A Brave New (digital) World
A study on the impact of disruptive technology and business model innovation in a fast pacedchanging digital world
Jan Willem van Houwelingen
August 2015
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A Brave new (digital) world
A study on the impact of disruptive technology and business model innovation in a fast paced changing digital world
Author: J.W. (Jan Willem) van Houwelingen MSc Place: Amstelveen
Date: August 11, 2015
Institute: University of Amsterdam, The Netherlands Amsterdam Business School
Programme: Amsterdam IT-Audit Programme Committee: University supervisor
Drs. A.W. Abcouwer
University of Amsterdam - Amsterdam Business School Faculty of Science
University supervisor
Mr. A. van der Drift RE
University of Amsterdam - Amsterdam Business School Faculty of Economics and Business
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Management Summary
New technology and innovation is an unstoppable and pure push force in the today’s world. Technology has become accessible for anybody, it has become cheap and new innovations are widespread around the globe within seconds. Technology is no longer only a matter of means, but as well an objective on itself. This enables opportunities for change. Change is everywhere and always. It has always been part of our world, economy, environment and business. The speed of change may be not changing as rapidly as we thought, but the potential impact is higher than ever.
Globalization, smartphones, high speed mobile data networks and the availability of this all to vast amount of people have led to architectural innovation using the existing building blocks. The number of new organizations, or start-ups, grow by the minute, and are able to implement new technology in a short amount of time, where existing organizations such as KLM and Booking.com have challenges in keeping up with this new way of innovating their business model.
Organizations have to realize these new terms of engagement, how technology is being developed, and it is their decision on how they will adopt new technology in their business model to gain or hold their competitive advantage.
But not only adoption of new technology or changing your business model leads to success. Organizational control and management of IT from an IT-audit perspective remains important and relevant to organizations to ensure the efficient and smooth operation of IT operations. This nurtures the risk averse stance towards change in organizations, where they preferably don’t change at all. A stable IT environment is after all the easiest to control.
With this study we have identified the ‘controlled innovation dilemma’. Organizations need to change, but they preferably don’t want to change. In fact, innovation will not succeed without proper control. That proves the need for tailored control frameworks and measures to enable controlled innovation within organizations.
Conceptual models such as the adaptive cycle or resilience have shown to be spot on when it comes to the dilemma of change and control. This combination of the need for change and innovation seems to be opposite of the increase of control and management of organizations and IT. This has triggered the use of business models, that allow the conceptual understanding of how a business operates and what makes it (or doesn’t make) the organization successful. A business model is therefor used as an architectural overview of the core elements of an organization. It can be used to illustrate the impact of changes and innovations, but also identify where innovation is required. From a control perspective it enables to identify the organizational risks and from an IT-audit perspective to identify the relevant controls that will be impacted by the proposed change or innovation.
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Preface
This research is the final chapter of the Amsterdam IT Audit Program. I started this program a few years ago, and during the program I have had the opportunity to learn a lot on organizational governance, auditing, control frameworks, project management, innovation and IT.
Technology and innovation have always been inspiring to me, and as far as I can remember, I have always questioned the status quo and always asked myself and others, why certain things are happening in the way they happen.
Change brings new insights. Insights enable new changes. It is circle in which we live and in which we can make a difference. A difference towards ourselves, but also towards the world. This drives my continuous need for exploring the world. But also for innovating and understanding new technology.
This thesis is of course not only the result of my own efforts. Many have helped me to where I am today. As physical limitations apply, I cannot list all who I am thankful, but sure I can try to name at least some of them. My appreciation goes out to (in random order) Toon Abcouwer, Lex van der Drift, Annelies Vethman, Susanne van Hoek, Richard Wagenmakers, Fons Trompenaars, Jeroen van Gassel, Sander van der Meijs, Chantal Dekker, Anno Perk, Iris Cremers, all of my fellow students and teachers of the AITAP/EMITA program, all of my colleagues at KPMG who challenge me on this topic, all of my friends who keep me motivated, my family who always ask me what my next study will be and my wife Veronique who is always there for me.
Jan Willem van Houwelingen Amstelveen, August 2015
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Contents
MANAGEMENT SUMMARY ... V PREFACE ...VII 1 INTRODUCTION ... 1 1.1 Introduction ... 1 1.2 Problem field... 1 1.3 Relevance of study ... 2 1.4 Research design ... 3 1.4.1 Objective ... 3 1.4.2 Research question ... 4 1.4.3 Research methodology... 4 1.5 Reading guide ... 6 2 THEORETICAL FRAMEWORK ... 7 2.1 Disruptive change ... 72.1.1 What is disruptive change? ... 7
2.1.2 Disruptive technologies as change driver ... 8
2.2 Dynamics of change ... 8
2.2.1 What are the dynamics of change? ... 8
2.2.2 The Adaptive Cycle of Resilience ... 11
2.3 Business models ... 12
2.3.1 What is a business model? ... 12
2.3.2 Available and used business models ... 13
2.3.3 Business model canvas ... 14
2.4 Business model innovation ... 16
2.4.1 Innovate your business model ... 16
2.4.2 How to deal with disruptive technologies in business model innovation?... 17
2.5 Innovation and control ... 18
2.5.1 Organizational control ... 18
2.5.2 Business model innovation from a control perspective ... 19
2.6 Optics on the theoretical framework ... 20
2.6.1 Integration of the literature review ... 20
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3 BUSINESS MODEL INNOVATION IN PRACTICE ... 25
3.1 Operationalizing the theoretical framework ... 25
3.1.1 Interview protocol ... 25
3.1.2 Coding scheme ... 27
3.2 Business model innovation from an expert perspective ... 29
3.2.1 Expert interviews ... 29
3.3 Results of expert interviews ... 32
3.3.1 Disruptive change and technology ... 32
3.3.2 Impact of change on organizations and their business model ... 32
3.3.3 Business model innovation ... 33
3.3.4 Triggers for innovation ... 33
3.3.5 Business model process design ... 34
3.3.6 Adaptive cycle of resilience and application ... 34
3.3.7 Internal control measures / frameworks ... 35
3.3.8 Innovation and control ... 36
3.3.9 Conclusion on expert interviews... 36
3.4 Business model innovation from a business perspective ... 37
3.4.1 Case studies ... 38
3.4.2 Results case study 1 – KLM Royal Dutch Airlines ... 38
3.4.3 Results case study 2 – Booking.com ... 39
3.4.4 Conclusion on case study results ... 41
3.5 Conclusions ... 42
4 CONCLUSION ... 45
4.1 Synthesis ... 45
4.2 Conclusions ... 45
4.3 Recommendations for A Brave New (digital) World ... 48
4.4 Constraints, limitations and future research ... 49
4.5 Reflection ... 49
REFERENCES ... 51
APPENDIX... 57
A. Expert interview 1: Richard Wagenmakers ... 57
B. Expert interview 2: Fons Trompenaars ... 61
C. Expert interview 3: Jeroen van Gassel ... 65
D. Expert interview 4: Chantal Dekker ... 69
E. Expert interview 5: Sander van der Meijs ... 71
F. Case study 1: KLM Royal Dutch Airlines ... 73
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1
Introduction
1.1 Introduction
In the last years, the speed of development of new technology has become more rapid than ever. The internet, open innovation and information symmetry have accelerated the speed and number of innovations (Carayannopoulos 2009, Chesbrough 2010).
