Executive Programme in Management Studies
Strategy TrackMaster thesis – final version
30-‐01-‐2015
Securing business model innovation in the organizational structure.
Student: Dennis Theodorus Johannes Disseldorp Student number: 10475389
First supervisor: Sebastian Kortmann
Statement of Originality
This document is written by Student Dennis Disseldorp who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is 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.
Signature ___________________________________________
Index
Abstract ... 4
Introduction ... 5
Literature review ... 7
Dynamic capabilities ... 7
Sensing, seizing and reconfiguring activities (S-‐S-‐R activities) ... 9
Limitations dynamic capabilities ... 13
Business model innovation ... 14
Limitations business model innovation ... 18
Theoretical framework ... 19
The importance of continuous evaluation of the business model ... 19
Dynamic capabilities as antecedents for business model innovation ... 19
Business model innovation, S-‐S-‐R activities, and centralization ... 22
Methods ... 28 Data collection ... 28 Data sample ... 29 Independent variables ... 30 Dependent variables ... 32 Control variables ... 33 Results ... 33 Reliability analysis ... 34 Correlations ... 40 Regression analysis ... 41 Moderation analysis ... 44 Discussion ... 47 Theoretical implication ... 51 Managerial implication ... 52 Conclusion ... 53
Limitations and future research ... 54
References ... 56
Appendices ... 60
Appendix A – Measures and scales ... 60
Appendix B – Descriptive statistics of the sample ... 61
Abstract
Business model innovation is an important process for restoring environmental
alignment and as preparation for opportunities and threats. Furthermore, it will lead to an increase of the firm’s value creation and value capturing. Leih et al. indicates dynamic capabilities as possible antecedents for business model innovation (Leih, Linden, & Teece, 2014). In prior research, Teece et al. states dynamic capabilities exists out of sensing, seizing and reconfiguring activities, or S-‐S-‐R activities (D. J. Teece, 2007). The separate possible antecedent effects of S-‐S-‐R activities on business model innovation will be empirical analysed in this research. Organizational design has proven to affect dynamic capabilities and will likely influence the relation of dynamic capabilities on business model innovation. A possible moderation effect of centralization will explain that strong dynamic capabilities will not per se lead to business model innovation. Therefore, the organizational design could be an important component in embedding business model innovation in the structure of the firm. Results indicate that only
reconfiguring activities will stimulate business model innovation. In contradiction with prior research the effect of dynamic capabilities on business model innovation only occurs in medium and highly centralized firm. In decentralized firms reconfiguring activities have no effect on business model innovation. Therefore, this research is
suggesting that strong reconfiguring activities in a centralized organizational design will secure business model innovation into the process of the firm.
Introduction
If you always do what you always did, you will always get what you always got – Albert Einstein
Innovation is crucial in market survival, especially in highly dynamic environments. Recent literature is indicating that innovation is no longer only about product
innovation (Chesbrough, 2007; Lindgardt, 2013). Therefore, business model innovation is receiving increased attention as well in literature, as in practice (Osterwalder,
Pigneur, & Tucci, 2005a). Business model innovation offers an alternative manner to handle competition by avoiding this competition. Market competition encompasses outperforming competitors with new products. However, business model innovation will change the competition, as it provides the firm to explore different ways of doing business (Lindgardt, 2013). A business model separates the firm in different
components and explains how a firm creates value and how this value is captured from the market (Chesbrough, 2007). Business model innovation is the development process of a new business model in order to increase, and change, the firm’s current value creation and value capturing (Chesbrough, 2010; Lindgardt, 2013). Business model innovation will restore possible misalignment with the internal and external
environment and will be from assistance in the firm’s preparation for opportunities and threats. Due the holistic approach, business model innovation provides identification of new insights and combinations of the firm’s business model components (Morris, Schindehutte, & Allen, 2005a). In the past decade, business model innovation has been developed from a convenient marketing tool to a strategic process.
