model innovation. This topic inspired me because, innovating your business model is nowadays regarded as a very successful way to achieve competitive advantage (e.g. Chesbrough & Rosenbloom, 2002). More specifically, through business model innovation firms can shape industry boundaries (Gambardella & McGahan, 2010). What fascinates me is that a firm which develops products or services that are considered worse or more expensive than its competitors has still the possibility to overcome this disadvantage and be able to outperform this competitor through an superior business model. The business model, in combination with a specific underlying strategy, can namely act as an unique, synergistic combination of individual elements inter alia target segment, product/service offering, revenue model, cost structure and value chain.
The primary practical reason for writing this thesis, is that executives all over the globe see business model innovation as the fastest emerging risk and the overall number two risk area for their business strategy (Deloitte, 2013). This study, through review of the literature and data analysis, aims to provide insight in whether innovations of the business model in practice results in large performance advantages over competitors that are currently not willing or not capable of successfully innovating their business model. In addition, the role of industry turbulence plays an important factor, as especially firm in fast changing volatile environments encourage and experiment with business model innovation (Berman, 2010).
I would like to thank the different professors, that contributed to my understanding about the value of scientific research and brought my knowledge about management and business administration issues to an higher level. Towards the content of the thesis and the process of
shaping my thesis, I would like to thank supervisor Dr. Dipl.-Wirt.-Ing. Sebastian Kortmann for his input, advice and supervision. Lastly, I also would like to thank my fellow research group members for setting up this research project and helping each other during the process of data gathering. I expect that business model innovation will continue to grow in the strategic management literature as more in-depth research is required to make firms aware of its major performance potential.
Amsterdam, 2014
Table of contents
Abstract ... Preface ...
1. Introduction ...1
2. Literature Review ...3
2.1: Relationship between innovation and performance in turbulent industries ...3
2.2: Business models ...7
2.2.1: Defining business models ...7
2.2.2: Business models, value creation and value appropriation ...10
2.2.3: Business models and strategy ...12
2.3: Business model innovation in turbulent industries ...15
2.3.1: Defining business model innovation ...15
2.3.2: Business model innovation and technological change ...20
2.3.3: Business model innovation barriers ...24
3. Hypotheses and Conceptual Model ...26
3.1: Hypothesis 1 ...26
3.2: Hypothesis 2 ...28
3.3: Conceptual model ...33
4. Methods ...34
4.1: Description of sample and research instrument...34
4.2: Variables...35
4.2.2: Business model innovation - independent variable ...35
4.2.3: Business-unit performance - dependent variable ...36
4.2.4: Industry turbulence - moderator ...36
4.2.5: Control variables ...37
4.3: Description of data analysis procedure ...37
4.3.1: Data cleaning and screening ...37
4.3.2: Dealing with missing values ...38
4.3.3: Recoding counter-indicative items ...39
4.3.4: Computing reliability...39
4.3.5: Computing scale means ...40
5. Results ...42
5.1: Correlation ...42
5.2: Regression analysis - business model innovation, business-unit performance ...45
5.3: Conditional moderation regression analysis ...47
6. Discussion and Implications for Future Research ...50
7. Limitations and Implications for Future Research ...56
8. Conclusion ...59 References ...
1 1. Introduction
For decades innovation activities were merely focused on new technologies, products, services and business processes (Utterback & Abernathy, 1975). However, since the beginning of the twenty-first century, a group of strategic management researchers introduced the business model as a groundbreaking phenomenon for firms to achieve competitive advantage on a different level (e.g. Afuah & Tucci, 2003; Mitchell & Coles, 2003; Chesbrough, 2002, Magretta, 2002; Amit & Zott, 2001). Innovations and experimentations focus on the business model's customer value proposition, value network, revenue model or value chain (Koen, Bertels & Elsum, 2011; Lindgardt, Reeves, Stalk & Deimler, 2009; Giesen, Berman, Bell & Blitz, 2007) and can help firms outperform competitors in highly turbulent environments (Schumpeter, 1942) and overcome obstruction and confusion barriers (Amit & Zott, 2010; Christensen, 1997).
Apple's illustrious business model combined with the underlying breakthrough technology of the iPod introduced in 2001, shows how firms can outperform competitors through business model innovation in highly turbulent industries such as the portable audio player market. Apple did not offer a lower price nor focused on another target market to disrupt the dominant position of Sony (Koen et al., 2011). What Apple actually did was wrapping good technology in a great iPod/iTunes business model (Johnson, Christensen & Kargermann, 2008), by creating the low-margin iTunes music as a lock-in for customers (Zott & Amit, 2010) to purchase the high-margin iPod.
Zott and Amit (2010) argue that novel business models can lead to improve firm performance by creating new customer value. Teece (2010) argues that new business models might be difficult to imitate, as it is much easier to copy a novel product than an entire business model (Amit & Zott, 2010).
2 This study's main objective is to research if business model innovation, as suggested by the strategic management literature, in practice leads to higher firm performance. The results from this study can form valuable contributions, considering the limited research done so far on the quantitative performance implications of firms' strategic emphases on business model innovation (Aspara et al., 2010).
The research gap this study aims to address concerns the role industry turbulence plays on this performance relationship with business model innovation. Turbulent industries are characterized by rapid pace of innovation together with greater dynamism and uncertainties (Schumpeter, 1934), in which business model innovation takes place more often and/or to an higher degree, with a stronger influence on firm performance.
The remaining part of this thesis is structured as follows; the literature review provides a critical overview of the important strategic management literature related to business model innovation, the role of turbulent industries and the innovation performance relationship in general. In addition, the literature review also addresses the different debates, concerning technological change and strategy, which are of high importance in the business model literature. Consequently, the foundations for both hypotheses regarding the performance of business model innovation and the influence of industry turbulence, are discussed. Subsequently, the method section clarifies the survey methodology used in order to ensure research and database analysis reliability and validity. Furthermore, the results section and the discussion deal with the findings from the data analysis and this thesis concludes by stressing this study's limitations and implications for future research on business models.