Innovation and new technology have become a mean on itself. People are thirsty for innovation and this has resulted in a clear technology push, in contrast with the classic technology push from organizations (Christensen 1997, Henderson, Venkatraman 1993).
Technology is available, cheap and useable by anyone. Early adopters become business leaders, and technology slackers often face the disgrace of penny stock on the stock markets (Hinssen 2010). Companies like FaceBook and Google are established on a business model that embrace technological innovations (Pascale et al. 2000). These are only a number of examples which show the power and endless opportunities of innovations and new technology.
Technology has really become disruptive in the today’s market. Organizations are made and broken, depending on their ability to adapt their business model. Classic successful business models which resulted in great revenues are no longer guarantees for the future. Large and successful companies like Kodak and Winkler Prins have already faced this path (Lucas, Goh 2009).
The ability to deal with new technologies and innovate your business model is now a crucial competitive advantage. Organizations that are the best capable in identifying new technologies, assessing the impact on their business model and adapting their business model will be the survivors of the new era, the digital era (Darwin 1859, Huxley 1932).
1.2 Problem field
New technology and technological innovations are currently being developed from a push rather than a pull mechanism. New technology has become almost a mean on itself. The speed of developments have become so rapid that organizations are having problems with adopting these new technologies within their business models.
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This gives new ventures the possibility to become early adopters in the market and offer their products and services making use of the latest technology. Less dynamic organizations who suffer to integrate the new technology in a nimble way will face declining markets and loose customers to competitors.
The problem for organizations is that they currently are unable to identify all technological developments, to assess the potential impact of each new technology on their business model and to incorporate the new technology in their business model to their advantage.
1.3 Relevance of study
In the current literature there is already much research conducted in the field of business modeling, innovation, organizational strategy and technology acceptation (Almirall 2010, Armour 2000, Boudreau 2009, Bughin 2013, Chesbrough 2003, Manyika 2013, Pateli 2005, Szajna 1996, Yu 2010). These areas are however not yet been connected from a technology push or business model pull situation.
The classic business-IT alignment model (Henderson, Venkatraman 1993) defines the relationship between the business and IT department in a very holistic way. Originally it depicted that each change to the business-IT alignment equilibrium was business (strategy) initiated and was mandated to the IT strategy and organization. The updated business-IT alignment model has taken cross connections between the four areas in consideration, but still places the IT department as a sub-function of an organization (Henningsson 2007).
This study assumes new technology and technology innovation as an unstoppable and pure push force in the today’s world. Technology has become accessible for anybody, it has become cheap and new innovations are widespread around the globe within seconds. Technology is no longer only a matter of means, but also because it is just possible.
Organizations have to realize this new terms of conditions how technology is being developed, and it is their decision on how they will adopt new technology in their business model to gain or hold their competitive advantage.
But not only adoption of new technology, or changing your business model leads to success. Organizational control and management of IT from an IT-audit perspective remains important and relevant to organizations to ensure the efficient and smooth operation of their IT (or electronic data processing) demands. This is typically designated by confidentiality, integrity and availability (Fijneman 2008).
It is therefore important for organizations to have an integrated approach on the introduction of changes and innovations in their business model, and the level of control and management on
3 in-place systems. From different perspectives (Brynjolfsson 2000, Danneels 2016, Kostoff 2004, Latzer 2009, Roberts 2010), this has already been denoted as a real challenge for organizations and possibly a game changing capability.
This study will explore the state-of-the-art on business model innovation, used business models and the current use of business model innovation in practice. This will be connected to organizational control and management of IT from an IT-audit perspective.
The ability of organizations to adapt their business models with innovations and new technology determines the success of the business model and the success of the organizations. From a shareholder perspective this means that the organizations must make sure that all possibilities to improve the revenues are taken into account.
Abcouwer and Parson (2011) have proposed the adaptive cycle of resilience in their study which describes the relationship between organizational innovation and organizational management. This model (Lemniscaat) will form the basis of this research study, to explore the need for organizational business model innovation to create a competitive advantage with disruptive technology.
1.4 Research design
1.4.1
Objective
The goal of this research will be to explore the state-of-the-art on business model innovation, used business models and the current use of business model innovation in practice. This will be connected to organizational control and management of IT from an IT-audit perspective.
This can then be applied to describe and outline the current challenges which organizations face with the rapid development of new technology and how this will impact their business model. Organizations therefore need a structured and organized process of innovating the business model, by which it makes it a relevant topic for auditors.
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1.4.2
Research question
The main research question of this study is:
What is the state-of-the-art on business model innovation and how can organizations combine innovation with organizational control?
This research question will be answered, making use of these sub research questions:
1 What is disruptive change? 2 What is a business model?
3 What is the impact of disruptive change and technology on a business model? 4 How do organizations innovate their business model?
5 How can the adaptive cycle of resilience by applied by organizations?
6 How do organizations combine innovation of the business model with organizational control?
1.4.3
Research methodology
The goal and research question of this study have as explorative nature, to combine the existing knowledge on business model innovation, and to explore as well how organizations apply this currently.
A tailored research methodology is therefore needed to be able to answer the research question and to achieve the goal of this study.
