University of Amsterdam, Amsterdam Business school 1 THESIS: DIGITAL INNOVATION OF BUSINESS MODELS
All Innovative ideas start out as half-baked propositions.
— Clayton M. Christensen, Michael E. Raynor, and Scott D. Anthony (2003)
Name: Jetske Jonker Student NR: 10218424 Date: 30-06-2017
Version: Thesis Jetske Jonker Vfinal Faculty: Economics and Business
Program: Executive Programme in Management Studies Track: Strategy
Institution: Amsterdam Business School Supervisor: Dhr. S. Kortmann
Linking Competitive Intensity, Entrepreneurial Proclivity and the Strategic Dilemma of Ambidextrous Digital Innovation of Digital Business Models: the Mediating role of Innovation Orientation and Moderating effect of Technology Uncertainty
University of Amsterdam, Amsterdam Business school 2 STATEMENT OF ORGINALITY
This document is written by Jetske Jonker, who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document are original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
University of Amsterdam, Amsterdam Business school 3 TABLE OF CONTENT
ABSTRACT ... 5
INTRODUCTION ... 7
TOPIC AND RESEARCH QUESTION ... 7
LITERATURE REVIEW ... 12
INTRODUCTION ... 12
CONTINGENCY THEORY ... 12
CONTINGENCY THEORY & DYNAMIC CAPABILITY VIEW ... 16
DYNAMIC CAPABILITY VIEW ... 17
INNOVATION OF DIGITAL BUSINESS MODELS ... 20
AMBIDEXTROUS INNOVATION ... 22
CONSTRUCTS AND HYPOTHESES ... 25
INTRODUCTION ... 25
AMBIDEXTROUS INNOVATION OF DIGITAL BUSINESS MODELS ... 25
ENTREPRENEURIAL PROCLIVITY ... 27
COMPETITIVE INTENSITY ... 29
INNOVATION ORIENTATION ... 30
TECHNOLOGY UNCERTAINTY ... 32
CONCEPTUAL MODEL AND HYPOTHESES ... 35
METHODOLOGY ... 37
INTRODUCTION ... 37
RESEARCH AND SURVEY DESIGN ... 37
DATA COLLECTION AND SAMPLE ... 38
TYPE OF SURVEY AND CONSTRUCTS ... 39
CONTROL VARIABLES ... 40
DATA ANALYSIS ... 41
DESCRIPTIVE STATISTICS ... 42
STRUCTURAL EQUATION MODELLING ... 44
RELIABILITY AND VALIDITY... 46
RESULTS ... 50
INTRODUCTION ... 50
CORRELATION ... 50
HYPOTHESES TESTING... 53
DISCUSSION ... 58
University of Amsterdam, Amsterdam Business school 4 THESIS IMPLICATIONS ... 66 CONCLUSION ... 68 REFERENCE LIST ... 69 APPENDICES ... 81 APPENDIX A ... 81 APPENDIX B ... 81 APPENDIX C ... 83
University of Amsterdam, Amsterdam Business school 5 ABSTRACT
The need for innovation of digital business models arises quickly, as the world around us is digitising and “customers are increasingly demanding to communicate with companies anywhere and anytime” (Weill & Woerner, 2013, p. 71). In order not to lose any customers and business, organisations are pressed to innovate new and current digital business models at the same time to satisfy different customers groups (Weill & Woerner, 2013). This paper builds on contingency theory, to explain the fit between three key aspects of contingency theory: environmental aspects, in this study referred to as: “technology uncertainty” and “competitive intensity”, the structure of the organisation, in this study referred to as: “entrepreneurial proclivity” and “innovation orientation”, and the process of the firm, in this study referred to as: “ambidextrous innovation of digital business models (DBM)”. Next to that, elements of the dynamic capability view are used to explain various elements of this thesis. The two theories are complementary, as contingency theory explains the need for fit between environment and the firm, and proposes different models for organisational design (Donaldson, 2001), whereas the dynamic capability view dives a layer deeper on how to responds to ever changing environments, through dynamic capabilities and establish competitive advantage (Helfat, Finkelstein, Mitchell, Peteraf, Singh, Teece & Winter, 2009). While both theories explain competitive advantage, this will not be the focus of this research. I aim, with this study, to understand fit, therefore contingency theory is the main theory used in this research. The dynamic capability view is solely used to understand the internal characteristics for creating this fit. In integrating dynamic capabilities and contingent perspectives, I accept the view that the general business environment influences a firm’s strategy, however it does not determine it, therefore I am avoiding criticism on contingency literature that is seen as deterministic (Aragón-Correa & Sharma, 2003), and dynamic
University of Amsterdam, Amsterdam Business school 6 capabilities help the organisation to execute the strategy and enhances the firm’s ability to create fit with the environment.
A total of 99 respondents have filled out an online survey in the Netherlands and partial least square structural equation modelling (PLS-SEM) is used to test the relationships between the constructs. Results show that both entrepreneurial proclivity and competitive intensity stimulate innovation orientation. Both innovation orientation and entrepreneurial proclivity are vital for a firm to be able to generate ambidextrous innovation of DBM, while technology uncertainty weakens the relationship between innovation orientation and ambidextrous innovation of DBM. Therefore this research shows how certain environmental aspects stimulate innovation, which leads ultimately to ambidextrous innovation of DBM. Furthermore it shows how to find fit between the organisational context (process and environment) and the structure of the organisation.
University of Amsterdam, Amsterdam Business school 7 INTRODUCTION
TOPIC AND RESEARCH QUESTION
Rapid changes in digital technologies and their application are causing major changes for individuals, organisations and industries. The internet and big data are playing an important role in radically impacting our personal and professional lives. These recent changes also challenge us, as individuals and companies, on how we live, work, communicate, learn and collaborate. Therefore, one of the buzz words of these decennia in business is: digital innovation. The importance of this topic is growing, as the world is digitalising and digital business model innovation is the way to connect digital technology with unfulfilled customer’s needs, through identification and exploitation of gaps in the industry positioning (Osiyevskyy & Dewald, 2015). Today, it’s not the questions: will digital innovation happen, but when will it happen? As part of this digital innovation, new business models are emerging and established models are revised to adjust to fit with the new environment. Changes to business models are effecting all sorts of industries, from established industries, such as: manufacturing and transport, to new converged industries, such as: media and communications. According to Archibugi & Iammarino (2002, p. 1) “globalisation of innovation is the zip between […] increased international integration of economic activities and the raising importance of knowledge in economic processes”.
The difficulty with innovation is to find a way to build companies, in which innovation is both radical and systematic (Assink, 2006; Hamel, 2002). Previous studies acknowledge that innovation is a key factor for a company to survive and provides the possibility to grow in the long run (Assink, 2006). According to Christensen, Raynor, & Anthony (2003), only a few companies really understand what is necessary for successful innovation, despite all successful examples of implementation. To further complicate
University of Amsterdam, Amsterdam Business school 8 innovation, it also increases uncertainty and market pressure, hence there are only a few companies who are successful in innovation and can deal with this increased uncertainty and external pressure (Assink, 2006). Yet, in a quickly changing environment and uncertain world, innovation is the key to survive, create and sustain competitive advantage (Assink, 2006). According to Markides (1999) many companies are not organised or ready to give new ideas a chance. They struggle to recognise trend breaking points in the market, as they are late adopters and abandon an innovation when it shows first sign of trouble (Markide, 1999). Most businesses find it difficult to adapt quickly to changing market circumstances, as they do not effectively manage the organisational transition from the old to the new and they cannot cause a market change in the first place, as they lack the necessary core competencies to take advantage of the new innovation or build it themselves (Markide, 1999).