Despite the increase of literature in business model innovation the conditions under which business model innovation is undertaken is not yet further explored. These
conditions must be identified in order to further embody business model innovation as a continuous process that is connected with the current internal and external
developments. The necessity for a new business model seems a challenging decision-‐ making, as antecedents for business model innovation were, until recently, unidentified. The research of Leih et al. discovered a connection between business model innovation
and dynamic capabilities; business model innovation is a result out of dynamic capabilities (Leih et al., 2014). This conception provides an explanation for the firm’s decision-‐making in executing business model innovation, based on information required from dynamic capabilities. In other words, dynamic capabilities are antecedents for business model innovation. This paradigm is providing new insights about the
integration of business model innovation in the organizational processes, as they now can be connected with dynamic capabilities. In earlier research Teece has defined dynamic capabilities in three sets of key activities, namely sensing, seizing and reconfiguring activities (S-‐S-‐R activities) (D. J. Teece, 2007). Prior research already indicated dynamic capabilities will synchronize business models with their environment (D. J. Teece, Pisano, & Shuen, 1997). However, this research will empirically prove the influence of S-‐S-‐R activities separately on business model innovation.
With strong dynamic capabilities business model innovation is too a large extent secured in the firm’s processes and routines. However, the effectiveness of dynamic capabilities will be influenced by the organizational structure of the firm (Leih et al., 2014; D. J. Teece, 2007). For example, in highly centralized firms information from sensing activities needs to go through several layers. This will possibly slow down decision-‐making, as information will not reach top management in pace. Therefore, it is likely the level of centralization will influence the effect of dynamic capabilities on business model innovation. However, the possible moderation effect of centralization seems to be missing in the business model innovation literature. This missing part in the literature is crucial for successfully securing business model innovation in the processes of the firm. The purpose of this research is not only trying to establish the level of
centralization as moderator, it will also show the preferred level of centralization for the successful implementation of the business model innovation process inside the firm.
This research will contribute to the existing business model innovation literature. First, empirical evidence is provided about the correlation of dynamic capabilities and
business model innovation. Secondly, this research will zoom into dynamic capabilities by specifying the relation of each S-‐S-‐R activity and business model innovation. Thirdly, the moderation effect of centralization on the relation between dynamic capabilities and business model innovation will be analysed. Finally, in case of a moderation effect the
results will show which level of centralization will influence business model innovation by dynamic capabilities.
A survey is conducted between Dutch small/medium enterprises (SME’S) or strategic business units (SBU’s) in order to give insights about the awareness of dynamic
capabilities and business model innovation. Data is collected via an online survey, which is developed in cooperation with other strategy students. Hypotheses are tested with the collected data sample and will be further explained in this research.
This thesis will start to elaborate the dynamic capabilities view and discusses the latest literature. The current state of literature of business model innovation will be described and discussed as well. Furthermore, a theoretical framework will show the foundational literature for the hypotheses. This is followed by the description of the applied methods in conducting this research. The developed results from the collected data will be shown in a subsequent section. These results will be discussed and explained. In the last section of this thesis an overall conclusion will be given along with the managerial implications and future research.
Literature review
Dynamic capabilities
An ordinary capability is a routine for a dedicated performance of one specific (Feiler & Teece, 2014). An ordinary capability will not per se create or capture more value, while a dynamic capability is continuously pursuing to create or capture more value
(Eisenhardt & Martin, 2000). Dynamic capabilities are high-‐order capabilities assuring routines, resource and “soft assets” remain valuable to the changing environment by continuously assessing the most value creating or capturing combination of resources (Leih et al., 2014; Zahra, Sapienza, & Davidsson, 2006). “Soft assets” in this matter are defined by Teece et al. as values, culture and organizational experience (D. Teece & Pisano, 1994). Over the last two decades dynamic capabilities have been developed into the paradigm of the dynamic capabilities view (DCV). Earlier theories, as the resource-‐
firms. Firms can still be successful in markets with high competitive forces and without VRIN resources. The DCV provides an explanation for this unexplained part with the use of dynamic capabilities. Dynamic capabilities are defined as “ the firm’s ability to sense and then to seize new opportunities, and to reconfigure and protect knowledge assets, competencies, and complementary assets with the aim of achieving a sustained
competitive advantage” (Augier & Teece, 2009). Hence, dynamic capabilities are the routines, processes and assets that will inform the firm upfront about future
opportunities and threats. Furthermore, dynamic capabilities will indicate how to address opportunities and threats by developing the required resources, assets and processes.