Based on a literature review the state-of-the-art on business model innovation will be researched, and the outcomes will reviewed with experts on the different areas. This will lead to a verified and motivated state-of-the-art on business model innovation, as well as the integration of the expertise and experience of the interviewees.
The field work of this study will thereafter continue and conclude with a small qualitative case study, consisting of interviews at two different organizations. Although the practical research part will not be exhaustive, the combination of two entirely different organizations gives us the possibility to combine and compare the results to generalize the outcomes.
The setup of this research methodology gives the author the possibility to combine a desk-researched literature framework with a more practical study, which will improve the usability in practice from the results of this study.
To answer the research questions of this study a combination of explorative desk research and case study research will be applied.
The explorative desk research is conducted to describe the state-of-the-art on disruptive change and business models. This will outline the theoretical framework of disruptive change, technology and the impact on business models, and to form an author’s perspective.
5 To form a good viewpoint of the impact on business models and how organizations can use this in their advantage to innovate and create a competitive advantage, a small qualitative case study research is conducted using two organizations who managed to innovate their business model using disruptive technology and create a competitive advantage.
Based on the theoretical framework, a conceptual model (Figure 1) is proposed for applying an adaptive innovation cycle, and used for conducting expert interviews as input to the qualitative case study research. By applying axial coding within the expert interviews, the conceptual model is validated in this study. The output of this is used to update the author’s perspective on the conceptual model, and will be the basis for the interviews in the case study research of two organizations.
The conceptual model acts as a research basis, which shows the relation between a business model innovation concept (the adaptive cycle of resilience), and the relationship it has with the business goal: successfully combine innovation with organizational control. Within this study the potential positive effect on that business goal will be explored in theory and practice.
Figure 1. Conceptual model
Successfully combine business model innovation with organizational control Adaptive Cycle
of Resilience
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1.5 Reading guide
This research starts with exploring the state-of-the-art on disruptive change, dynamics of change, business models, business model innovation and organizational control and IT-audit in chapter 2. This exploration will from the theoretical framework of this study.
Based on the theoretical framework and the optics on this, the study will continue on the practical research part in chapter 3. First, the most important topics will be identified based on the literature framework and these will be in-depth analyzed using expert interviews.
The updated and aligned research topics will be used to conduct two small case studies at KLM Royal Dutch Airlines and Booking.com. In these case studies, interviews will be held and combined with case knowledge and documents a practical assessment is done to analyze on the combination of innovation and organizational control.
This research concludes in chapter 4 with a synthesis on the study, research conclusions, recommendations and limitations of this study.
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2
Theoretical framework
The theoretical framework has the objective to review the state of the art on the topics of this research, and to introduce the concepts on which the practical part of business model innovation will continue.
2.1 Disruptive change
2.1.1
What is disruptive change?
Change is inevitable. Nature describes that existing systems will change (Pascale et al. 2000). Even if organizations don’t have the desire to change, the world around them will change, or will make them change. This sets the scene for not only the relevance of this study, but also the need for organizations to recognize their change appetite and the capability they have to innovate their business model in a controlled way.
Changes can come in many forms. In the context of this study we focus on disruptive, inevitable, changes that impact organizations and the environment in which they reside. A disruptive change is an event that creates the opportunity for enlarging and broadening markets and providing new functionality. From a (digital1) technology perspective disruptive technologies can be referred as a new technology at lower costs and higher ancillary performance (Utterback et al. 2005).
These changes can be created or triggered by different sources such as internal R&D, inventions, technological advancements or architectural innovations such as new combinations of existing elements.
The disruptiveness of a change lies in the fact that existing systems or organizations have now the opportunity to create new possibilities, or that a competing organization has introduced a disruptive business offering that will give them a competitive advantage on other organizations. The disruptiveness is though in the eye of the beholder, and a change only disrupts a market or organization if effective use or exploitation of the change has been materialized (Christensen 1997, Christensen et al. 2000).
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In this study we will make no distinction between digital or non-digital technology and only refer to it as technology. Hinssen (2011) already states that assertions of digital refer to a legacy state of mind.
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In advancement of the results of this study we would already like to pose that most disruptive changes are not being caused by true inventions or technological breakthroughs, but by the capability of organizations to implement (the opportunity created by these changes) in true productive solutions or offerings to customers.
2.1.2
Disruptive technologies as change driver
The opportunities of disruptive technologies are excellently described by Christensen (1997) and summarized by Tellis (2006):
“(1) A new disruptive technology initially underperforms the dominant one along the dimensions mainstream customers in major markets have historically valued. (2) But the disruptive technology has other features a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, or more convenient than those established on the dominant technology. (3) The leading firms’ most profitable customers generally do not want and indeed initially cannot use products based on disruptive technologies. So disruptive technologies are first commercialized in emerging or insignificant markets. Incumbents conclude that investing in disruptive technologies is not a rational financial decision for them. (4) The new disruptive technology steadily improves in performance until it meets the standards of performance demanded by the mainstream market. (5) At that point, the new (disruptive) technology displaces the dominant one and the new entrant displaces the dominant incumbent(s) in the mainstream market.”
In addition to the definition above, we also would like to add that a disruptive change, enabled by technology could for instance also occur if new business opportunities are enabled by a new technological platform, not necessarily replacing an existing technology or platform.
Given the fact that changes and technological advancements are inevitable, there will always be a change driver for organization. An organization must be prepared for these types of change to be able to incubate disruptive technologies in their existing or to be designed business models.
To understand the dynamics of change and how organizations are able to react on it, we will further investigate the dynamics of change, business models and how they can be innovated and we will finalize with indicating the relationship on organizational control and business model innovation.
2.2 Dynamics of change
2.2.1
What are the dynamics of change?
In paragraph 2.1 we have described that changes are always happening and that some changes may even be disruptive. That means, disruptive to an organization. From that perspective it is
9 clear that a changing environment creates a different playing field for organizations. The question is, how are organizations able to respond to those changes, and how can they respond?
The response to a changing playing field cannot be an ad-hoc activity. To deliberately react on changes, organizations need an model driven approach to deal with changing environments. Luckily, there is a vast amount of literature available on this topic, which organizations should be aware of (Abcouwer and Parson 2011, Christensen 1997, Christensen and Overdorf 2000, Gunderson and Holling 2002, Holling 2001, Snowden and Boone 2007).