In these high velocity markets of today, where change is inevitability coming, “the ability to renew competencies to accommodate the changing business environment is very important” Assink (2006, p. 219). These abilities are commonly referred to as “dynamic capabilities” (Teece, Pisano & Shuen, 1997). This is supported by Jansen, Tempelaar, van den Bosch & Volberda: “achieving long-term success requires dynamic capability, enabling firms to satisfy current demands while simultaneously being prepared for tomorrow’ s developments, therefore you need to be ambidextrous to survive” (2009, p. 797). This implies that firms are pressed to be both big and small, efficient and effective, and to operate in multiple time frames, as well as to be prospectors and analysers (Smith & Tushman, 2005). A firm needs to innovate and optimize at the same time, which explains the tension between exploring and exploiting, as innovation (exploration) and renovation (exploitation) are both necessary for a firm to exist (Kashani & Miller, 2000). This is a common dilemma faced by strategic management in established industries “whether to explore new digital business models, or exploit existing models that provided past success” Osiyevskyy & Dewald (2015,
University of Amsterdam, Amsterdam Business school 9 p. 2). Previous research proofs that most successful companies are able to combine both exploration and exploitation simultaneously, this is referred to as: ambidextrous innovation (e.g. Jansen et al., 2009; Kashani & Miller, 2000; Kortmann, 2015; Smith & Tushman, 2005 & Teece et al., 1997).
This common dilemma of exploration and exploitation is generated by building a competitive advantage, the heart of strategic management and soul of business existence (Venkatraman & Ramanujam, 1986) Strategic management is either implicit or explicit focused on building competitive advantage, as this is the time test of any strategy (Venkatraman & Ramanujam, 1986). In other words, the entrepreneurial proclivity of management determines the strategic roadmap of the company and sets the bar for the level of innovativeness that is necessary to build competitive advantage. According to Afuah & Tucci (2001, p. 3) there are three major determinants of building competitive advantage (see appendix A for relations between determinants): “business models, the environment in which businesses operate, and change”. Firstly, business models can be explained as: “the method by which a firm builds and uses its resources to offer its customers better value than its competitors and to make money doing so” (Afuah & Tucci, 2001, p.3-4). Furthermore Osiyevskyy & Dewald (2015, p. 6) describe that “functionally, a firm’s business model is a meta-routine for: i) creating and ii) appropriating economic value” (i.e. Chesbrough, 2007; Zott & Amit, 2007; Zott, Amit & Massa, 2011). It is important to point out that, despite the level of interest that recently have been paid to business models, it is, according to Casadesus-Masanell & Zhu, “a slippery construct to study” (2013, p. 480). The slippery is caused by “inconsistencies in the conceptual framework of business models itself, which resides somewhere between economics and business strategy without possessing a solid theoretical anchoring in either field” (Teece, 2010 in Spieth, Schneckenberg & Ricart, 2014, p. 238). Secondly, a competitive environment, which forces organisations to assess their
University of Amsterdam, Amsterdam Business school 10 business models, “as they face competitors with their own business models and who may be equally capable of offering the same level of value to customers” (Afuah & Tucci, 2001, p. 5). The third factor is change, which affects the environment and business models (Afuah & Tucci, 2001). Change has external and internal factors: e.g. innovation can be an internal change, caused by external triggers (Afuah & Tucci, 2001).
The need for innovation of digital business models arises quickly, as the world around us is digitising and “customers are increasingly demanding to communicate with companies anywhere and anytime” (Weill & Woerner, 2013, p. 71). In order not to lose any customers and business, organisations are pressed to innovate new and current digital business models at the same time to satisfy different customers groups (Weill & Woerner, 2013). Support for the importance and relation of innovation and business models, is found in Osiyevskyy & Dewald (2016). “The economic value of any invention (including new technology) can be materialized only through commercialisation by a business model” (Osiyevskyy & Dewald, 2015, p. 6) Furthermore this means that technology is an important input and shaping factor of business models.
From contingency theory, the complexity of finding fit with the internal business and a changing, digitising environment is recognized. The complexity arises, because most organisations face multiple and, often conflicting, environmental demands, opposing performance criteria, and different structural internal arrangement (Lewin & Minton, 1986; Thompson, 1967; Van de Ven, Ganco & Hinings, 2013). Therefore, achieving fitness between environmental demands and the business strategy regularly results in conflict (Child, 1975; Khandwalla, 1973; Van de Ven et al., 2013). These complexities and conflicts require making trade-offs between calculated and emergent goals at different organisational levels (Miller, 1993; Sinha & Van de Ven, 2005; Van de Ven et al., 2013). Furthermore these complexities make it difficult to specify, in concrete terms, the relationship among
University of Amsterdam, Amsterdam Business school 11 organisational environment and configuration in contingency theory (Van de Ven et al., 2013).
To understand these relationships and determine fit between these five factors, change in terms of innovation, technology, entrepreneurial proclivity, competitive environment and ambidextrous innovation of digital business models, leads to the following main research question of this study:
How do innovation orientation, technology uncertainty and competitive intensity effect the relationship between entrepreneurial proclivity and the strategic dilemma of ambidextrous innovation of digital business models?
This study aims to explain the direct relationships between entrepreneurial proclivity and ambidextrous innovation of DBM, which ultimately effects competitive advantage. The environmental effect of competitive intensity on the innovation orientation within a firm. As well as the mediating effect of innovation orientation on the relationship between entrepreneurial proclivity and ambidextrous innovation of DBM, and the moderating effect of technology uncertainty on the relationship between innovation orientation and ambidextrous innovation of DBM. In other words, it focuses on the effect of dynamic and competitive environments on innovation orientation and the execution and entrepreneurial management stimulation of these innovations, through digital business models.
This research used partial least square structural equation modelling (PLS-SEM) to test the hypotheses, based on a survey of 99 respondents in the Netherlands.
University of Amsterdam, Amsterdam Business school 12 LITERATURE REVIEW
INTRODUCTION
This chapter reviews the main literature applicable for this study. Starting point is an introduction of contingency theory, the basic foundation of this research. Secondly, the dynamic capability view and thirdly, innovation of digital business models and ambidextrous innovation, and how these subjects are combined in this study. The next chapter “constructs and hypotheses” will discuss the constructs used in this research and describe the underlying relationships.
CONTINGENCY THEORY
The aim of this research is to understand the fit between environmental aspects: technology uncertainty and competitive intensity, the structure of the organisation: entrepreneurial proclivity and innovation orientation, and the process of the firm: ambidextrous innovation of DBM. This origin of determining fit between environment, structure and process, stems from contingency theory (Drazin & Van de Ven, 1985). “The essence of contingency theory paradigm is that organisational effectiveness results from fitting characteristics of the organisation, such as its structure, to contingencies that reflect the situation of the organisation” (Burns & Stalker, 1961; Lawrence & Lorsch, 1967; Pennings, 1992; Woodward, 1965, in Donaldson, 2001, p. 1). The fit of these characteristics ultimately determine competitive advantage, therefore firms are motivated to seek fit by adopting new organisational characteristics that meet the changes in the environment (Donaldson, 2001). “This results into organisations moving into with their contingencies, so that there is an alignment between the organisation and its contingencies, creating an association between contingencies and organisational characteristics” (Burns & Stalker, 1961; Drazin & Van de Ven, 1985; Woodward, 1965, in Donaldson, 2001, p. 2).