Teece et al. have developed three “strategic dimensions”, processes, positions and paths, in order to identify dynamic capabilities in a firm; (D. Teece & Pisano, 1994). Processes will determine the current behaviour and routines of employees in order to perform tasks. Dynamic capabilities are dependent on the explorative behaviour of employees. This importance of explorative, or entrepreneurial, behaviour inside the firm is
emphasized in the behavioural theory (Cyert, March, & others, 1963). The focus of this research will be the behaviour and routines in information sharing, the given authority to employees and collaboration between different business units. Information about new opportunities, market demand and technology needs to be shared through different layers within the firm in order to up-‐date the firm about developments. Eisenhardt et al. are stating that dynamic capabilities are the outcome of organizational learning and emphasize the importance of learning mechanisms (Eisenhardt & Martin, 2000). Teece agrees on this conception as he is acknowledging organizational learning, skills of employees, processes and organizational culture as the foundations of dynamic
capabilities (D. J. Teece, 2012). Organizational learning out of experimentation must be embedded in the firm’s processes in order to assure asset development (Marshall, 1925). The performance of experimentation is influenced by the given authority to employees in order to experiment. Cooperation is another important component in the firm’s processes, as different angles are required in order to assess threats or
opportunities. In short, processes will identify the need for an organizational change in order to maintain environmental fit and reconfigure the processes accordingly (D. Teece & Pisano, 1994). Positions will identify the current state of knowledge and “business
assets” of the firm (D. Teece & Pisano, 1994). Paths are the firm’s available strategic direction and will arise from the identified opportunities and the firm’s positions. Dynamic capabilities will be the processes and assets evaluating these “strategic
dimensions” in order to identify the “gap” between the current capabilities and potential opportunities. Closing this “gap” by developing the current capabilities towards the chosen opportunity, or strategic direction, will be a second task of dynamic capabilities. The firm requires governance in developing the capabilities, for example acquiring and divesting resources, which mainly encompasses the transaction theory (Williamson, 1979). Dynamic capabilities will provide processes to ensure governance. Dynamic capabilities will not only identify and prepare the firm for future opportunities and threats, as they also identify misalignment with internal or external environment and restore the alignment in order to remain competitive in the market and internally effective. In sum, dynamic capabilities will result in information about the changing environment needs by continuously evaluating environmental fit by the firm. Secondly, dynamic capabilities will adjust capabilities, like resources, procedures, management and knowledge-‐flow-‐systems, in order to maintain environmental fit.
Sensing, seizing and reconfiguring activities (S-‐S-‐R activities)
Strategy needs to be aligned with the environment and therefore requires autonomous strategic behaviour (Burgelman, 1983). This strategic behaviour allows changes in strategy in order to align activities with the environment and employees of all layers are authorized to evaluate current strategy. In particular, employees of the operational level are important in this strategic behaviour, as they need to indicate possible disconnections between the current activities and environment. Dynamic capabilities are required in order to embed this strategic behaviour in the routines of the firm in order to remain environmental fit. Teece has categorized dynamic capabilities in three activities; sensing, seizing and reconfiguring activities (S-‐S-‐R activities) (D. J. Teece, 2007). Sensing activities will constantly scan development in the internal and external environment in order to spot future radical change. In case of spotted information of radical changes seizing activities will be activated. Seizing activities will assess applicability of the information on the firm and will develop seizing preparations. Reconfiguring activities will evaluate alignment of the current environment and current capabilities of the firm. Furthermore, reconfiguring activities will assure the firm’s
innovative culture by reconfiguring processes, routines and resources in possible growth or drops (D. J. Teece, 2007).