Change has a certain dynamic, and it is exactly that dynamic that creates opportunities for organizations to either profit from it by creating a competitive advantage or to suffer from it by making the wrong decisions according the change dynamics.
Pascale et al (2000) have defined four principles for living ecosystems, such as an organization: 1 Equilibrium is a precursor to death. When a living system is in a state of equilibrium, it is
less responsive to changes occurring around it. This places it at maximum risk.
2 In the face of threat, or when galvanized by a compelling opportunity, living things move toward the edge of chaos. This condition evokes higher levels of mutation and experimentation, and fresh new solutions are more likely to be found.
3 When this excitation takes place, the components of living systems self-organize and new forms and repertoires emerge from the turmoil.
4 Living systems cannot be directed along a linear path. Unforeseen consequences are inevitable. The challenge is to disturb them in a manner that approximates the desired outcome.
These principles are in basic the dynamics of change that will happen. It is up to an organization to decide how they will respond on change, and if they are able to deal with the increasing complexity. The principles are applicable for all living ecosystems, including ecosystems in which organizations reside. The organization is on itself a living system, as it has defined goals, processes, in- and outputs and concepts which are organized in a structured way. Depending on the context and environment in which an organization resides, one or more principles are applicable and leaders should act accordingly.
Snowden and Boone (2007) have developed the Cynefin Framework (Figure 2), that can help leaders to determine what their prevailing context is so that can make the right decisions.
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Figure 2 - The Cynefin framework (adopted from Snowden and Boone 2007)
The Cynefin framework defines five states in which an organization (or living system) can reside. On the ordered side, organizations have a simple or complicated context. Both allow cause and effect decisions as the nature of the context is ordered. In this situation organizations can clearly oversee their environment and in the simple stadium leaders can easily manage and delegate responsibilities. In the complicated state, the environment is still ordered, but it has become more complicated to make the right decisions. Testing and analyzing results have become powerful tools to create a competitive advantage for leaders.
On the unordered side, organizations have a complex or chaotic context. In the complex case the environment has become unpredictable and is in constant flux. No one has the clear answers and they are also not available. The right way for leaders is to start probing solutions, and react according the responses they receive. Though this situation is complex, an increase on trying to order the situation, by for instance install overly controlled mechanisms, will fail. In this case experiments and probing is the right scenario. Given the current rapid speed of changes it is almost safe to state that many organizations are (at least) in the complex phase.
If environments even change towards a chaotic state, all known cause and effect relations are not present anymore and the only correct response a leader can take in this situation is by taking action. Take action and see what the responses are. Existing frameworks, controls or processes have become useless in this situation, as there are no known responses to this situations. Snowden and Boone (2007) refer to the September 2001 terrorist attack on New York, which is a case of chaotic context.
The final state or environment concerns the disordered state, of which most organizations often are not aware they are in this type of state. Different changes occur and different reactions are required. It is therefore required to break down the different elements of the situation and assign
11 them to one of the four states (simple, complicated, complex or chaotic), and respond in that state accordingly.
2.2.2
The Adaptive Cycle of Resilience
Given the dynamics of change, we have described the states in which organization can reside, and how they should react, based on the nature of the invoked change. However, it is not only the environment that is changing, but also the organizational developments in and outside of an organization makes that an organization is changing in states (Abcouwer and Parson 2011, Gunderson et al. 2002).
The way organizations are reacting on their (changing) environment and the situation in which they reside is not random, as it follows a specific direction, shaped as lemniscate, which is also indicated as the adaptive cycle in literature (Abcouwer and Parson 2011, Gunderson et al. 2002). Figure 3 shows the adaptive cycle of resilience, as proposed by Abcouwer and Parson (2011).
Figure 3 - The adaptive cycle of resilience (Abcouwer and Parson 2011) (Dutch)
In the normal (or starting) situations organizations reside in the bottom left corner where there is an equilibrium. However, as Pascale et al. (2000) have described, in this situation an organization is doomed, unless the organization itself or the environment changes and the organization is able to respond accordingly. The next phase (top right) is where the organization arrives after the equilibrium has been disturbed. Management should acknowledge that the current way of working does not suffice anymore with the organizational challenges. The way that should suffice is unknown.
From starting exploring new combinations and business models, organizations can find their way to exploit the situation and create a new competitive advantage, after which the organization will return to the stable equilibrium.
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Different states require different responses from management. Innovation is not a proven path and no one knows the desired or possible outcomes. Organizations are in a state of constantly avoiding accidents to happen, and have to react on changing environments.
Innovation is an unordered process which requires a probing to seek for potential solutions to enable the new sought equilibrium.
We see that there is a logic in the change we need to understand. Changes relevant for organizations appear to have a cyclic process. To leverage on the potential of the upside of the change an organization needs to grasp the change on its upswing (or top level plateau) and establish a new equilibrium. From this position the organization should move forward and try to organize its business (model) around it.
2.3 Business models
2.3.1
What is a business model?
The term business model is itself a model that describes a business. However, different authors (Boulton 2000, Doganova 2009, Osterwalder 2004, Osterwalder and Pigneur 2010, Chesbrough 2010, Chesbrough and Rosenbloom 2002) on this subject have stated that although it is a general accepted phrase, the use of it is a bit more widespread. The definition of a business model is according literature twofold:
A business model represents an organization and its competitive concepts;
A business model is a method for designing an organization and its competitive concepts. Osterwalder and Pigneur describe a business model as “the rationale of how an organization creates, delivers, and captures value” (Osterwalder and Pigneur 2010), which puts the dispute on the term business model whether it is a representation of a method on the side, and describes as the rationale of an organization.
A more complete overview of business model definition is adopted from Zott et al (2011), and updated to the state of the art on business models:
Author(s), year Definition Papers citing the definition
Timmers, 1998 The business model is “an architecture of the product, service and information flows, including a description of the various business actors and their roles; a description of the potential benefits for the various business actors; a description of the sources of revenues” (p. 2).