3 2 Literature Review
2.1 Relationship between innovation and performance in turbulent industries
In the strategic management literature there is a widespread belief that innovation is a key driver of firm success (Jiménez-Jiménez & Sanz-Valle, 2011; Cho & Pucik, 2005; Calantone, Cavusgil & Zhao, 2002; Mone, McKinley & Barker, 1998). Multiple scholars provide evidence that the relationship between innovation and performance is positive (Weerawardenaa, O'cass & Julian, 2006; Brown & Eisenhardt, 1995; Wheelwright & Clark, 1992; Damanpour, 1991). This implies that firms must be innovative in order to outperform competitors and survive. In fact, Camisón-Zornoza et al. (2004) identify one common major element in all definitions of innovation (e.g. Tushman & Nadler, 1986; Damanpour & Evan, 1984; Daft, 1982; Zaltman, Duncan & Holbek, 1973; Schumpeter, 1934), a new idea that is put into practice and attempts to improve organizational performance. Firms often pursue innovation activity particularly in Schumpeterian markets where intense competition leads to the process of "creative destruction" (Schumpeter, 1934). Through new products, production processes or organizational techniques the innovator outcompetes competitors and the market disrupts due to these entrepreneurial activities (Jacobsen, 1992). Brown and Eisenhardt (1995) emphasize that these dynamic markets are characterized by increasing complexity and constant change. Firms that stand out in terms of innovation capability will be able to respond to the turbulence of the external environment and exploit new products and market opportunities better than non-innovative companies (Brown & Eisenhardt, 1995).
In the strategic management literature organizational performance can't be separated from competitive advantage. According to Porter and Millar (1985) competitive advantage grows out of the firm's unique ability to create superior customer value. Ma (1999) concludes therefore that any factor or action that could increase the differential between rival firms on a
4 particular dimension that allows a firm to create better customer value than others, may be a potential cause of competitive advantage. The resource-based view of the firm (Barney, 1991) helps explain the reasoning behind innovation in relationship to performance and competitive advantage (Bowen et al., 2009). According to the resource-based view, competitive advantage comes from resources that are heterogeneous and immobile. Innovative efforts within a firm can help develop new valuable, rare, inimitable and hard-to-copy resources (Barney, 1991). From a different kind of perspective one can argue that the ability to adapt rapidly to changing opportunities (Nair, Paulose, Palacios & Tafur, 2013) and dealing with complexities, uncertainties and risks involved in that process (Taran, Riis, Ulhøi & Corso, 2011) can best be described as a capability (Teece, 2010). Innovation as an intangible knowledge-based capability of a firm that enables firms to develop a competitive advantage over competitors (Cho & Pucik, 2005).
In 1934, Schumpeter, the "prophet of innovation" (McGraw, 2007) introduced innovation as the centre of economic change, causing creative destruction. According to Schumpeter the entrepreneur is the central innovator, and business success depends on his ability to innovate. Economic development takes place when firms implement new products, processes and organizational techniques which can disrupt the market and moves it away from equilibrium (Jacobsen, 1992). New knowledge or new combinations of existing knowledge are transformed into innovations in the enterprise (Camisón & Monfort-Mir, 2012). Through completed innovation firms outcompetes other firms and receives economic profits, although often short lived due to imitation and replacements by other innovations. Jacobsen (1992, p. 6) states that "the forces of dynamic competition doom any firm that merely attempts to maintain its present position". In Schumpeterian environments characterized by rapid pace of innovation together with greater dynamism and uncertainties, there is a fundamental shift in
5 the rules of competition, as competition is steady and self-reinforcing process that triggers the exploitation of new alternatives (Giarratana & Fosfuri, 2007).
It is therefore understandable that innovation activity is not without its risks and expenses (Simpson, Siguaw & Enz, 2006). In addition, innovation does not always lead to high performance outcomes but also to negative ones, such as increased exposure to market risk, increased costs, employee dissatisfaction or unwarranted changes (Jiménez-Jiménez & Sanz-Valle, 2011). From a resource-based view perspective there exist arguments as well that innovation not always pays off. Innovation could lead to an uneven balance between exploiting existing resources and developing new ones (Danneels, 2002). Blyer and Coff (2003) put forward that even when innovative activities result in competitive advantage, the associated profits may not be gained by the shareholders within the organization but be appropriated by external stakeholders outside the organization.
Damanpour (1991) argues that not all innovative activity will relate to performance in the same way, as the influence of innovation capability on performance is still a very complex relationship (Jiménez-Jiménez and Sanz-Valle, 2011). Based on the diversity of innovations, researchers have categorized types of innovative activities. The most accepted and extended distinction of innovation types is the one Damanpour (1991) proposes, focused on separating technical innovation from administrative innovations. Technical innovations include new products, services and processes, while new procedures, policies and organizational forms are considered as administrative innovations (Tushman & Nadler, 1986). Henderson & Clark (1990) suggest another categorization of innovation types, distinguishing between incremental, modular, architectural and radical innovation. While Damanpour (1991) focuses on the different typology of innovation, Henderson & Clark (1990) emphasize the degree of change in concepts and linkages with components of the innovation. "Radical innovation establishes a new set of core design concepts embodied in components that are linked together
6 in a new architecture" (Henderson & Clark, 1990, p.11). In this way a new dominant design can be created, which sets new standards for determining the way in which components and modules would interact (Abernathy & Utterback, 1978). Such a new standard architecture could shake up an entire industry enabling a surge of innovation in process technology rather than product technology, to aim for cost reductions as the components and modules of the innovation itself are generally accepted throughout the marketplace (Christensen in Dorf, 1998).
Brown & Eisenhardt (1995) argue that innovation helps firms to deal with the turbulence of the external environment. Therefore, innovation is regarded as one of the key drivers of long-term success in dynamic markets. In 1982, Winter and Nelson (1982) state that diversity is seen as the main driving force of evolution. A competitive environment that is characterized by firm diversity is indeed a promoter of innovation and facilitates the entry of new firms that may be specialized in new product or service niches (Woerter, 2008). Woerter (2008) finds evidence that diversity and dynamics in an industry have a significant positive impact on innovation intensity of firms. Innovation is therefore of increasing importance as at the business unit level the pace of global competition and technological change challenges managers to their utmost (Collis & Montgomery, 2008). Davis and Eisenhardt (2007) view fast changing industries, Schumpeterian environments, as turbulent flows of opportunities. In stable and mature markets these opportunities may be developing slowly, but in highly dynamic markets they tend to be very volatile because these markets are processes of entrepreneurial create destruction (Schumpeter, 1942). In those environments competencies are put through a fierce selection process (Giarratana & Fosfuri, 2007).