University of Amsterdam, Amsterdam Business school 13 Donaldson explains SARFIT as the heart of contingency theory: structural adaptation to regain fit (2001). In his research, Donaldson (1996, 1999, 2001, 2010) stresses the importance of contingency theory, demonstrates the rich contribution that already has been made and the promise what it holds for the future: the progress in organisational theory through building with existing frameworks, rather than looking for new ones (Van de Ven et al., 2013). The contingency theory has evolved over the past years through different perspectives (Van de Ven et al., 2013), I will discuss the five key ideas and challenges to provide an understanding of these changes. First of all, contingency theory provides a rich theoretical foundation of understanding fit between the environment and the organisation, however caution should be taken when stating simplistic views of contingency theory (Van de Ven et al., 2013). Second, configuration and complimentarily perspectives build on the contingency theory concepts and adopting a more holistic view of organisation context to prevent falling into traps of earlier research (Van de Ven et al., 2013). The third perspective of complex system theory, adopts a more dynamic view of organisational design, where the focus shifts from the analysis of fit, to adaptation to an environmental landscape, with a more static or changing organisation (Van de Ven et al., 2013). Fourth, the creative organisation design follows a more organic, flexible, fruitful and engaging approach to organisational design and is materialising in reaction to the more static and analytical focus of the three earlier mentioned perspectives (Van de Ven et al., 2013). The last and fifth perspective, acknowledges the difficulties to conceptually deduce a theoretical solution, or model a solution when organisations are as complex as today (Van de Ven et al., 2013). Simulation modelling is emerging as an analytical tool to build theories in situations where organisations have multiple conflicting environmental demands and conflicting performance expectations, which results into internal trade-offs (Van de Ven et al., 2013). These new creative approaches, create new criteria that transcend efficient forms of organising (Van de Ven et
University of Amsterdam, Amsterdam Business school 14 al., 2013). This shows the importance of contingency theory for organisations, as these issues that are created from changing conditions and demands, will need to be addressed and will create high-performance organisation designs that fit these dynamic landscapes (Van de Ven et al., 2013). Furthermore, previous research (Keller & Price, 2011) reports that scale and stability has been replaced by innovation and change as determinants of organisational survival. Instead of refining internal structure to fit a stable environment, organisations are focussing on innovation and searching for distinctive ways to increase innovation capacity in their organisations (Van de Ven et al., 2013). A common factor in all key ideas of contingency theory, is the proposition: performance is enhanced by external fit between the environmental landscape, demands and the design of the internal structure of the organisation, as well as the fit among the elements of the internal organisation: strategy, structure, systems and culture (Miller, 1992; Van de Ven et al., 2013). In contingency theory, the claim that organisational environment moderates the relationship between organisational design and firm performance is central, more generally: any proposition that contains a moderating variable is a contingency theory (Van de Ven et al., 2013). The interpretation of contingency theory for this research, emphasizes cognition. This means “the basis for management action is the degree of perceived understanding of the condition” (Souder, Sherman & Davies-Cooper, 1998, p. 522). In other words, the perception of the level of environmental conditions, determines the actions taken by management. This means that under similar environmental conditions, companies perceive a different level of e.g. technology uncertainty or competitive intensity and therefore take different actions within their firm, as their level of perception is incomparable.
The contingency theory of organisational structure consists of three contingencies: environment, organisational size and strategy (Donaldson, 2001). The environmental stability contingency affects the structure of the organisation (Pennings, 1992). The rate of
University of Amsterdam, Amsterdam Business school 15 technological change, in this research referred to as: technology uncertainty, and market changes, here referred to as: competitive intensity, affect the structure of the organisation (Donaldson, 2001). In this research, the structure of the organisation is focused on whether the organisation is innovation oriented and the level of entrepreneurial proclivity, stimulated by management. A mechanic structure (hierarchical, static) fits a stable environment, whereas an organic structure (innovative and entrepreneurial) fits an unstable environment, where technology is changing, competition is fierce and companies need to adjust to keep finding fit with the environment (Donaldson, 2001). The size contingency affects the degree of structure in a company. A large organisation fits a mechanic structure, whereas smaller organisations tend to be more flexible, organic and able to innovate (Donaldson, 2001). The strategy contingency affects the structure of the divisions and output, whereas an undiversified strategy focuses on a single product or service and builds on existing business models (Donaldson, 2001). In contrast, a diversified strategy focuses on multiple products and services and seeks to deploy new and diversified business models to execute the strategy (Donaldson, 2001). “Thus the structural contingency theory argues that organisational structure needs to fit the three contingencies of environment, size and strategy” (Donaldson, 2001).
For this research, the particular focus lies on the selection conceptual approach of the contingency theory (Drazin & Van de Ven, 1985). The selection approach follows the assumption: “fit is assumed premise underlying a congruence between context and structure” (Drazin & Van de Ven, 1985, p. 515). This is a distinction from the interaction and systems approach, where the focus lies on the fit between contingencies and the affection of performance (Drazin & Van de Ven, 1985). Another distinguishing can be made from universalistic normative theories of organisations, which argue that there is “one best way” to organize your firm, similar to the argument of “survival of the fittest”, where, in contrast,
University of Amsterdam, Amsterdam Business school 16 contingency theory focuses on the appropriate level of structural variables that fits the contingency (Donaldson, 2001). Rather than thinking there is “one best way” for an organisation to fit, the contingency theory distinguishes between external and internal fit, and the appropriate strategy for changing the organisation and/or its environment (Van de Ven et al., 2013). Researches of this theory have proposed the proactive and reactive strategy, to handle environmental dependencies (Pfeffer & Salancik, 1978; Thompson, 1967; Van de Ven et al., 2013). In a reactive strategy, the internal design of an organisation is changed to fit the constraints of its environment (Van de Ven et al., 2013). On the other hand, with a proactive strategy, an organisation can change its environment and/or industry to better fit its goals and operations (Van de Ven et al., 2013).
CONTINGENCY THEORY & DYNAMIC CAPABILITY VIEW
The next chapter describes the dynamic capability view and the relation with contingency theory. The dynamic capability view is an extension of the resource based view (i.e. Barney, 1986; Dierickx & Cool, 1989; Wu, 2010) to dynamic markets (Helfat & Peteraf, 2003; Wu, 2010). The dynamic capability view is acknowledged for an inward looking view, but also accounts for environmental factors, and is focused on how to deal with turbulent environments by creating dynamic capabilities (Zhou & Li, 2010). This an extension of the early RBV, as this view solely focuses internally on resources and does not take environmental conditions in consideration (Barney, 1986; Dierickx & Cool, 1989; Wu, 2010).