Hedman & Kalling, 2003
Amit & Zott, 2001;
The business model depicts “the content, structure, and governance of transactions designed so as to create value through the exploitation of business
Hedman & Kalling, 2003; Morris, Schindehutte, & Allen, 2005; Zott &
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Zott & Amit, 2010
opportunities” (2001: 511). Based on the fact that transactions connect activities, the authors further evolved this definition to conceptualize a firm’s business model as “a system of interdependent activities that transcends the focal firm and spans its boundaries” (2010: 216).
Amit, 2007, 2008; Santos, Spector, & Van Der Heyden, 2009; Bock, Opsahl, & George, 2010 Chesbrough &
Rosenbloom, 2002
The business model is “the heuristic logic that connects technical potential with the realization of economic value” (p. 529).
Chesbrough, Ahern, Finn, & Guerraz, 2006; Chesbrough, 2007a, 2007b; Teece, Magretta, 2002 Business models are “stories that explain how
enterprises work. A good business model answers Peter Drucker’s age old questions: Who is the customer? And what does the customer value? It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?” (p. 4).
Seddon, Lewis, Freeman, & Shanks, 2004; Ojala & Tyrväinene, 2006; Demil & Lecocq, 2010
Morris et al., 2005 A business model is a “concise representation of how an interrelated set of decision variables in the areas of venture strategy, architecture, and economics are addressed to create sustainable competitive advantage in defined markets” (p. 727). It has six fundamental components: Value
proposition, customer, internal
processes/competencies, external positioning, economic model, and personal/investor factors.
Calia, Guerrini, & Moura, 2007
Johnson, Christensen, & Kagermann, 2008
Business models “consist of four interlocking elements, that, taken together, create and deliver value” (p. 52).
These are customer value proposition, profit formula, key resources, and key processes.
Johnson & Suskewicz, 2009
Casadesus-Masanell & Ricart, 2010
“A business model is . . . a reflection of the firm’s realized strategy” (p. 195).
Hurt, 2008; Baden-Fuller & Morgan, 2010 Teece, 2010 “A business model articulates the logic, the data
and other evidence that support a value proposition for the customer, and a viable structure of revenues and costs for the enterprise delivering that value” (p. 179).
Gambardella & McGahan, 2010
Osterwalder, Pigneur 2010
“the rationale of how an organization creates, delivers, and captures value”
Osterwalder, Pigneur 2010
Table 1 - Business Model Definitions (adopted and updated from Zott et al 2011)
2.3.2
Available and used business models
Different business models are available, all which their own specific objective and usage. This is not very strange, as that we see from literature there are in fact three different approaches, or categories, in which available business models approaches can be put:
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1 Conceptual Business Models
The first category: Conceptual business models are models that can capture the organizational concept of its business, with all competitive concepts (Timmers 1998, Magretta 2002, Chesbrough and Rosenbloom 2002, Osterwalder, 2004).
2 Meta-Business Models
The second category: Meta-business models contain an industry specific common language that describe the taxonomy of a system (Timmers 1998, Weil and Vitale 2001).
3 Business Model Examples
The third category: Business model examples are instances of actual organizations of their business model and describes them in organizational detail, and not in concepts (Chesbrough and Rosenbloom 2002)
These three categories are in general the most applied business models. They serve however each a different goal. The first category is aiming to deliver comprehensive guidance on the design and representation of organizations, where category two delivers a taxonomy to compare and sketch industry specific business models on a meta-level. The third category finally is merely a method, but is the actual depiction of a specific company like Netflix or Shell to a certain degree of organizational detail.
The business model on itself is very applicable for organizations to continuously review and update their combination of products, processes, systems, risk, etc. From a research perspective the business model can be used as a conceptual model but also as an architecture framework to use in alignment with all involved stakeholders and departments.
To further analyze the application of a business model with organizational control, we need to identify one business model that currently is acknowledged as the industry standard, and will be used in this study.
2.3.3
Business model canvas
The availability of business models is widespread and different types of business models are used for different purposes. The definition of Osterwalder and Pigneur for a business model (the rationale of how an organization creates, delivers, and captures value) is the most appropriate approach on business models for the goal of this research study. Continuing in this research we will therefore use the business model canvas (Figure 4 – The Business Model Canvas (Osterwalder and Pigneur 2010).
The business model canvas is a widely accepted and used model for designing the unique characteristics of a business, but also representing the competitive elements. The approach is
15 used by many leading organizations such as Microsoft, MasterCard, Michelin, Xerox and NASA (business model generation 2015).
The business model canvas is the most prominent and popular tool used for modelling organizations and used to come to a practical approach for business modelling (De Reuver et al 2013).
Based on the widespread usage and being the most prominent used business modeler, we therefor will use the business model canvas in the practical part of this research.
Figure 4 – The Business Model Canvas (Osterwalder and Pigneur 2010)
The business model canvas consists of nine building blocks which describe the characteristics of a specific organization:
1 Customer Segments
An organization serves on of several Customer Segments
2 Value Propositions
An organization seeks to solve customer problems and satisfy customer needs with value propositions
3 Channels
Value propositions are delivered to customers through communication, distribution and sales channels
4 Customer Relationships
Customer Relationships are established and maintained with each customer segment
5 Revenue Streams
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6 Key Resources
Key resources are the assets required to offer and deliver the previously described elements…
7 Key Activities
…by performing a number of key activities (to enable the unique value proposition)
8 Key Partnerships
Some activities are outsourced and some resources are acquired outside the organization
9 Cost Structures
The business model elements result in the cost structure (of the organization)
2.4 Business model innovation
2.4.1
Innovate your business model
Now we understand what business models are, we need to further explore the usage of business models in changing environments. Business models are a pragmatic approach for organizations to design the concept of the business, including all aspects. However, business models are not a static given as the world is changing. Almost continuous innovation of a business model is required.
Every organization has an implicit business model, that details their capabilities, revenues, clients, and so on. This accounts for existing corporate organizations, but also for start-up companies (Sako 2012, Teece 2010, Yip 2004).
As changing environments and introduction of disruptive technologies create the opportunity for organizations to create a competitive advantage, they need to take the changing environment and technology into account in their business model and convert this to a unique value proposition that will attract customers and realize revenues (Pascale et al 2000, Sako 2012, Teece 2010).