In order to understand how and why certain firms build competitive advantage in regimes of rapid change, the dynamic capabilities approach (Teece, Pisano & Shuen, 1997) provides insight in a Schumpeterian world of innovation-based competition, price/performance rivalry,
7 increasing returns and the creative destruction of existing competences. Teece et al. (1997) acknowledges the influence of the rapidly changing environment for firms. They stress that firms should develop dynamic capabilities in order to be able to react quickly and accurately to dynamic external forces. The dynamic capabilities approach acts as a paradigm to understand how competitive advantage is achieved in industries characterized by high rate of technology and market changes. A dynamic capability refers to the capacity to renew competences by appropriately adapting, integrating and reconfiguring organizational skills, resources and competences to match the requirements of a changing environment (Teece et al., 1997). In other words, an organization's ability to achieve new and innovative forms of competitive advantage given path dependencies and market positions (Leonard-Barton, 1992).
2.2 Business models
2.2.1 Defining business models
Despite agreement on the importance of a business model to an organization's success, the concept is still considered vague and there still lacks real consensus regarding its compositional facets (Al-Debei & Avison, 2010). The first widely-supported definition of a business model was developed by Amit and Zott (2001). Amit and Zott (2001) have laid the foundation of the business model concept by stating that business models create value based on three different sources. Content includes information, goods and recourses, structure refers to networks and the ways in which parties are linked, while governance consists mainly of control mechanisms (Amit & Zott, 2001). Similarly to the content element, Hamel (2000) points out that configuration is an important element of a business model as it represents the company-specific combination of resources, skills and procedures. Casadesus-Masanell and Ricart (2011) describe business model choices along the same line. They note that companies
8 need to make asset choices about the resources a company deploys, but at same time policy choices are needed to determine the actions an organization takes across all its operations. Casadesus-Masanell & Ricart (2011) also mention the important business model choices that are expected to be made about how a company arranges decision making rights over both policy and asset issues. Amit & Zott (2010) define the business model more precisely as "the bundle of specific activities that are conducted to satisfy the perceived needs of the markets, including the specification of the parties that conduct these activities (i.e., the focal firm and/or its partners), and how these activities are linked to each other" (Amit & Zott, 2010, p. 4). According to Amit & Zott (2010) the key to understanding the firm's business model is by analyzing it from a activity system perspective. An activity system consists of interdependent organizational activities that are centered on a focal firm. These activities include activities conducted by the focal firm, its partners, suppliers or customers (Zott & Amit, 2010). While content, structure and governance are defined as design elements that describe the activity system's architecture, the second set of parameters consists of four design themes that describe the sources of value creation of the business model (Zott & Amit, 2010). A novelty-centered activity system design is characterized by the adoption or linking of new activities and activity systems centered around lock-in assure through power that third parties are kept attracted as business model participants. When executing multiple activities together within a system provides more value than running them separately, the activity system is built around complementarities. Finally, efficiency orientated designs aim to reduce transactions in order to achieve greater efficiency. Afuah and Tucci (2003) share the activity system view from Amit and Zott (2001) by arguing that the business model encompasses the set of which activities a firm performs, how it performs them and when it performs them. To sum up, the activity system perspective on business models emphasizes a system that is made up of components, linkages between the components and dynamics (Afuah & Tucci, 2003) that
9 explains how business models create value through different designs and how firms do business in general (Amit & Zott, 2010).
Although the activity system perspective increases the theoretical understanding of the underlying concepts and elements of the business model, other scholars have developed definitions more appropriate for translating to practical implications for firms in all kinds of industries. Magretta (2002) compares business models to storytelling. When a business model is successful, it is able to tell a convincing and straightforward story to the customer about how the enterprise works and what it delivers to the customer. In clarifying the business model, Magretta (2002) proposes Peter Drucker's (1954) questions concerning the customer. A good business model should definitely be clear about who the customer is and what the customer values. Another fundamental question that defines the core of a business model is: What is the underlying economic logic that explains how the firms can deliver value to customers at an appropriate cost? This aspect of the business model is similar to what Amit and Zott (2010) see as the value creation principle. Mitchell and Coles (2003) analyze business models from a similar perspective. They also aim to clarify the construct by emphasizing that business model comprises "the combined elements of 'who', 'what', 'when', 'why', 'where', 'how' and 'how much' involved in providing customers and end users with products and services" (Mitchell & Coles, 2003, p. 16).
Chesbrough and Rosenbloom (2002) articulate that value created is one of the main objectives of a business model. They set forward that the value proposition is one of the business models' main functions. Furthermore, they argue that a business model identifies a market segment, similar to Magretta's (2002) questions: Who is the customer? And what does the customer value? Subsequently, a business model also defines the value chain structure, the cost structure and profit potential of producing the created value and describes the position of the firms within the value network of suppliers and customers. In addition to the elements
10 Chesbrough & Rosenbloom (2002) identify, Lindgardt et al. (2009) also mention 'organization' as a key element. While target segment, product offering and revenue model are part of the value proposition of a firm, 'organization' forms together with the value chain and cost model the operating model of the firm. Lindgardt et al. (2009) interpret 'organization' as the way people in the organization are deployed to sustain and enhance competitive advantage. Johnson et al. (2008) agree that the customer value proposition is the most important element of a business model as it is crucial in the process of value creation and value delivering to customers. According to Johnson et al. (2008) it is impossible to invent a business model without on forehand identifying how the firm can help customers solve a fundamental problem in a given situation. This is something Hamel (2000) describes as the 'consumer benefits' element of the business model. The meta study by Shafer et al. (2005), about business model definitions, develops four major categories of elements within the business model concept, based on citations. According to that analysis, business models is related to the concepts of strategic choices, creating value, capturing value and the value network. The next sections elaborate on the relationship between value creation and appropriation and how strategy relates to the business model construct.