The next chapter on the dynamic capability view, starts with contingency theory and describes how the dynamic capability view can answer questions of contingency theory. In this research the two theories are complementary, as contingency theory explains the need for fit between environment and the firm and proposes different models for organisational design (Donaldson, 2001). The dynamic capability view builds on this and explains how to respond
University of Amsterdam, Amsterdam Business school 17 to ever changing environments, through certain dynamic capabilities and establish competitive advantage (Helfat et al., 2009). In integrating dynamic capabilities and contingent perspectives, I accept the view that the general business environment influences a firm’s strategy, however it does not determine it, therefore I am avoiding criticism on contingency literature that is seen as deterministic (Aragón-Correa & Sharma, 2003), and dynamic capabilities help the organisation to execute the strategy and enhances the firm’s ability to create fit with the environment.
DYNAMIC CAPABILITY VIEW
In the study of Burns & Stalker (1961), they describe an attempt to change traditional organisations with common products, into new organisations with rapidly changing products and therefore came up with a distinction between two ideal types: mechanistic and organic. They describe mechanistic organisation as differentiated, clear roles and definitions, strong hierarchies and control, it has a strong correspondence with a bureaucracy (Van de Ven, et al., 2013). Whereas “organic design continually adjusts and redefines tasks with as much horizontal as vertical communication and the avoidance of formally laid down rules, procedures and role definitions” (Van de Ven, et al., 2013, p. 400). From a contingency theory, the fit for these two types is, once again, environment and task uncertainty (Van de Ven, et al., 2013). An organic organisation performs well under conditions of high uncertainty and the mechanic when conditions are certain (Van de Ven, et al., 2013). Burns & Stalker (1961) stress in their research, their understanding that “there is no optimum type of organisation and management” (Van de Ven, et al., 2013, p. 400). Further support from contingency theory, shows that next to internal fit or congruence, a firm must also achieve an external fit with its environment or context (i.e. Ketchen, Combs, Russell, & Shook, 1997; Siggelkow, 2001; Van de Ven, et al., 2013). Achieving, both internal and external, fit is an ambiguous goal and forces management to make trade-offs on achieving an internal and
University of Amsterdam, Amsterdam Business school 18 external match (Miller, 1993: Van de Ven, et al., 2013). These ambidextrous goals show how “organisations operate in contexts of multiple and often conflicting contingencies” (Van de Ven, et al., 2013, p. 406). The question then rises: “what are the implications for organisational design, when encountering different contingencies” (Van de Ven, et al., 2013)? Child (1975, 1977), concluded from his research that firms who performed well, generally sacrificed external fit and created internal consistency, while low performing firms showed internal inconsistency, through adopting elements in an attempt to respond to environmental changes (Van de Ven, et al., 2013). This introduces an element of choice for organisational design (Drazin & Van de Ven, 1985; Van de Ven, et al., 2013). It can be acknowledged that “both environmental contexts and organisational designs are composed of multiple, partly conflicting dimensions, and that organisations pursue multiple, partly conflicting goals” (March & Simon, 1958, in Van de Ven, et al., 2013, p. 406). It can therefore be recognized, that rarely a single organisation design can match perfectly with a specific environmental context (Van de Ven, et al., 2013). This raises the next question: “how can an organisation internally organise with multiple designs for different environmental landscapes? More specific for this research the question is: “how can an organisation internally organise innovation for different environmental landscapes, in order to create fit”? The answer stems from the dynamic capabilities view: dynamic capabilities defines the internal design and can both address changing and stable environments (i.e. Eisenhardt & Martin, 2000; Teece et al., 1997; Vogel & Güttel, 2013; Zollo & Winter, 2002).
Teece et al., define dynamic capabilities as: “the firm's ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments” (1997, p. 561). Therefore these dynamic capabilities reflect “an organisation’s ability to achieve new and innovative forms of competitive advantage given path dependencies and market positions” (Teece et al., 1997, p. 561). Dynamic capabilities are an important part in
University of Amsterdam, Amsterdam Business school 19 understanding how competitive advantage arises, can be created and is sustained over time (Eisenhardt & Martin, 2000). Prior literature has argued that successful organisations are ambidextrous (Duncan, 1976) and according to Tushman & O’Reilly (1996), they generate competitive advantages by combining revolutionary and evolutionary change (Jansen et al., 2009). Competitive advantage can also be created by explorative and exploitative innovation (Benner & Tushman, 2003; Jansen, Van Den Bosch, & Volberda, 2006). Furthermore dynamic capabilities, “vary with the level of market dynamism and enable an organisation to adapt to changes in the general business environment” (Cockburn, Henderson & Stern, 2000; Rosenbloom, 2000, in Aragón-Correa & Sharma, 2003, p. 73-74). Therefore, this theory relates to contingency theory and highlights that the characteristics of a business environment influences the development of dynamic capabilities within the firm (Aragón-Correa & Sharma, 2003). Just as in contingency theory, the dynamic capability view acknowledges that a proactive strategy manages the interface between a business and its environment and “has the characteristics of a dynamic capability that enables an organisation to align itself with changes in its general business environment” (Aragón-Correa & Sharma, 2003, p 74).
It is widely recognized that in firms the development, creation and management of dynamic capabilities is of highly strategic importance (Kyläheiko, Sandström & Virkkunen, 2002). The dynamic capability view has become an important topic in strategic management and has become a dominant factor for performance-focused theory (Arend & Bromiley, 2009; Vogel & Güttel, 2013). The strategic relevance of dynamic capabilities is demonstrated as: the responsiveness of a firm’s internal structure, processes and resource deployment to an increasingly turbulent environment, is correlated to competitive advantage (Vogel & Güttel, 2013). On the other hand, Eisenhardt & Martin (2000) and Zollo & Winter (2002) “emphasize that firms also need dynamic capabilities in markets characterized by lower rates of change, in order to keep pace with competitive dynamics” (Vogel & Güttel, 2013, p. 426).
University of Amsterdam, Amsterdam Business school 20 The difficulty lies in the fact that it is hard to define what radical change contains with precision (Helfat & Winter, 2011), this suggest the importance of being prepared for any form of change, to enable a firm to deal with contingency and make use of dynamic capabilities to support both radical and incremental change. However, “the assessment of the extent of change is likely to be a matter of perspective, expertise, and degree” (Helfat & Winter, 2011, p. 1246). Therefore related actions and decisions of a company will depend on the view of management and degree of change that is perceived and stresses the importance of dynamic capabilities to support these actions and decisions.
The success of dynamic capabilities strongly depends on “the company’s ability to exploit its existing (i.e. static) resources and to explore new, not yet existing, or at least fully realized (i.e. dynamic) capabilities” (Kyläheiko et al., 2002, p. 65). The genuinely dynamic perspective of an organisation and in particular the management of dynamic capabilities will be a major success determinant (Kyläheiko et al., 2002). In this research the dynamic capability view will predominantly used to test for the relationships between dynamic capabilities (innovation orientation and ambidextrous innovation of DBM) and to understand the effect of environmental aspects (competitive intensity and technology uncertainty) on these dynamic capabilities.
With an understanding of the two main theories, the following chapters introduce the two main parts innovation of digital business models and ambidextrous innovation, which combined form: ambidextrous innovation of DBM.