Sensing activities are internal processes, which enable the firm to identify new
opportunities. According to Teece this can be accomplished by scanning, learning and interpreting the usability of developments in different markets and technologies (D. J. Teece, 2007). This does not necessarily have to encompass development in the
operating market or close to the used technology of the firm. Developments in other markets or no-‐related technology can still support in the firm’s development and additionally lead to an increase of the current market position. Therefore, two types of search mechanism are embedded in sensing activities (Nelson & Winter, 1973). The first type is defined as “incremental” search; the development inside the own R&D of the firm. However, developments can also result from cooperation with suppliers, complementors and even customers, which eventually can lead to outbound open innovation (Chesbrough & Crowther, 2006). It is important to involve external parties, as these parties need to develop along with the innovation of the focal firm. For example, in the gaming-‐industry, a new developed gaming console is dependent on the game developers. Customers are not able to use the new console, if no games are developed for the new console. The second search type is about understanding development in non-‐related industries and technologies and assessing the usability for the focal firm. For example, the Reebok Pump Shoe is developed out of technology used for inflatable splints and medical bags (Hargadon, 1998).
It is important the sensed development will flow through the firm, so more individuals, or groups, can interpret the knowledge and usability. More angles on the sensed
information will better evaluate if the development is a potential opportunity for the firm. Organizational processes that enable individuals to learn from developments and information sharing are crucial in sensing activities.
Seizing activities will establish clear boundaries within the firm and develop decision protocols for seizing opportunities. The firm’s boundaries will have two conceptions in seizing activities(D. J. Teece, 2007). Firstly, the vision of the firm will determine the firm boundaries. Boundaries are required in order to assess applicability of opportunities
and threats. Secondly, the firm’s boundaries will encompass the shortcomings of the firm in the sensed opportunities. It is crucial to evaluate the current resources, assets, skills and experience before pursuing an opportunity. For example, in case the firm does not have the required resources in order to pursue the opportunity, the required
resources need to be developed, acquired or co-‐created. This is related to the
assessment of processes, positions and paths by determining the strategic direction (D. Teece & Pisano, 1994). Obviously, this is important to know before pursuing the
opportunity.
Decision protocols and processes need to point out which development requires investments. First, decision-‐making protocols will determine which opportunities, or threats, are applicable to the firm (D. J. Teece, 2007). These decision-‐making protocols are based on the agreed boundaries of the firm determined in the firm’s vision and strategy. In other words, seizing activities will assess according the firms’ strategy and vision, which opportunities will be seized, and which threats be covered. Secondly, processes and activities are required in order to discover the possible seizing actions. Thirdly, it encompasses investment decisions, like make–or-‐buy decisions and
development of technology and resource and preparing employees and processes. These decision protocols and processes need to be developed and continuously be evaluated by experienced and highly skilled individuals, most likely top management, in order to avoid bias errors. However, the protocols and processes need to be discussed with the operational layers, as they need to evaluate efficiency and effectiveness. Decisions need to be made in pace and can best be performed in a non-‐hierarchy organizational
structure with only a few layers. Information will flow in pace to top management, while middle line management has the authority to make decisions as well. Incentives and internal processes will make sure the opportunities will actually be seized. Hence, seizing activities will filter sensed opportunities applicable for the firm and guarantee the seizing of opportunities and selecting the correct business model.