2.2.2 Business models, value creation and value appropriation
Within the business model literature, scholars have different perspectives on what the business model construct covers with respect to value creation and value appropriation. Value appropriation is about how large the share is that the firm can capture from the total value created. Teece (2010) points out that the business model defines the way the firm delivers value to customers (value creation), entices them to pay for value and coverts those payments into profit (value appropriation). In other words, value creation and value capture are two key tasks set forth by a business model (Pitelis, 2009). The definition of Teece (2010) is therefore very focused on the firm assuring, through the business model, to appropriate value in terms
11 of profit. Amit and Zott (2001) state that a business model primarily has to create value. Through the revenue model, which determines how the firm is compensated for a certain offering, the firm affects the amount of value that is appropriated (Amit & Zott, 2001). This indicates a point for discussion as scholars that define business models based on a number of universal elements, consider the revenue model as a crucial part of the business model construct (Lindgardt et al., 2009; Johnson et al., 2008; Chesbrough & Rosenbloom, 2002). Although Amit and Zott (2010) theoretically neglect the revenue model as part of the business model, they do agree that firms can also appropriate value through business models. In addition to considering interdependencies among business model elements, Amit and Zott (2010) point out that the revenue model complements the business model and although the business model concept and the revenue model are conceptually distinct, they are closely related and are at times even inextricably intertwined.
Chesbrough and Rosenbloom (2002) argue that creating value is necessary, but not sufficient, a firm must also address how it will capture some portion of the value for itself. In addition to mentioning the revenue model as business model element, they stress the importance of the role the firm plays in the vertical value chain and the value network in order to appropriate value. Chesbrough and Rosenbloom (2002) therefore agree that those aspects of the business model determine whether the firm profits from the value created, although they also indicate that possessing complementary assets (Teece, 1986) can help appropriate value. In addition, also Desyllas and Sako (2013) provide evidence that the long-term competitiveness and chances of value appropriation are higher when the firm builds a strong position in (specialized) complementary assets. In later work, Zott and Amit (2010) stress that the business model lays the foundation for the focal firm's value capture by defining the overall 'size of the value pie', which is the upper limit of the firm's value capture potential. Although the size of the total value created affects the value capture in the end, Zott and Amit (2010)
12 argue that the total value the firm actually captures depends on the firm's pricing strategy or revenue model, which are both not considered as part of the business model. Imitating and copying can seriously harm the value capturing potential of business models (Teece, 2010). As Desyllas and Sako (2010) find out, business models are impossible to protect on copyright, patents are therefore by far not that effective as in the case of products (Cohen et al., 2000). However, Teece (2010) suggests, in line with the resource based view, that business model's underlying systems, processes and assets may be hard to replicate or the implementation of a business model is non-transparent for competitors so that they are unaware of details in execution of a business model. Furthermore, incumbents could be uninterested in imitating another firm's successful business model as it could involve cannibalizing their own existing sales and profits. To conclude, in order for firms to capture value through their business model, the revenue model containing an acceptable price formula for customers that is also allowing considerable own profits, is essential. The ownership of complementary assets by the firm and hard to replicate roots of the business model could enable the business model to appropriate a significant share of total value created by the business model.
2.2.3 Business model and strategy
Another debate going on within the strategic management literature deals with the question whether the business model concept overlaps with the strategy concept (Porter, 1987). Chesbrough and Rosenbloom (2002) argue that the business model results less from a carefully calculated choice out of a variety of well-understood alternatives (Porter, 1980), and more from a process of sequential adaptation to new information and possibilities provided by Schumpeterian environments.
Both Casadesus-Masanell and Ricart (2011) and Ghezzi, Balocco and Rangone (2010) stress the interrelatedness between business model and strategy. Hamel (2000) makes arguments
13 along the same line through stating that the capacity to construct wealth-generating strategies is at the heart of the business model concept. of both concepts. Strategy comprises how firms wish to compete in the marketplace while the system of choices and consequences is a reflection of the strategy, representing the actual business model. Strategies contain provisions against a range of contingencies in the form of competitor's moves or environmental shocks, whether or not they take place (Casadesus-Masanell & Ricart, 2011).
A critical perspective is developed by Abraham (2013), as he stresses that firms only focus on the business model, face major limitations as the strategic development approach has far more advantages. Abraham (2013) emphasizes that organizations should not blur the distinction between its business model and its long-term strategy, because solely focusing on the business model won't help an organization to develop a competitive advantage (Aspara, Hietanen & Tikkanen, 2010), outperform its competition or bring about a merger. This gap should be filled in by strategies and strategic analyses that can bundle with an organization's capabilities and resource to find ways to become a stronger competitor (Abraham, 2013). Teece (2010) treats strategy along the same line as he sees business models as more generic than a business strategy, while Abraham (2013) states that every viable firm has at least a business model. For firms to protect the competitive advantage resulting from business model implementation, strategy analysis and business model analysis should be used as complements (Teece, 2010; Shafer, Smith & Linder, 2005). Since firms that address the same customer needs and pursue similar product market strategy can achieve this with very different business models (Zott & Amit, 2008). Strategy is thus an essential step as it imposes filters in which the business model should survive, in order to become viable as most of the business models' features could be easily imitated (Teece, 2010). Chesbrough and Rosenbloom (2002) express also the need for strategy in value capturing and sustainability of the business models as the competitive threats to returns posed by current and potential rivals take center stage. As
14 Christensen (2001) indicates, the business model can be a source of competitive advantage that is distinct from the firm's product market position. According to Zott, Amit and Massa (2011) the business model can play an important role in a firm's strategy as both Shafer et al. (2005) and Casedesus-Masanell and Ricart (2010) view the business model as a reflections of a firm's realized strategy. Although strategy and the business model are intertwined, the business model is constructed around joint value creation (Zott et al., 2011; Magretta, 2002) and while there is some focus to capture a portion of the value created (Teece, 2010), the emphasis on value capture is strong in the realm of strategy (Chesbrough & Rosenbloom, 2002). Therefore, the business model concept and the strategy concept should be used as complements as both have different purposes and when there is no supporting link between the two, firm survival on the long term is at risk. As Casadesus-Masanell and Ricart (2010) identify, strategy refers to the choice of business models through which the firm will compete in a marketplace.