The innovation of a business model can include different types of innovation. In theory, we have identified three types of business model innovation (Pascale et al 2000, Sako 2012):
1 Incremental change – Incremental change refers to the change of a business model that gradually increases the value of the business model to a customer. Examples are for instance the including a new channel (e.g. Snapchat) as customer service.
2 Disruptive change – A disruptive change refers to the introduction of a new opportunity that can disrupt the existing market. For instance the widespread availability of high speed wireless networks and affordable smartphones, on which organizations like Uber have based their business model and disrupts the existing taxi market.
3 Radical change (or redesign) – A radical change refers to a game-changing impact on the business model that disrupts the existing market, where often competitors are placed on
17 significant arrearage. An example is for instance Netflix launching its online movie streaming product.
2.4.2
How to deal with disruptive technologies in business model
innovation?
The ability to incubate disruptive technology to innovate your business model is very important for organizations. Failing to do so, can even lead to massive loss of market share, as Lucas et al. (2009) haven pointed out in the case of Kodak, who were unable to make the transition to digital photography.
The continuous adaptation of a business model, by applying business model innovation seems therefor extremely relevant. Many organizations have shown what can happen if they forget or choose to not adapt their purpose and business model in alignment with the market demands. Disruptive technologies can act as a trigger in the process, as we have witnessed in the case of upcoming new companies such as Uber, but as well with existing organizations who have successfully adapted their business model based on the latest available technology such as in the case of Netflix, who switched from postal DVD delivery to an internet based streaming platform.
As Boulton (2000) points out, no business model can be regarded as safe, as competitors are always researching new combinations to create a competitive advantage on your business model, or a disruptive change will put your organization in unordered situation (Snowden and Boone 2007).
Organizations should therefore accept the principles of Pascale et al. (2000) and innovate their business model by applying the appropriate response depending on the situation they reside in.
Based on experts opinions (Boulton 2000 and Pascale et al. 2000), organizations must be aware of which situation they currently reside in to make best decision how they should proceed in returning to a simple or complicated situation.
In addition to that, we would like to stress that not only the current situation should be a starting point, but as well taking into account the business environment including competitors, the market demands, the organizational innovation capability and the available resources. RIM (Research In Motion), the former name of BlackBerry has illustrated this situation quite good. Sales figures were dropping quarter after quarter and the introduction of new smartphones wasn’t enough to change the tide for BlackBerry. Despite their enormous deep pockets and efforts they were unable to battle the upcoming market share of Apple and Android (e.g. Samsung, LG). Clearly they applied innovation only on their products, where the business model was left intact. As their business model was primarily based on the BlackBerry Corporate platform, with significant security advantages, this business model was unsuited for the consumer market.
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The sole adoption of new technology is clearly not always a straight market trigger to use for innovation, but it should be incorporated in the wide update of the business model, using business model innovation.
2.5 Innovation and control
2.5.1
Organizational control
Organizational control is the comprehensive process of managing, maintaining and creating authority of and over an organization. This includes managing the business from a shareholder’s perspective and realizing the short and long term goals of an organization (Ouchi 1977).
The shareholder’s perspective is in most cases the management of the value cycle (‘waardekringloopmodel’) of an organization, which includes the accountability of revenue and the accuracy of costs (Starreveld et al 2002).
Controlling an organization is from that perspective initially creating the organizational control, and after that maintaining the organization as is, and pursue its goals. From a more control perspective, this focuses on revenues and costs and maintaining these according the organizational goals.
The classical approach of organizational control is therefore maintaining the current status, and run the organization as embodied in the installed control measures and frameworks, which together have the goal to be able to check the organizational performance using key controls in business functions, such as IT (general or application IT controls), finance (finance and accounting controls) and business specific controls (internal or administrative controls) (Fijneman et al 2008).
Corporate scandals in the early 2000’s and the 2008 global economic crisis have put more emphasize on organizational control, as it turned out that current controls did not prevent occurred fraud cases, scandals, or even financial institutions filing for bankruptcy, such as Lehman Brothers in September 2008.
To prevent more these kind of incidents to happen shareholders and authorities have increased their level of control on organizations, which may decrease the risk of history repeating itself. Fijneman et al have defined a (organization) risk “as a function of the probability of the occurrence of a negative event and the resulting loss” (Fijneman et al 2008). Consequently the define the a project risk, a risk that “form a threat to the successful outcome of a project, or risks that affect activities within a project”.
Organizations have a commitment towards stakeholders to ensure the operation and revenues. To enable this from a technology perspective, the confidentiality, integrity and availability are
19 of utmost importance. A breach or flaw in any of these will possibly trigger loss or revenue/customers, reputation damage or decline the success of the business model.
The combination of controlled innovation is the key. No innovation will eventually lead to a declining business model, but innovation without control could lead to an uncontrolled situation.
Control as a steering mechanism is furthermore used as to increase the adoption intentions and implementation of innovations (Unsworth 2012). Innovation without control is as the top management of an organization is steering the organization blindfolded. The level and formality of control, and required to be applied in an innovation environment depends on a number of variables that can be embedded in control systems (Simons 1995).
The organizational dynamics require that the appropriate balance in an organization is maintained using the control systems to focus on value-adding innovation processes and measuring the outputs (results). The feedback mechanism on these processes allow top management to steer and adjust the installed control systems (and processes) to optimize the innovation results, leading to emerging business opportunities (Simons 1995).
From this perspective the theoretical view but also the practical experience can help to answer our research question, how that combination can be achieved.
As part of the practical part of this study we will research the current application of controls in two organizations and conclude if the increased demand for organizational control have lowered the risks for the specific organization.
2.5.2
Business model innovation from a control perspective
From a business model innovation perspective this introduces a possible contradiction. From the one hand do organizations need to constantly innovate their business model (including revenues and costs building blocks), and on the other hand are organizations focused on maintaining organizational control and implement control frameworks to maintain the current status.
But how are business model changes aligned with organizational control frameworks? Applying more control usually results in a change freeze of the organization, in which it resides in a static state, not being able to respond to changes in the environment.
Therefore it is required to enable the alignment of the control framework with the almost dynamic virtue of the business model of an organization.
Most control frameworks are designed to preserve the current state of the organization. This has explainable justifications to acquire a stable scenario for an organization and its shareholders (Simons 1995).
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Maintaining the current state is exactly the opposite of an adaptive business model in which the organization constantly adapts its business model to the changing environment.