INNOVATION OF DIGITAL BUSINESS MODELS
Markides (2006) describes business model innovation as: “the discovery of a fundamentally different business model in an existing business” (p. 20). Other researchers refer to it as: “the search for new business logics of a firm and new ways to create and capture value for its stakeholders” (Casadesus-Masanell & Zhu, 2013, p. 464). The rise of business models and
University of Amsterdam, Amsterdam Business school 21 the importance of, in particular business model innovation, is reflected by a spectrum of recent and increase of articles in peer-reviewed academic journals (Spieth et al., 2014). The traditional view of business models from the dynamic capability view, describes how these models: reflect and execute the company’s strategy on how and which benefit will be delivered to its customers, plus which slice of the cake will be captured by the company of that delivered value (Teece, 2010). Without a solid model, no value is either created or captured (Teece, 2010). More recent articles, notices a shift of focus from traditionally execution of a strategy, to a mean for firms to “commercialize new ideas and technologies” (Chesbrough, 2010, p. 354). With still a strong focus on how companies generate revenues, the focus lies on specific opportunities for businesses, enabled through a (digital) business model (Spieth et al., 2014).
The digital element of business model innovation is emerging, however the maturity differs per industry (Zott et al., 2011). Whereas the media industry has noted a strong shift into digital platforms and therefore a structural change in the media industry (Zott et al., 2011), a more conventional industry, such as steel, is just beginning to dip her toes in the world of digital business models. According to Kalakota & Robinson (1999), joining the e-business is a matter of re-teaching an old lesson, you need to change the competitive question in order to change the rules of the game. New business models are central to the innovations that are carried out by e-business (Brousseau & Pénard, 2007), as old business models are being transformed into new, information replaces inventory and digital products are replacing the physical ones (Kalakota & Robinson, 1999). This transformation is an important aspect, as new digital business models are likely related to many conventional models and therefore new digital concepts can influence the existing business models and change the mind of decision makers to implement new digital concepts (Brousseau & Pénard, 2007).
University of Amsterdam, Amsterdam Business school 22 The importance of digitisation is expressed through the output, as it makes “physical products programmable, addressable, sensible, communicable, memorable, traceable, and associable” (Yoo, Henfridsson & Lyytinen, 2010, p. 725). Furthermore through digital innovation a firm is required to reconsider their organising logic and the use of IT infrastructure (Yoo et al., 2010). This leads to new and innovative ways of the relationship between demand and supply, “the specificity of information and the ability to differentiate and discriminate, thanks to digital technologies” (Brousseau & Pénard, 2007, p. 82). Furthermore digital innovation and technological innovation often necessitates business model innovation, “which creates both the need to bring discoveries to market and the opportunity to satisfy unrequited customer needs“ (Teece, 2010, p. 176).
Most researchers state that innovation of a digital business model is making small changes to the existing business model, to make the value proposition more explicit to the customers (Johnson, Christensen & Kagermann, 2008). In additional to that statement, every new value proposition should be executed through a new business model (Johnson et al., 2008). This shows how one company can innovate their current business model with small incremental (exploitation) steps and simultaneously create new business models (exploration) to deliver a new value proposition.
AMBIDEXTROUS INNOVATION
This simultaneously use of exploitative and exploratory innovation is called ambidextrous innovation, which captures discontinuous innovation and incremental innovation (He & Wong, 2004; Kortmann, 2015). To further explain “exploratory innovations are radical innovations and are designed to meet the needs of emerging customers or markets” (Benner & Tushman, 2003; Danneels, 2002, in Jansen et al., 2006, p. 1662). These innovations are able to create new products, new markets, offer new design and channels of distribution (Abernathy & Clark 1985; Jansen et al., 2006). These radical innovations require departure
University of Amsterdam, Amsterdam Business school 23 from existing knowledge, involves risky decision, new knowledge and operating in the unknown (Benner & Tushman, 2002; Jansen et al., 2006; Levinthal & March, 1993; McGrath, 2001). On the other hand, exploitative innovations are incremental innovations with the purpose to meet the need of existing customers or markets (Benner & Tushman, 2003; Danneels, 2002; Jansen et al., 2006). “They broaden existing knowledge and skills, improve established designs, expand existing products and services, and increase the efficiency of existing distribution channels” (Abernathy & Clark 1985, p. 5). Therefore, these innovations build on existing skills and knowledge, with a strong focus on gaining efficiency of current processes and structures (Abernathy & Clark 1985; Benner & Tushman, 2002; Jansen et al., 2006; Levinthal & March, 1993; Lewin, Long & Carroll, 1999). Both the performance of exploration and exploitation are captured in innovative ambidexterity, because innovation of digital business models refers to a value creating process (Kortmann 2015; Tsai & Ghoshal, 1998).
With an understanding of the concepts, the focus shifts towards the environmental aspects. In the research of Jansen et al., it states that “pursuing exploratory innovation is more effective in dynamic environments, whereas pursuing exploitative innovation is more beneficial to a unit’s financial performance in more competitive environments” (2006, p. 1661). This is in line with contingency theory, where hierarchical structure fits a stable environment and an organic structure fits a dynamic environment (Donaldson, 2001). Furthermore contingency theory stresses the importance of fit with the environment and internal arrangements (Van de Ven et al., 2013), therefore it is important to have the ability to make changes to internal arrangements to provide this fit. This increases the confrontation of the paradoxical challenge to exploit existing competencies and exploring new ones (Jansen et al., 2009; Vera & Crossan 2004). Thus, this challenge creates the strategic dilemma between exploratory and exploitative innovation (Osiyevskyy & Dewald, 2015). It therefore stresses
University of Amsterdam, Amsterdam Business school 24 the importance of successful resolutions of the paradoxical challenges that arise from fundamentally different concepts: discontinuous and incremental innovations (Gibson & Birkinshaw, 2004; Jansen et al., 2009; Kortmann 2015; Tushman & O’Reilly, 1996).
To provide further arguments of contingency theory, recent studies have addressed that “organisational attributes, such as structural differentiation (Gilbert, 2005; Tushman & O’Reilly, 1996) and organisational context (Gibson & Birkinshaw 2004) enable firms to balance these conflicting demands and to achieve ambidexterity” (Jansen et al., 2009, p. 797). Previous scholar articles emphasize that both structure and context attribute as core elements in the ability of firms to pursue ambidexterity (Jansen et al., 2009; Siggelkow & Levinthal, 2003; Tushman & O’Reilly, 1996).
While the solution seems to be ambidextrous innovation in order to survive, it brings a difficult strategic dilemma. According to previous research, this can be solved by structural differentiation and integration of organisational context (internal and external) (Jansen et al., 2009; Siggelkow & Levinthal, 2003; Tushman & O’Reilly, 1996). When companies are able to both explore and exploit innovation, this delivers new value for the business. In this study I will focus on the combination of ambidextrous innovation and the value, created through innovation, which is executed in digital business models, in order to create fit with the environment by delivering value for customers.
University of Amsterdam, Amsterdam Business school 25 CONSTRUCTS AND HYPOTHESES
INTRODUCTION
This chapter presents a theoretical foundation regarding the relations of the different latent variables used in this study. First, I will discuss the outcome variable: ambidextrous innovation of DBM. Secondly, the relation between entrepreneurial proclivity and competitive intensity (H1), and the direct effect of entrepreneurial proclivity on ambidextrous innovation of DBM (H2). Thirdly, I will discuss the relation between competitive intensity and innovation orientation (H3). Fourthly, the effect of innovation orientation on ambidextrous innovation of DBM (H4) and lastly, the direct (H5) and moderating effect (H6) of technology uncertainty of the former relationship. All relations are expressed in hypotheses and visualised in a model, see below (figure 1).