Reconfiguring activities consists out of processes and protocols in order to evaluate environmental fit of the current business model. The environment does not solely encompass the external environment, like customer preferences, the internal fit needs to be evaluated as well. Alignment of corporate strategy and the business model is
necessary in order to actually operate the chosen strategy. Besides the “evaluating” activities reconfiguring activities also exists out of activities that manage the actual change in order to reach environmental alignment. However, reconfiguring activities are important in the actual change for future threats and opportunities as well. This will make reconfiguring activities crucial for sensing and seizing activities. Reconfiguring activities will create an “organizational design embracing open innovation with integration and coordination processes” (D. J. Teece, 2007). In other words,
reconfiguring activities will make it possible that sensed information will be shared and coordinated in order to increase the seizing potential. Therefore, reconfiguring activities can be seen as the foundation for sensing and seizing activities. In a more general
conception reconfiguring activities are managing sensing and seizing activities. Due to reconfiguring activities employees will be educated and incentivised in order to perform sense and seize activities. Information-‐flow systems are created because of
reconfiguring activities and are important support processes for sensing and seizing activities. Reconfiguring activities creates innovation and change culture. Also reconfiguring activities will show a more coordinated role by searching, combining information and combining new components in a business model. Reconfiguring activities are responsible as well for the protection as for the outcome of sensing and seizing activities from imitation by competitors (D. J. Teece, 2007). In short,
reconfiguring activities are performing three important tasks. First, evaluating current internal and external fit. Second, reconfiguring the firm to restore environmental misalignment or to prepare for future threats and opportunities. Three, to an
appropriate extent reconfiguring activities are managing sensing and seizing activities.
Burgelman acknowledges the importance of dynamic components in organizational capabilities in market survival (Burgelman, 1994). In this research Burgelman
emphasizes the importance of developing new combinations, the capacity of searching and retaining “viable strategic initiatives”. This conception broadly encompasses S-‐S-‐R activities. Reeves et al. are emphasizing competitive advantage will be sustained through adaption and the active role of frontline employees (Reeves & Deimler, 2011). In their paper S-‐S-‐R activities are acknowledged, as the authors state adaption can be reached via organizational capabilities which has “the ability to read and act on signals of change, the ability to experiment, the ability to manage complex and interconnected
systems of multiple stake holders, the ability to motivate employees and partners”. The first mentioned ability clearly indicates sensing and seizing activities. The ability to experiment is not directly compared with S-‐S-‐R activities. However, the freedom to experiment must be embedded in S-‐S-‐R activities in order to stimulate learning and expanding knowledge. The third ability is about managing collaboration of different individuals and these coordination processes are a component of reconfiguring activities. The last ability encompasses the design of an organizational design “that encourages the knowledge flow, diversity, autonomy, risk taking, sharing, and flexibility”. Reconfiguring activities are stimulating an organizational design like mentioned above.
Limitations dynamic capabilities
Dynamic capabilities will be incrementally developed and are therefore not immediate effective in order to sustain a competitive advantage (D. Teece & Pisano, 1994). When dynamic capabilities are fully implemented they will show their effectiveness with change as an outcome. However, actually changing for example internal processes or divesting and acquiring new resources will be challenging and requires financial investments (D. Teece & Pisano, 1994).
Although dynamic capabilities will search for interesting developments by competitors, dynamic capabilities will not follow the strategic moves of competitors. If dynamic capabilities will give the firm high successes it is likely that competitors will try to imitate dynamic capabilities. However, a strong appropriability-‐regime will protect the firm from imitation and as dynamic capabilities need be built it will be difficult for competitors to imitate (D. Teece & Pisano, 1994). Not necessarily competitors require the exact same dynamic capabilities , as equifinality is possible. According to Eisenhardt et al. dynamic capabilities can not be seen as a sustainable competitive advantage (Eisenhardt & Martin, 2000). Applying “ad hoc problem solving” can result in the same change (Winter, 2003). Winter explains, “ad hoc problem solving”, as only changing the firm as response to an occurred environmental change and implies a reactive behaviour of change. Although ad hoc problem does not require investment in dynamic capabilities and will change the firm eventually, the risk of falling behind in the market will increase and can be crucial for the firm’s market position (Helfat & Peteraf, 2009). According to
Arend et al. DCV risks tautology as the theory of dynamic capabilities is not significantly proven with empirical research and is not resulting in managerial heuristics (Arend & Bromiley, 2009).