Scholars also struggle to set forward one unified unit of analysis for the business model construct. Over the years the business model has been considered context dependent (Dahan, Doh, Oetzel & Yaziji, 2010 as cited in Arend, 2013; Amit & Zott, 2007), firm dependent (Rajgopal, Venkatachalam & Kotha, 2003 as cited in Arend, 2013) and time dependent (George & Bock, 2011 as cited in Arend, 2013; Osterwalder et al. 2005). This implies considerable confusion about the appropriate unit of analysis. According to Chesbrough and Rosenbloom (2002) business models apply often to a specific business-unit. Amit and Zott (2001), on the other hand, see the business model itself as a different unit of analysis, while in Malone, Weill, Lai, D'Urso, Herman, Apel & Woerner's (2007) study, business models are analyzed between industry and strategic group levels (Arend, 2013). Casedesus-Masanell and Ricart (2011) suggest that business models should be analyzed at firm-level, while there are also arguments for using the industry as unit of analysis, as new successful business models
15 set new industry-wide standards (Osterwalder, Pigneur & Tucce, 2005), similar to a dominant design in product or service innovation (Christensen as cited in Dorf, 1998).
2.3 Business model innovation in turbulent industries
2.3.1 Defining business model innovation
For decades innovation activities were merely focused on new technical products, services and business processes (Utterback & Abernathy, 1975). However, since the beginning of the twenty-first century a group of strategic management researchers introduced the business model as a groundbreaking phenomenon for firms to achieve competitive advantage on a different level (Afuah & Tucci, 2003; Mitchell & Coles, 2003; Chesbrough & Rosenbloom, 2002; Magretta, 2002; Amit & Zott, 2001). The business model construct as a tool to differentiate from competitors. From a holistic business model perspective, innovation not only refers to product or service offering, production processes, distribution channels and markets, but also to exchange mechanisms and transaction architecture (Amit & Zott, 2001). Innovative business models have the potential to pose a serious threat to incumbent firms through disrupting existing industry structures, which is in line with the 'creative destruction' reasoning (Schumpeter, 1934). Mainly due to the rise of the knowledge economy and the emergence of new Internet based models inspired by the emergence of digital technology, this recent wave of research concerning the performance advantage potential of business models really became significant within the strategic management literature (Desyllas & Sako, 2013; Amit & Zott, 2010; Afuah & Tucci, 2003; Chesbrough & Rosenbloom, 2002; Amit & Zott, 2001;).
Mitchell and Coles (2003) stress that firms that are able to execute continuing business model innovation have the capability in hand to outperform the competition. Although Chesbrough (2010) believes that business model innovation is very difficult to achieve, it is vital for firm's
16 success. If business model innovation is sufficiently differentiated and hard to replicate for incumbent firms and new entrants, business model innovation can itself be a pathway to competitive advantage according to Teece (2010). Gambardella and McGahan (2010) suggest that firms can even shape industry structures to their own advantage through business model innovation. Huang, Lai, Kao & Chen's (2012) study finds evidence that business model innovation is positively related to firm performance and the performance advantage differs across industry borders. In some cases winner-take-all effects can be triggered by firms when they are able to make the right choice in the process of developing and shaping their new business model (Casadesus-Masanell & Ricart, 2011). Furthermore, Matzler, Von den Eichen & Kohler (2013) stress that indeed business model innovation is the way forward as product innovations no longer provide sufficient opportunities for differentiation. Pohle and Chapman (2006) report that strategic flexibility and cost reductions were considered top benefits from business model innovation, while organizations at the same time also become more nimble and responsive. Johnson et al. (2008) emphasize that firms need to take their time in revolutionizing their business model in order to achieve high long term performance outcomes. Incumbent firms innovating their business models should focus on learning and adjusting as much as on executing, as successful new business typically revise their business model several times on the road to profitability.
However, although less widely supported in the strategic management literature, there are studies that give argumentations that business model innovation does not impact firm performance in a positive manner (Abraham, 2013; Aspara et al., 2010). According to Abraham (2013) business models do not play a role in outperforming competitors, acquiring decisions or diversification, as this remains the main objective for strategy. Aspara et al. (2010) find evidence that business model innovation, at least on its own, would not lead to superior performance outcomes. In fact, Aspara et al. (2010) argue that for large firms, mere
17 business model innovation is related to lower average financial performance than refraining from business model innovation altogether due to effective replication possibilities for rivals. This again reminds firms that the confusion and secrecy of underlying linkages and elements of a business model (Teece, 2010) plays an important role in capturing value from innovations of the business model.
In order to understand how business model innovation exactly is performed and eventually leads to organizational success, it is important to consider the different views scholars have on the business model innovation concept. Amit and Zott (2010), in line with their definition from an activity system based perspective, view business model innovation as the changes made in the three business model design elements - content, structure and governance. Innovations in the activity design elements can be a new way of interlinking activities by modifying the exchange mechanisms among the linked activities. Amit and Zott (2010) explain this type of business model innovation with reference to online travel agency Priceline.com, that introduced a reverse market in which customers post desired prices for sellers' acceptance. In this way Priceline.com fundamentally innovated the exchange mechanism through which airline companies, credit card companies and travel agencies interact and by which items such as airline tickets are sold.
Koen et al. (2011) notify that the current innovation typologies, such as the distinction between incremental and radical innovations (Wheelwright & Clark, 1992), sustaining and disruptive innovations (Christensen, 1997) or exploitive and explorative innovations (March, 1991) are individually inadequate to explain the business model innovation concept, as it is considered as a more complex set of factors. A typical business model innovation is an innovation in the value network of a firm (Koen et al., 2011; Giesen et al., 2007). Giesen et al. (2007) define this business model innovation type as industry model innovation and firms can accomplish this via horizontal moves into new industries. Koen et al. (2011) stress that the
18 value network dimension is embracing the unique relationship that a company builds with both its upstream and downstream channels, and how it works with and reacts to customers, suppliers, and competitors (Gambardella & McGahan, 2010). The value network innovation by multinational computer technology company Dell is an example of how redefining the existing industry by eliminating intermediaries and supplying directly to customers leads to a successful business model innovation. As Johnson et al. (2008) shows, re-inventing the business model requires firms sometimes to break rules that had previously guided its success.
A second strategic area where firms can innovate their business model, is the way a firm generates revenues. Innovations of the revenue model refers to reconfiguring offering and introducing new pricing models (Giesen et al., 2007). Lindgardt et al. (2009) points out the business model innovation executed by Jetstar, an Australian low-cost airline, with its revolutionary pricing approach for traditionally bundled services. When firms articulate their new customer value proposition or their enhance new profit formula, often new competencies, key resources and processes are needed (Johnson et al., 2008), as is the case for Jetstar. With this revenue model innovation Jetstar enables customers to customize the onboard experience with a variety of food, comfort, and entertainment. Not only are revenue model innovations about leveraging customer experience, choices and preferences, it also can leverage new technologies.