Figure 1
AMBIDEXTROUS INNOVATION OF DIGITAL BUSINESS MODELS
Ambidextrous innovation of DBM, is a dynamic capability to simultaneously explore and exploit innovation of digital business models (He & Wong, 2004; Jansen et al., 2009; Kortmann, 2015). This means that a firm builds on the current strengths of the existing business models, while, at the same time, creating new business value to deliver a new value
H4 H3 H2 H5 H1 H6 Technology Uncertainty Entrepreneurial Proclivity Innovation Orientation Competitive Intensity Exploratory Innovation of DBM Exploitative Innovation of DBM Ambidextrous Innovation of DBM
University of Amsterdam, Amsterdam Business school 26 proposition to its customers (He & Wong, 2004; Jansen et al., 2009; Kortmann, 2015). This is in line with the dynamic capability view, as it reflects the ability of a firm to achieve new and innovative forms of competitive advantage (Teece et al., 1997).
For this study to measure ambidextrous innovation of DBM, innovation ambidexterity of Jansen et al., (2009) is used. Innovative ambidexterity is the capability to simultaneously use exploratory and exploitative innovation (Jansen et al., 2009). They argue that organisational ambidexterity counts as a dynamic capability, as it refers to “the routines and processes by which ambidextrous organisations mobilize, coordinate, and integrate dispersed contradictory efforts, and allocate, reallocate, combine, and recombine resources and assets across differentiated exploratory and exploitative units” (O’Reilly & Tushman, 2007, Teece, 2007, in Jansen et al., 2009, p. 797). Furthermore combining exploration and exploitation helps organisations to focus both on exploration and exploitation, to accelerate beneficial contribution from innovation and prevents them for structural inertia (Jansen et al., 2009). Whereas both types are crucial for firm survival, they simultaneously create paradoxical challenges (Jansen et al., 2009). According to March (1991) exploration results from experimentation and flexibility, whereas exploitation is generally associated with efficiency and refinement. In practice this means “providing new competencies and technologies to some units while further improving well-develop and established ones in others, organisations can simultaneously enter new product-market domains as well as improving existing product market positions” (He & Wong, 2004; Volberda, Baden-Fuller & van den Bosch, 2001, in Kortmann 2015, p. 669).
For this research, the construct innovation ambidexterity (Jansen et al., 2009) is transformed to ambidextrous innovation of DBM. The digital business model element is added to the questions of the construct, which are originally solely focused on ambidextrous innovation. This second order construct, still consists out of exploitative and explorative
University of Amsterdam, Amsterdam Business school 27 innovation, however now focused on innovation of DBM. To provide an example, the question of Jansen et al., (2009, p. 809): “our organisation accepts demands that go beyond existing products and services” is transformed to “our organisation responds to demands that goes beyond our existing digital business models”.
ENTREPRENEURIAL PROCLIVITY
From the dynamic capability view, it is stated that the reconfiguration of internal and external competencies, as mentioned by Teece et al., (1997) are determined by a companies’ management orientations, such as entrepreneurial proclivity. To further explain the concept from entrepreneurial management theory, Matsuno, Mentzer & Özsomer (2002) define entrepreneurial proclivity as “the organisation’s predisposition to accept entrepreneurial processes, practices, and decision-making” (Griffith, Noble & Chen, 2006, p. 52). Previous research shows that entrepreneurial proclivity is composed of “five, independent, yet related dimensions: innovativeness, risk taking, proactive and competitive aggressiveness and autonomy” (Barringer & Bluedorn, 1999; Covin, 1991; Lumpkin & Dess, 1996; Matsuno et al., 2002, in Griffith et al., 2006, p. 52). The dimension of innovativeness is related to the development of new products, services, ideas et cetera (Lumpkin & Dess, 1996; Griffith et al., 2006). Innovativeness in product-market and technology is crucial for a firm’s understanding of its competitors, customers, environments and suppliers, to “design and introduce products and services that both meet market demand as well as regulatory and industry standards” (Cooper, 1979; Lumpkin & Dess, 1996; Maidique & Patch, 1982, in Griffith et al., 2006, p. 52). The risk dimension refers to the tendency of accepting greater levels of risk (Griffith et al., 2006; Lumpkin & Dess, 1996). Risk, in perspective of the entrepreneurial literature, presents the issue of venturing into the unknown, operating under high uncertainty by committing large amount of assets and heavily borrowing (Baird &
University of Amsterdam, Amsterdam Business school 28 Thomas, 1985; Griffith et al., 2006). “The dimension of pro-activeness refers to acting in the expectation of future changes or opportunities” (Lumpkin & Dess 1996, in Griffith et al., 2006, p. 52). This is reflected in the ability to employ strategic expansion and seizing market opportunities, in the process of exploring new market entries (Griffith et al., 2006; Lumpkin and Dess, 1996). Competitive aggressiveness reveals the propensity of a firm to directly and intensively engage with competitors, it reflects a willingness to engage in unconventional methods of competition, such as targeting competitors and markets (Griffith et al., 2006; Lumpkin & Dess, 1996; Macmillan & Jones, 1984). Lastly, autonomy describes the independent actions of bringing forward an idea and executing it (Griffith et al., 2006; Lumpkin & Dess, 1996).
With an understanding of the construct, this can be linked to contingency theory, which suggests that “congruence or fit among key variables, such as environment, structure, and strategy, is critical for obtaining optimal performance” (Miller, 1988, in Lumpkin & Dess, 1996, p. 151). The industry and environmental variables, and the structural and managerial characteristics are important factors that influence how entrepreneurial orientation will shape optimal performance of a firm (Lumpkin & Dess, 1996). Companies that operate under a management of entrepreneurial proclivity, recognize the importance of innovation, as the innovative and proactive underpinnings of entrepreneurial firms actively support innovative strategies and creative solutions (Griffith et al., 2006). These creative solutions and innovation strategies can be translated to the market, to create value through a new digital business model or can strengthen the current digital business model (Griffith et al., 2006). Therefore, as the managerial characteristic of a firm impact the internal firm structure and processes, I propose the following hypotheses:
University of Amsterdam, Amsterdam Business school 29
H2: Entrepreneurial proclivity has a positive impact on ambidextrous innovation of
digital business models.
COMPETITIVE INTENSITY
While the dynamic capability view generally focuses on creating competitive advantage through dynamic capabilities, environmental conditions are an important factor in the dynamic capability framework to understand how to adapt to it (Eisenhardt & Martin, 2000; Protogerou, Caloghirou & Lioukas, 2012; Teece et al., 1997). The focus of dynamic capability literature is on how environmental turbulence impacts the relationship between dynamic capabilities and survival of the firm (Eisenhardt & Martin, 2000; Helfat et al., 2009; Zahra, Sapienza & Davidsson, 2006).