The last decades regulatory changes have led to an increased amount of controls within organizations, which has also shown that increased control is by no means a guarantee for a future-proof business model.
However, control does not necessarily eradicates innovation. Control frameworks should be aligned with the required innovation to reach the future-state of a business model. Effective leaders of an organization therefore know clearly what type of action is required in which situation (Snowden and Boone 2007), as we have described in paragraph 2.2 Dynamics of change.
2.6 Optics on the theoretical framework
2.6.1
Integration of the literature review
As we have reviewed the state-of-the-art on a number of topics in the literature framework, we can integrate the relevant topics and outcomes.
The world has become faster, it changes faster and the introduction of changes are more disruptive and create much more possibilities. It is perhaps not the significance of technology that enables the impact of innovation or changes, but the combinations that are enabled by applying technology in a new does. Smartphones, high speed mobile data networks (e.g. 4G and 4G+) and open platforms offer a powerful basis for new combinations of products and services. Established organizations face these changes with and the need for innovation, in parallel with their task to upkeep legacy systems, in a heavily controlled environment.
Recent major events such as the credit crisis, global environment catastrophes and globalization of organizations have triggered the demand for more control and management of organizations. This goes all the way to the control and management of IT, and impacts directly the possibility to change business models and for instance websites overnight. Much more sophisticated testing and change management processes are necessary to approve changes, or to structure change projects and programs within organizations.
This combination of the need for change and innovation seems to be opposite towards the increase of control and management of organizations and IT. This has triggered the use of business models, that allow the conceptual understanding of how a business operates and what makes it (or doesn’t) it successful.
A business model is therefor used as an architectural overview of the core elements of an organization. It can directly be used to see the impact of changes and innovations, but also identify where innovation is required. From a control perspective it enables to identify the organizational risks and from an IT-audit perspective to identify the relevant application and
21 general IT controls that will be impacted by the change. The relevant IT controls can then be updated to represent the current situation and remain their effectiveness.
The most important findings in the theoretical framework are based on a number of topics which are relevant for organizations be able to change their business model. This starts with identifying a disruptive change or technology, and assessing what the potential opportunity or impact to the business model can be.
Triggers for innovating the business can reside in different sources, and organizations need to clarify for themselves what tangible sources are. As a business model is not a static given context, organizations should approach this in a process methodology, to constantly adapt to their surroundings in a cycle of resilience.
Also the internal control mechanisms and frameworks of an organization need to be aligned with the required innovation processes, to support and facilitate the innovation from a risk management’s perspective.
Key lessons are:
Design your business model using a solid business model approach such as the business model canvas;
Designing your business model is not an one-off exercise, but an ongoing activity to maintain a competitive and resilient business model
Organizations that have shown that good use of business model innovation results in a forward looking and future proofed organization;
And also organizations that have neglected to innovate their business model and their changing surroundings have caught up on them, pushing their business model out of business.
Integrate control and management of IT with business model innovation. The change or innovation can be identified using the business model canvas and organizational controls or IT (application or general IT) controls can be aligned to reflect the new situation and remain effective if properly tested.
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2.6.2
Research structure
We have structured the outcome of the literature review further into a number of topics which will form the structure of the practical research part of this study. This structure enables us to align expert interviews to cover all topics and to structure the outcomes of the interviews with the relevant topics to be able to answer the research questions.
Based on the literature review and the key lessons, we conclude that the process of business model innovation, and recognizing it as an important activity to maintain the added value of a specific business model are vital.
That leads to the first two topics that we will apply in this research. The notion of change in the environment of an organization and the new technologies that are introduced can be disruptive of nature to a business (1). The question in that scenario is what the potential impact is on an existing business model or the opportunities that arise for a new business model (2).
Assessing the impact of innovations and new technology is not an easy task. It is very hard to predict what the next big hit will be in any type of market. However, certain elements are there that can trigger process of innovation and innovation of a business model. These triggers can be external or internal. Depending on the situation an organization resides in it may have the luxury to be in the position of leading the innovation from a simple or complicated situation, in which it has far more possibilities to use innovation to achieve a competitive advantage rather than from a complex or chaotic situation (4). Not ignoring the trigger and taking up the challenge to innovate a business model is the first step in the actual process (3).
There are different business model methodologies available for business model innovation, of which the business model canvas has shown to be the current prominent used methodology (5). Applying a well thought through process increases the chances of developing a good business model, and place it in the right context besides the current ongoing operations.
From the theory of the adaptive cycle of resilience and application (6) we have learned that innovation is a continuous process in which the known and unknown are phases in which an organization is supposed to give appropriate response to the challenges at that time. Understanding it and applying it in the right setting is key. The right setting is important to pursue business model innovation, rather than invention. This implies that innovation cannot go without control. The right risk measures and control systems (7) must be in place to nurture but also to leverage the output of the process to top management in the form of feedback to be able to steer for results . Put in the right context and an appropriate balance between innovation and control will lead to a solid business model innovation process (8).
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Topic
1. Disruptive change and technology
2. Impact of change on organizations and their business model 3. Business model innovation
4. Triggers for innovation
5. Business model process design
6. Adaptive cycle of resilience and application 7. Internal control measures / frameworks 8. Innovation and control
Table 2 - Structured topics for practical study
The theoretical framework is the groundwork for our research in practice on business model innovation. Our findings in the theoretical part will be verified using independent expert interviews. After the verification of what we have aligned with experts, we will assess the current proceedings in the case study research.
For the case study two cases will be used to cover different aspects of the research questions, the first case (Booking.com) focuses on the alignment with internal control and risk management frameworks, where the second case (KLM Royal Dutch Airlines) focuses on business model innovation as an organizational process.
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3
Business model innovation in
practice
3.1 Operationalizing the theoretical framework
The theoretical framework has given us a solid foundation on disruptive change, the state-of-the-art of business model innovation and the relation of innovation and control in organizations. To research how organizations deal with disruptive change and innovate their business model, we have operationalized the key aspects of the theoretical framework into a structured interview protocol. By applying a structured interview protocol we provide the basis for conducting the qualitative research in practice.