Giesen et al. (2007) also distinguish value chain innovations. This type of business model innovation modifies the organizational structure and the role the organization plays in new or existing value chains. Lindgardt et al. (2009) states that innovations of the value chain deal with the configuration of customer demand delivery and the in-house versus outsource trade-offs (Mitchell & Coles, 2003). An business example of enterprise model innovation is Zara, a clothing retailer that manages design through delivery creating feedbacks loops from customer data at stores back to designers through manufacturing.
19 Implementing those innovations is a step-by-step process (Sosna, Trevinyo-Rodríguez & Velamuri, 2010). Based on a case study of Naturhouse's business model metamorphosis, Sosna et al. (2010) developed a four stage model to business model innovation. The first stage involves the initial business model design and testing. Together with second stage, defined as business model development, the first stage is categorized as exploration, while both stage three and four are clustered as exploitation. In stage three firms scale up the refined business model before sustaining growth through organization-wide learning in stage four.
Furthermore business model innovations also differ in terms of their value creation and value capturing effect. Matzler et al. (2013) distinguish three types of business model innovation based on their consequences on willingness to pay, customer value added, income and expenses (Bowman & Ambrosini, 2000). The first type creates additional customer value through a new value creation system that allows the company to reduce product costs and prices. The second type of business model innovation results in an higher willingness to pay, while the third type the customer's benefit is actually reduced but the price reduction is comparably higher, which means that the create customer value increases. Gambardella and McGahan (2010) also view these three types as consequences of pushing industry boundaries.
Cavalcante, Kesting and Ulhøi (2011) rank the organizational impact of business model innovation by suggesting four different types of business model change. With business model creation Cavalcante et al. (2011) mean the materialization of a business idea into a new venture. Business model extension implies adding activities or expanding existing core processes to an existing business model. Removing an element that modifies an existing business model and replacing it with a new process is defined as business model revision. Furthermore business model termination which refers to abandoning processes, for example closing down a business unit assuming that it has its own business model (Cavalcante et al., 2011).
20 2.3.2 Business model innovation and technological change
An emerging issue that needs to be dealt with is the role of technology in business model innovation. As Chesbrough (2007) outlines, there was a time not long ago, when innovation meant that firms needed to invest in internal research laboratories, hire the most brilliant people and wait for novel products to emerge. Due to shortening product life cycles and rising costs of creating, developing and transporting novel products, that time appears to be in the past (Chesbrough, 2007). This reasoning is what many scholar make to point out that innovation nowadays must include business models, rather than just technology and research and development (Sabaratier, Craig-Kennard & Mangematin, 2012; Koen et al., 2011; Gambardella & McGahan, 2010; Doganova & Eyquem-Renault, 2009; Johnson et al., 2008; Chesbrough, 2007;).
Johnson et al. (2008) and Amit and Zott (2010) argue that a firm needs to wrap a good technology in a great business model to be successful and stand apart. This is the approach Apple took when introducing the iPod. The low-margin iTunes music created a lock-in for customers to purchase the high-margin iPod. This lock-in centered business model (Zott & Amit, 2010) defines value in a new way and provides game-changing convenience to the customer. Baden-Fuller and Haefliger (2013) define the business model as a separate construct from technology but emphasize that technology development can facilitate new business models. The coming together of a technology leap and a business model leap is what Google achieve in 2003, by developing its two-sided dynamic search engine. The novelty of Google's approach lays in linking the two sides in a constantly changing manner, that cause an increase in consumer satisfaction and revenues grew for any given set of users on each side of the platform (Baden-Fuller & Haefliger, 2013).
21 Based on research in the drug industry, Sabatier et al. (2012) suggest that technological discontinuities trigger business model innovations that the industry's logic evolves. As technologies develop, the mature industry stage is characterized by competition between incumbents, low firm entry and exit rates (Sabatier et al., 2012). In this phase the introduction of new business models will challenge dominant industry logics. Sabatier et al. (2012) state that for the time period the new entrants are still small entrepreneurial firms, the incumbent firms are able to maintain the dominant logic of their industries for a while. However, as the technology, matures and becomes widely accepted and thus well-diffused, business model innovations arise. This is similar to the statement Gambardella and McGahan (2010) make, by suggesting that business model innovation can shape their industry structures and organize themselves and their interactions with customers and suppliers in unprecedented ways. Business model innovations increase the ability of firms to capture a larger share of the value created by the underlying technological discontinuity (Gambardella & McGahan, 2010). However, one should be aware that the business model frames managers hold in their heads also determine the way in which technology gets developed (Chesbrough & Rosenbloom, 2002). These connections could be very powerful, and therefore Baden-Fuller and Haefliger (2013) note that the connection between business model choice and technology is two-way and complex.
Sabatier et al. (2012) interprets that business model innovation follows technological innovation and when these innovations appear into the industry new logics and standards will be created. In order for firms to appropriate features of a new technology that has the potential to create customer value, the firm's business model must adapt (Baden-Fuller & Haefliger, 2013). When firms are powerful enough to promote new business models that are characterized by new value propositions and are working via new value chains, major technological breakthroughs can be set up with specific assets and capabilities to challenge
22 the industry's dominant logic. Thereby, it is important to consider that the choice of business model influences the way in which technology is monetizes and in addition the profitability of the firm (Baden-Fuller & Haefliger, 2013). Solely a better business model will often beat a better idea or technology (Chesbrough, 2007), but reviewing the recent literature on business model innovation suggests that firms have the highest probability of success when a great technology is strengthened or reinforced by a great innovative business model.
Hereby it is important to not hold on to the assumption that creating value from technology through business model innovation is simply of managing technical uncertainty. As Chesbrough and Rosenbloom (2002) argue, there is significant uncertainty in the economic domain as well and identifying business model reinventions is an entrepreneurial act, which requires insight into not only technology but also into the market, as the architecture of revenues and a powerful value proposition for customers are indispensable (Nunes & Breene, 2007).