Competitive intensity is defined by Auh & Menguc (2005) as: “a situation where a firm operates in markets that are characterized by a high number of manifestly competing organisations, limiting potential growth opportunities” (Wilden, Gudergan, Nielsen & Lings, 2013, p. 11). Porter (1980), adds that “competitive intensity is apparent in conditions, such as: high price competition and high levels of advertising” (Wilden et al., 2013, p. 11). According to Wilden et al. (2013), firms struggle in a competitive intensive environment with finite resources, this is increased by the number of firms in the environment. There are extreme cases of monopoly, where a firm outperforms competition and will make use of their resources and deploys actively their dynamic capabilities (Wilden et al., 2013). Therefore, as a consequence, when competitive intensity increases, adaptation of the environment and reactions to other competitors will be increasingly important to survive (Wilden et al., 2013). Specifically when competitive intensity increases, firms can benefit from gaining first mover advantage (Wilden et al., 2013). Therefore, firms who are able to “sense new market trends and seize opportunities prior to key competitors” (p. 11) will have the winning hand (Wilden
University of Amsterdam, Amsterdam Business school 30 et al., 2013). Identifying and actually capturing new market share is extremely important in an intensive competitive environment (Wilden et al., 2013). According to Wilden et al. these conditions “typically drive down profit and force firms to differentiate via innovation” (2013, p. 11).
Although it is clear that “competitive intensity influences strategic behaviour and performance”, it is not clear whether and, if so, how it interacts with dynamic capabilities in affecting strategic choices for new and existing business models (Wilden et al., 2013, p. 10). Therefore, the effects of dynamic capabilities are enhanced, when a firm is faced with a degree of competitive intensity, to make best use of these capabilities and deploy them as beneficial for the company as possible (Wilden et al., 2013). While this still depends on interpretation of the level of competition by the management of a firm. It is shown before, that the contingency theory highlights cognition and therefore the degree of perceived understanding of these environmental conditions, form the basis of managements’ actions (Souder, Sherman & Davies-Cooper, 1998) I suspect therefore, that the actions taken by the organisation will influence competitor’s reactions and vice versa. Hence the use of dynamic capabilities to stimulate digital innovation will be vital in competitive intensive times. This is support by Zahra (1993, p. 324) “when rivalry is fierce, companies must innovate in both products and processes, explore new markets, find novel ways to compete, and examine how they will differentiate themselves from competitors”. Therefore I propose the following hypothesis:
H3: Competitive intensity has a positive impact on innovation orientation.
INNOVATION ORIENTATION
For this construct, I differentiate between innovation and innovativeness. Where innovation is typically an outcome-oriented construct, which focuses on new product success (Ayers,
University of Amsterdam, Amsterdam Business school 31 Dahlstrom & Skinner 1997), innovativeness “captures the firm-level orientation toward innovation” (Hurley & Hult 1998, in Menguc & Auh, 2006, p. 63) and measures the organisations’ capability to enlist in innovative behaviour (Menguc & Auh, 2006). Another way of describing innovativeness is innovation effort of Marinova (2004), to capture the innovative enthusiasm residing in a firm (Menguc & Auh, 2006). Therefore innovativeness implies the pro-activeness of a firm to explore new opportunities, rather than solely exploiting current assets (Menguc & Auh, 2006).
Innovation orientation is referred to by Hult, Ketchen & Arrfelt (2007) as innovativeness orientation: “values associated with new idea generation (i.e., members’ openness to new ideas)” (p. 1038). Hurley & Hult further link this to the organisation, by showing this is part of the embedded culture and define it as “openness to new ideas as an aspect of a firms’ culture” (1998, p.44). Hence this dynamic capability “builds and renews competitive advantage through radical or discontinuous innovations” (Olson, Slater & Hult, 2005, p.52). Building and developing a dynamic capability is especially important for companies in turbulent and unpredictable environments, with emerging economies (Zhou & Li, 2010). This is supported by the dynamic capability view, where dynamic capabilities define the successful adaption to internal and external circumstances (Teece et al., 1997; Zhou & Li, 2010).
For this research, I will use the construct: innovation orientation, as described in Kortmann (2015). Innovation oriented firms focus on discovering new markets through innovative and technological solutions, instead of focusing on existing competences and market position, (Kortmann, 2015; Talke, Salomo & Kock, 2011; Zhou, Yim & Tse, 2005). Therefore, I expect a strong influence on exploratory innovation, despite this strong influences, an innovation orientation provides a firm with greater flexibility and capabilities
University of Amsterdam, Amsterdam Business school 32 to develop both discontinuous and incremental innovations (Damanpour & Gopalakrishnan, 1999; Kortmann, 2015; Tushman & O’Reilly, 1996).
Since innovation orientation refers to new ideas, radical change and discontinuous innovations, and is simultaneously able to stimulate incremental innovation, it seems likely that innovation orientation will stimulate ambidextrous innovation of DBM. I therefore propose the following hypothesis:
H4: Innovation orientation has a positive impact on ambidextrous innovation of
digital business models
TECHNOLOGY UNCERTAINTY
Returning to the work of Lawrence & Lorsch (1967), who challenged the concept of “one best way” to organise a firm, they affirm differentiation and integration, as the two basic design elements (Van de Ven, et al., 2013). From the contingency theory, it is shown that organisations develop differentiated structures to deal with the diverse tasks in a firm and therefore, differentiation requires integration to coordinate the organisation as a system (Van de Ven, et al., 2013). The answer to why organisations follow different forms of design is related to the extent of environmental uncertainty (Van de Ven, et al., 2013). This is supported from previous strategic management research, where business environment has been recognized as one of the contingency factors in strategic management and where the contingency view is a determining factor for effectiveness of a firms’ strategy (Hambrick & Lei, 1985; Miller & Friesen, 1983; Prajogo, 2016; Venkatraman & Prescott, 1990).
Lawrence & Lorsch (1967), found that “the greater the environmental uncertainty in markets and technologies, the greater the extent of internal differentiation; this greater differentiation requires more integration (Van de Ven, et al., 2013, p. 400). To summarise, organisations that are facing high levels of technology uncertainty, need both high levels of
University of Amsterdam, Amsterdam Business school 33 differentiation and integration in order to be effective (Van de Ven, et al., 2013). This touches the critical components of contingency theory: “an analytical description of organisations, the external circumstances that produce particular organisational designs and the idea that there is an appropriate linkage between the external, the internal, and performance” (Van de Ven, et al., 2013, p. 400).
There have been many ways to conceptualise the characteristics of a business environment, however most of them can be related back to the work of Dess & Beard (1984). In this study they examine dynamism and competitiveness as environmental constructs (Covin & Slevin, 1989; Khandwalla., 1977; Ozsomer, Calantone & Di Bonetto, 1997; Prajogo, 2016; Ward, Duray, Leong & Sum, 1995; Zahra, 1996). As previously stated, dynamic environments are characterised by a high rate of change (i.e. in technology), which opens the door to new product opportunities and new (digital) business models, to fit specific market niches. In these environments, firms will aim to stimulate innovation in products in order to meet changing customers’ needs (Lumpkin & Dess, 2001; Prajogo, 2016).