The qualitative research in practice includes two areas. We start with five interviews with independent experts in the field of this study. The goal of the expert interviews is to verify and improve our theoretical findings, based on the literature study in chapter 2. After the expert interviews we continue by conducting two case studies in practice, at organizations who are in the midst of disruptive changes and where new business models regularly enter the industry in which they reside. The cases studies will be used to assess the applicability of the findings in the theoretical framework and to integrate actual qualitative findings from the real world into the outcome of this research.
3.1.1
Interview protocol
The interview protocol will be applied in all interviews and will guarantee the all expert interviews are conducted using the same questions. This will enable the cross-validity and comparison of the interview results. For the case study interviews a separate interview protocol will be used, which is more specific practical environment.
The questions in the interview protocol are based on the identified topics in the theoretical framework, to be sure to cover all relevant areas and to be able to answer our research questions. After each question the corresponding codes are listed to illustrate the coverage of the interview questions on the research topics (this is explained in more detail in paragraph 3.1.2).
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Topic Code
Disruptive change and technology DCT
Impact of change on organizations and their business model ICB
Business model innovation BMI
Triggers for innovation TIN
Business model process design BMP
Adaptive cycle of resilience and application ACR Internal control measures / frameworks CMF
Innovation and control IC
Table 3 - Structured topics for practical study Interview questions expert interviews
Introduction and context description
1 What is your perception of the current pace of introduction of disruptive changes? (DCT, TIN)
2 Why is the speed of introduction of disruptive changes and technology increasing? (DCT, ICB, TIN)
3 What will this do with existing and to be founded organizations? (DCT, ICB, BMI) 4 What is, according to your knowledge and experience, the impact of disruptive change and
technology on existing business models? And what is their response? (ICB, TIN)
5 We all know the examples around us of winning and losing organizations when it comes to innovation. What is according you the reason behind this? (ICB, BMI)
6 Why do organization innovate their business model? (ICB, BMI, TIN, BMP) 7 What are triggers for organizations to innovate their business model? (TIN) 8 How come that some organizations spot the trigger and others don’t? (TIN) 9 Which business model process design do they use? (BMI, BMP)
10 What differentiates organizations who successfully innovate their business model from others? (BMI, BMP, ACR)
11 Can you clarify your knowledge and application of business models? (BMI) 12 Are you familiar with the ‘adaptive cycle of resilience’? (BMP, ACR)
13 How can organizations apply the adaptive cycle of resilience to innovate their business model? (ACR)
14 How will this work in practice? (BMP, ACR, IC)
15 Do you know examples of organizations who operate this way? (ACR)
16 Can innovation be combined with existing internal control measures/frameworks, which focus maintaining the status quo? And how? (BMI, BMP, CMF, IC)
17 Are innovation and internal control measures/frameworks a contradiction? (CMF, IC) 18 Where can innovation and internal control measures/frameworks be changed to become
mutual beneficial? (BMI, CMF, IC)
19 How can the combination facilitate organizations in innovating their business model? (BMI, ACR, CMF, IC)
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Interview questions case study interviews
Introduction and context description
1 What is your perception of the current pace of introduction of disruptive changes? (DCT, TIN)
2 Why is the speed of introduction of disruptive changes and technology increasing? (DCT, ICB, TIN)
3 What will this do with your organization? (DCT, ICB, BMI)
4 What is, according to your knowledge and experience, the impact of disruptive change and technology on the currently used business models of your organization? How do you respond? (ICB, TIN)
5 Why does your organization innovate their business model? (ICB, BMI) 6 What are triggers you witness to innovate your business model? (TIN) 7 How does your organization innovate their business model? (BMI, BMP) 8 How come that some organizations spot the trigger and others don’t? (TIN) 9 Which business model process design do you use? (BMI, BMP)
10 What differentiates organizations who successfully innovate their business model from others? (BMI, BMP, ACR)
11 Can you clarify your knowledge and application of business models? (BMI) 12 Are you familiar with the ‘adaptive cycle of resilience’? (BMP, ACR)
13 How could your organization apply the adaptive cycle of resilience to innovate their business model? (ACR)
14 How will this work in practice? (BMP, ACR, IC)
15 Can innovation be combined with existing internal control measures/frameworks, which focus maintaining the status quo? And how? (BMI, BMP, CMF, IC)
16 Are innovation and internal control measures / frameworks a contradiction? (CMF, IC) 17 How does your organization combine innovation and internal control measures /
frameworks? (CMF, IC)
18 Where can innovation and internal control measures/frameworks be changed to become mutual beneficial? (BMI, CMF, IC)
19 How can the combination facilitate your organization in innovating their business model? (BMI, ACR, CMF, IC)
3.1.2
Coding scheme
During the interviews a coding scheme will be applied which structures the key elements of the research during the interview and to enhance the usability of the results. The outcomes of all interviews will be coded using the scheme and integrated in the practical results of this study. Based on the outcome of our optics on the theoretical framework in paragraph 2.6 a coding scheme has been setup to facilitate the interviews and case studies.
The most important findings in the theoretical framework are based on a number of topics which are relevant for organizations be able to change their business model. This starts with
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identifying a disruptive change or technology, and assessing what the potential opportunity or impact to the business model can be.
Triggers for innovating the business can reside in different sources, and organizations need to clarify for themselves what tangible sources are. As a business model is not a static given context, organizations should approach this in a process methodology, to constantly adapt to their surroundings in a cycle of resilience.
Also the internal control mechanisms and frameworks of an organization need to be aligned with the required innovation processes, to support and facilitate the innovation from a risk management’s perspective.
Coding scheme expert interviews and case study interviews
Our synthesis on the theoretical framework leads to the following coding scheme for the interviews:
Topic of question Code
Disruptive change and technology DCT
Impact of change on organizations and their business model ICB
Business model innovation BMI
Triggers for innovation TIN
Business model process design BMP
Adaptive cycle of resilience and application ACR Internal control measures / frameworks CMF
Innovation and control IC
Table 4 - Coding scheme expert interviews
The coding scheme enables us to swiftly identify the relevant outcomes of the interviews with the identified topics of this research. During the interviews and after processing the full transcripts of the interviews (which are included in the appendix of this study), the codes will be placed in line of the text, to be able to combine and integrate the outcomes of the different interviews. This way, the outcomes of the different interviews can be combined to a single vision which has a greater general applicability for this research.