The relative large number of researchers arguing that business models arise or result from technology breakthroughs, implies that dynamic, turbulent industries where technology developments are needed to survive, act as a ideal environment for the development of new business models. Business models are namely the 'wraps' around sophisticated technologies. Although several scholar emphasize that high dynamic environments (Schumpeter, 1934) put pressure on firms to innovate and also regarding their business model (Baden-Fuller & Haefliger, 2013; Casadesus-Masanell & Ricart, 2011; Amit & Zott, 2010), there is still limited quantitative evidence of the relationship between industry turbulence and business model innovation. Amit and Zott (2010) indicate that especially in economic change (Sona et al., 2008), business model innovation can be a successful way for managers to create value. With declining revenues and severe pressure on profit margins, factors not unknown in turbulent industries, Amit and Zott (2010) propose business model innovation as a process that may
23 offer some answers. Through business model innovation firms can better exploit the resources and capabilities they already have. As Baden-Fuller and Haefliger (2013) point out, competitive dynamics does not only influence product margins but also the viability of the business model. As the industry becomes more complex, new business models arise to get an upper edge over industry rivals. The combination of technological change and high competitiveness in turbulent markets plus economic slowdowns in the developed world are forcing companies to modify their business models or create complete new ones (Casadesus-Masanell & Ricart, 2011). In this landscape and time the power is in the hands of the imaginative, "dispensing with linear ideas as the only way forward to create wealth and escape from endless competition" (Hamel, 2000 p.3). Business model innovation seems to be an appropriate tool to realize that ambition, as only the creation of business models which are very different, both from previous practices and from those of competitors can shake up industries (Hamel, 2000).
Contrary to the many scholars that are confident that high dynamic environments pressure firms to pursue and optimize business model innovation, Rumelt (1991) and Jiménez-Jiménez & Sanz-Valle (2011) argue that the positive impact from industry dynamics could be overestimated. Rumelt suggests that very large stable business-unit effect variables have an far more higher influence of ultimate firm performance than industry effects. These results imply that industry membership is relatively much less important source of economic rents compared to business-specific sources. Jiménez-Jiménez & Sanz-Valle's (2011) findings provide indications that market turbulence increase the risks of investment in innovations. Their analyzes of the moderating effect of environmental turbulence on the relations between organizational learning, innovation and performance, that the positive effect of innovation on performance is lower for firms competing in turbulent environments.
24 2.3.3 Business model innovation barriers
The previous sections of this literature review have indicated that it is not straightforward for firms to be successful at business model innovation. In order to develop a more specific perspective on the business model innovation capability, a couple scholars identify barriers that firms need to overcome to benefit from their efforts on business model innovation. As discussed before, Amit & Zott (2010) categorize business models based on their model design themes. They note that novelty, lock-in, complementarities and efficiency, each could be a key aspect of a specific business model innovation. But managers might resist to experiment with these business model themes as they may often conflict with the more traditional configurations of firms assets, as experimenting might endanger their ongoing value to the company (Chesbrough, 2010).
Christensen (1997) points out that resisted development of the right business model takes place due to its conflicts with the prevailing business model which acts as an innovation barrier. This barrier of obstruction concerns the conflict between the business model already established for the existing technology and the business model required to exploit the emerging, disruptive technology (Chesbrough, 2010).
Chesbrough and Rosenbloom (2002) show that for managers it is far from clear what the right business model ought to be. This barrier of confusion can only be overcome by heavy commitment to experimentation with business models and measuring resulting performance outcomes. The case from Sosna et al. (2010) shows that a severe crisis can provide a strong driving force to overcome these barriers. Sosna et al. (2010) even argues that such a crisis might even be necessary in order to initiate deep enough reflection on the currently prevailing dominant logic and status quo of the business model design that is currently in place.
25 In short, the capability of business model innovation, balancing incremental and radical model element innovations, is a dynamic system that requires constant adjustments to internal and external changes (Bucherer, Eisert & Gassmann, 2012; Berman, 2010; Mitchell & Coles, 2003). The increased industrial uncertainty and volatility provided by Schumpeterian environments in combination with technical shifts, require firms to become more innovative to offset potential obsolescence and market deterioration (Allred & Swan, 2005). Through new linkages between business model activities and technological change, value is created (Amit & Zott, 2010) which results in competitive advantage.
26 3. Hypotheses and Conceptual Model
Based on wide spread belief in the strategic management literature that business model innovation leads to an increase in firm performance, this study aims to find quantitative support for this relationship. In addition this study addresses a gap in the literature by researching how the level of turbulence of industries can affect the relationship between business model innovation and firm performance. The following two hypotheses bring these beliefs forward.
3.1 Hypothesis 1: The relationship between business model innovation and business-unit's
performance is positive.
There is a widespread belief in the strategic management literature that innovation is a key driver of firm success (Jiménez-Jiménez & Sanz-Valle, 2011; Cho & Pucik, 2005; Calantone, Cavusgil & Zhao, 2002; Mone, McKinley & Barker, 1998). Numerous studies indicate that the relationship between on the one hand innovation and on the other hand firm performance is positive (e.g. Hameed & Ali, 2011; Weerawardenaa, O'cass & Julian, 2006; Brown & Eisenhardt, 1995; Wheelwright & Clark, 1992; Damanpour, 1991). This is expressed in the most important element in all definitions of innovations (Camisóm-Zornoza et al., 2004), namely that a new idea is put into practice with an improvement of organizational performance as main objective (e.g. Tushman & Nadler, 1986; Damanpour & Evan, 1984; Daft, 1982; Zaltman, Duncan & Holbek, 1973; Schumpeter, 1934). This is line with arguments from the resource-based view, innovative efforts aid firms to develop new valuable, rare, inimitable and hard-to-copy resources (Barney, 1991). Cho and Pucik (2005) suggest that the innovation capability of a firm can be an intangible knowledge-based resource that enables firms to develop a competitive advantage over competitors.