Stump, Athaide & Joshi (2002, p. 451) define technology uncertainty: as representing “the rate of change in underlying technologies of a purchased product”. Rapid changes in the environment cause technology uncertainty. “Organisations that work with nascent technologies that are undergoing rapid change, may be able to obtain a competitive advantage through technology innovation” (p. 57), this competitive advantage can be created by translating the technology innovation through a new digital business model and at the same time strengthen the current one (Jaworsky & Kohli, 1993). “On the contrary, organisations that work with stable (mature) technologies are relatively poorly positioned to leverage technology for gaining competitive advantage” (Jaworsky & Kohli, 1993, p. 58). These organisations experience a low rate of technology uncertainty and are able to keep up with
University of Amsterdam, Amsterdam Business school 34 the environment, as they rely heavier on the current technology and business model. I therefore propose the following hypothesis:
H5: Technology uncertainty has a positive impact on ambidextrous innovation of
digital business models
Previous studies of contingency theory have shown the effectiveness of innovation as a strategy, it also shows that the level of effectiveness is influenced by the environmental context of the firm (Barney, 2001; Jansen et al., 2006; Katila & Shane, 2005; Prajogo, 2016; Tsai & Yang, 2013). The reason behind this statement is that an effective innovation strategy in a certain environment may not be as effective in another environment (Prajogo, 2016). “As a result, managers must seek the fit between firms' innovation strategies and the conditions of its environment, as external environment can moderate the relationship between firms' innovation strategies and their performance” (Prajogo, 2016, p. 242). In other words, the level of effectiveness of an innovation results from the interaction of the environment and the internal capabilities of the firm (Kerin, Varadarajan & Peterson, 1992; Prajogo, 2016).
The influence of the environment, in particular technology uncertainty, could be shown as following: due to technology uncertainty it could be more difficult to forecast future developments, as there is a likelihood of new opportunities, which arises and brings in new threats, and unforeseen events that can unfold (Bensaou & Anderson, 1999; Cannon & Perreault, 1999). Next to that, technology uncertainty makes it more difficult to process market information; it increases the difficulty to grasp standards in product price and quality performance in these uncertain environments (Ellis, Henry & Shockley, 2010).
Due to all these opportunities, threats and uncertainties, I would like to test for the moderating effect between the relation of innovation orientation and the strategic dilemma of ambidextrous innovation of DBM. So far, it is difficult to grasp what the influence of the technology uncertainty will bring on ambidextrous innovation of DBM. However, technology
University of Amsterdam, Amsterdam Business school 35 uncertainty makes the future more difficult to predict, hence this might complicate future decision making in strategy. According to contingency theory, the larger the environmental uncertainty, the more difficult it is to integrate and differentiate (Donaldson, 1999; Lawrence & Lorsch, 1997). The uncertainty effects the internal departments in a firm and creates a large difference between structure and culture within the firm (Donaldson, 1999). This calls for more integration and differentiation, where the focus is strong on efficiency within the firm, therefore the priority to innovate decreases (Donaldson, 1999). In other words, a high technology uncertain environment, possibly calls for a more conservative strategy and builds on existing strengths, rather than using new technology to discontinuous innovate. Next to that, it leaves the firm’s management with a huge responsibility to make appropriated choices to be effective and adjust to the uncertain environment; therefore ambidextrous innovation of DBM is of lower priority (Donaldson, 1999). I therefore propose the following hypothesis:
H6: The positive relation between innovation orientation and ambidextrous
innovation of digital business models is moderated by technology uncertainty, so that this relationship is weaker for a high level of technology uncertainty.
CONCEPTUAL MODEL AND HYPOTHESES
This study is focused on the direct relation of competitive intensity on innovation orientation, and ambidextrous innovation of DBM, moderated by technology uncertainty, and the relation of entrepreneurial proclivity on ambidextrous innovation, mediated by innovation orientation. Figure 1 shows again the proposed research model and hypotheses, which are all summarised below.
University of Amsterdam, Amsterdam Business school 36 Figure 1
H1: Entrepreneurial proclivity has a positive impact on innovation orientation.
H2: Entrepreneurial proclivity has a positive impact on ambidextrous innovation of
digital business models.
H3: Competitive intensity has a positive impact on innovation orientation.
H4: Innovation orientation has a positive impact on ambidextrous innovation of
digital business models
H5: Technology uncertainty has a positive impact on ambidextrous innovation of
digital business models
H6: The positive relation between innovation orientation and ambidextrous
innovation of digital business models is moderated by technology uncertainty, so that this relationship is weaker for a high level of technology uncertainty.
H4 H3 H2 H5 H1 H6 Technology Uncertainty Entrepreneurial Proclivity Innovation Orientation Competitive Intensity Exploratory Innovation of DBM Exploitative Innovation of DBM Ambidextrous Innovation of DBM
University of Amsterdam, Amsterdam Business school 37 METHODOLOGY
INTRODUCTION
In this chapter the empirical part of the study is presented. First, the research and survey design are explained, as well as the data collection, sample, type of survey and constructs. The middle part reports the data analysis method, descriptive statistics and structural equation modelling. Lastly, the reliability and validity are discussed.
RESEARCH AND SURVEY DESIGN
This research is part of a bigger research under the overall theme of digital innovation. The project is under supervision of Dr. S. Kortmann and all students involved are Masters Students of the Executive Programme in Management studies with the Strategy track, at the Business School of the University of Amsterdam. Some elements will be similar to the other students involved, however no research is structured the same and only the use of the same data set is allowed and applied.
To analyse the different constructs in the proposed model, a cross sectional study has been done and the data is analysed through quantitative analysis. An online questionnaire was created and tested before sending out. The survey consists of elements from this research, as well as questions from my fellow students, to create one large data set. The introduction of the survey introduced the subjects and related studies. All construct questions used are closed questions and based on a 7 point Likert scale with options from “strongly disagree” to “strongly agree” (see appendix B). A Likert point scale provides a high reliability and validity, plus gathered data can be profitably compared (Nemoto & Beglar, 2014). The questions all had a short introduction to provide context for answering the different questions.
University of Amsterdam, Amsterdam Business school 38 An online survey was used, because it has clear advantages over paper, due to lower costs, it saves time (especially when converting to digital data for analysis) and the possibility to easily reach large numbers of individuals (Wright, 2005). On the contrary, in general, the response and completion rate is higher for paper surveys (Yun & Trumbo, 2000). Most surveys have been sent out with a personal note to individuals. This has two advantages: first, the respondent feels personally engaged and second, the ability to track the response rate increases. A reminder for unfinished and non-respondents has been sent out two weeks after. Furthermore, the survey was distributed per email to a high number of students of the EPMS program and posted on LinkedIn and Facebook. The disadvantage of sending out a questionnaire via email to a large group is the lack of traceability of the non-respondents in the survey (Wright, 2005). Participation was voluntary and anonymous, an email address, to be updated with the results, was optional. To understand the various participants and make sure we only include a single data point per company, the company’s name is a mandatory field. To account for the differences between these companies, four control variables have been included in this research: firm size, firm age, firm function and firm industry.
DATA COLLECTION AND SAMPLE
A non-probability (convenience and snowballing) sample is used to collect data. Respondents are friends, family, EPMS students and work relations. A non-probability sampling reflects the ease of access to the respondents of the sample (Kothari, 2004). The survey is in English to target both national and international companies. The respondents work in different sectors and most respondents are based in the Netherlands. The survey was sent to over 300 respondents via email, however since anonymous links have been used and social media (Facebook and LinkedIn); the snowballing effect makes it difficult to predict how many respondents have been reached with this research.