27 For decades innovation was merely associated with technical products, services and business process (Utterbakc & Abernathy, 1975). However, when the twentieth century turned into the twenty-first century (Zott et al., 2011), a couple strategic management scholars introduced the business models as a groundbreaking phenomenon for firms to achieve competitive advantage on a different level (Afuah & Tucci, 2003; Mitchell & Coles, 2003; Chesbrough, 2002, Magretta, 2002; Amit & Zott, 2001). Does it make sense to apply the line of thought that innovation leads to improved performance, to business models? Casadesus-Masanell & Ricart (2010) express that the business model indeed can be a strategic tool to compete with other firms. Zott et al. (2011) ascertain that novel business models can create new or improved customer value which in turn represents a source of competitive advantage. In this way revolutionary business models or breakthrough business model upgrades can challenge the old way of doings by disrupting industry structures (Gambardella & McGahan, 2010; Amit & Zott, 2001) and become the standard for other firms to beat. Afuah & Tucci (2001) describe competitive advantage potential of business models by proposing that firms build and use their resources to offer its customer better value and to make money in doing so. Through successful business model innovations firms can experience financial performance benefits by reducing production cost or increasing customers' willingness to pay (Matzler et al., 2013).
These novel business models arise due to business model innovations, the changes made in business model design elements and the new linkages between those activities according to the activity-based system perspective from Amit & Zott (2010). Business model innovation occurs when one or more elements (e.g. value network or revenue model as construed by Koen et al. (2011)) of the business model are reinvented to deliver value in a new synergistic way (e.g. Amit & Zott, 2010; Lindgardt et al., 2009; Johnson et al., 2008, Chesbrough & Rosenbloom, 2002). Although business models do not warrant formal intellectual property protection (Desyllas & Sako, 2013), Chesbrough (2010) and Teece (2010) argue that while it
28 is difficult to achieve, the process of business model innovation should be hard to replicate and sufficiently differentiated so that itself can be a patch way to competitive advantage. A new business model design also affects the firm's ability to appropriate the value (Zott & Amit, 2007). The business model innovation capability of a firm determines whether the firms is able to outperform competitors (Giesen et al., 2007; Cho and Pucik, 2005; Mitchell and Coles, 2003). Practice-oriented research from IBM Global Business Services (2006) concludes that financial outperformers put twice as much emphasis on business model innovation as did underperforming firms.
Furthermore, Matzler et al. (2013) and Lindgardt et al., (2006) stress that business model innovation deliver superior returns as business model innovations provide a more extensive range of opportunities for differentiation than more unilateral product or service innovations. Analysis by Boston Consulting Group in 2009 showed that business model innovators earned an average premium that was more than four times greater than product or process innovators enjoyed. With these findings in mind, multiple scholars nowadays share the ideology that, as a potential replacement for product, service and process innovations, innovations of the business model have a significant effect on the long term success of firms and their capability to achieve competitive advantage (e.g. Chesbrough, 2010; Teece, 2010; Gambardella and McGahan, 2010; Mitchell and Coles, 2003).
3.2 Hypothesis 2: In a turbulent industry, the relationship between business model
innovation and business-unit performance is positive.
The second hypothesis integrates the moderator industry turbulence into the relationship formulated in the first hypothesis. In order to understand the causality between business model innovation and business-unit's performance it is essential to include the influence of the external environment. Turbulence and unpredictable environments affect both the
29 performance outcomes for firms (Nadkarni & Narayanan, 2007) and have a significant impact on the entrepreneurship of the firm (Woerter, 2008; Becherer & Maurer, 1997; Davis et al., 1991). According to Han, Kim and Srivastva (1998) the rationale behind organizational innovativeness showing a strong, positive influence on firm performance is ascribed to innovation serving to accommodate the uncertainties in the external entrepreneurial environment (Ettle & Bridges, 1982). Han et al. (1998) mention competitive intensity, technological turbulence and market turbulence as uncertainties to which innovations adapt. This is in line with Brown and Eisenhardt (1995), Jiménez-Jiménez and Sanz-Valle (2011) and Weiss and Heide (1993) stressing that firms through innovation activities are able to deal with the constant change and complexity of the external environment. One can argue that consistently adapting and innovating the business model is more effective in turbulent environments as the pace of global competition and technological change challenges managers to their utmost (Collis & Montgomery, 2008). According to Lindgardt et al. (2009) business model innovation can provide firms a way to break out of intense competition by addressing disruptions such as regulatory or technological shifts that demand fundamentally new competitive approaches. The combination of turbulent markets, associated with technological change and high competitiveness, plus economic slowdowns in the developed world are forcing firms to innovate their business models or create complete new ones (Casadesus-Masanell & Ricart, 2011). Firms with superior organizational innovativeness will exhibit superior responsiveness in dealing with a turbulent external environment (Han et al., 1998). Firms should align business model reinventions with emerging industry trends, evolving customer preferences and relative advantage or disadvantage over competitors.
A major aspect of industry turbulence is the role of technological change. Baden-Fuller and Haefliger (2013) argue that technology developments can facilitate new business models. Along the same line, Sabatier et al. (2012) suggest that technological discontinuities trigger
30 business model innovation. In fact, in order to appropriate features of new technological development that has the potential to create customer value, the firm's business model must adapt (Baden-Fuller & Haefliger, 2013). Firms should promote new business models with new value propositions and new value chain connections that accompany major technological breakthroughs, set up through specific assets and capabilities to challenge the industry's dominant logic. Business model innovation enlarges the ability of firms to capture a larger share of the value created by the underlying technological discontinuity. Furthermore, Amit and Zott (2010), Johnson et al. (2008) and Chesbrough (2007) emphasize the synergistic effect between a reinforced or innovated business model and a breakthrough technology, as wrapped together they have an greater chance of increasing firm performance than separately. It is no wonder that the successful business model innovation centered around Apple's iPod introduction took place in an highly volatile and turbulent industry as the portable audio player industry (Johnson et al., 2008). The relative large share of researchers arguing that game-changing business models should arise or result from technology breakthroughs, implies that dynamic, turbulent industries where the numerous technology developments are needed to survive, can act as a fertile environment for the development of new business models.
Technology change and the dominant design theory are closely related. A dominant design is a general accepted standard architecture of a product's design (Christensen, 1998). During the time period when an industry is seeking and developing different designs, and when a standard architecture still has to emerge, firms focus on product technology innovations. When the dominant design is broadly accepted across the industry, firms concentrate their innovative energies on process technology improvements to achieve cost reductions (Abernaty & Utterback, 1978). In order to make some aspects of this theory more fitting for business models, the paradigm of Prahalad and Bettis (1986) may be of value. They argue that