Business model innovation
In early literature a business model was seen as a tool management used to divide the firm into several firm elements in order to improve communication and the
understanding of the market (Osterwalder & others, 2004). Later Osterwalder et al. revised this conception into a more strategic definition; “a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm”(Osterwalder et al., 2005a). This definition is in line with the conception of Teece, who is describing a business model as the organizational structure in which value is created and captured (D. J. Teece, 2010). A business model explains how the factor market is connected with the product markets (Zott & Amit, 2010). In other words, how does the business model make sure the raw resources will be reconfigured to a value-‐adding product and services to the market?
The exact conditions of a business model are not stated in the literature yet. However, three aspects of the business model are acknowledged in almost every research; value creation, value capturing and logic fit (Chesbrough, 2007; Chesbrough & Rosenbloom, 2002; Leih et al., 2014; Magretta, 2002; Morris, Schindehutte, & Allen, 2005b; Zott & Amit, 2010). A business model must explain the value proposition, the operating
structure for capturing that value and must be aligned with the environment in order to be competitive. Environmental fit can be measured by evaluating the interaction of the separated firm elements, how these elements operates in sum and the logic fit of the complete business model to the external environment (Magretta, 2002; Morris et al., 2005b). The Boston Consultant group has developed a framework complementary to this conception and shows congruence with the mentioned theories (Zhenya, Reeves, Stalk, & Deimler, 2009). According the Boston Consultant Group the business model is divided into value proposition components and operating structure components. This framework is depicted in figure 1. The value proposition explains how the value is captured and indicates target segments, product or service offering and revenue model as value capturers. A business model needs to describe customer focus group in order to
evaluate the fit with other components of the business model(Chesbrough &
Rosenbloom, 2002). Determining a target segment is also required in order to evaluate environmental fit. The revenue model will explain how exactly the firm earns money and is essential in a business model (Chesbrough & Rosenbloom, 2002; D. J. Teece, 2010). A business model needs to explain the product or service offering to the market and why this is valuable to the customer segment(Chesbrough & Rosenbloom, 2002; Magretta, 2002; Morris et al., 2005a). This offering will be the outcome of the value creation process performed by the firm. This value creation process is explained in the operational model of the BCG framework. The value chain will be of direct influence on the offering and must therefore be explained in a business model (Chesbrough, 2007). It will be important to see which external party like, suppliers, partners and
complementors, are crucial in the value chain in order to determine the importance of each external party in the value creation (Zott & Amit, 2010). The cost structure and organizational structure will influence the offering indirectly, therefore important in the value creation process, and needs to be determined in the business model(Chesbrough, 2007; D. J. Teece, 2010). The framework, as a whole, needs to develop environmental fit for the firm in order to result in a competitive business model.
Figure 1 – Boston Consultant Group conception of a business model (Zhenya et al., 2009)
Ostenwalder et al. has categorized the business model in nine building blocks
(Osterwalder et al., 2005a). All segments are depended to each other as a change in one segment can influence another segment. For example; changing key activities can affect the customer segment and simultaneously remain the current key partnerships.
The BCG framework shows congruence with the nine building blocks canvas (NBB canvas) of Osterwalder (figure 2). The components target segment, cost model and revenue model are literarily used in both frameworks. The product-‐or-‐service-‐offering component in the BCG framework is more or less synonymous to the value proposition of the NBB canvas, as this is described by Osterwalder as the firm’s scope of products or services. The value chain explains the required assets and resources in order to create and deliver the product or service to the customer. The NBB canvas’ value configuration, partner network and distribution channel encompasses the creation and delivering of the product or service to the customer and are therefore included in the value chain. The organization component in the BCG framework explains the role of the firm’s
employees, whom are responsible for tasks like R&D, marketing, coordination of the value chain and controlling the revenue and cost model. Obviously, customer
relationship and core competences are included in this component. However, core competences are also required in the value chain and are represented in the BCG framework.
Figure 2 – Nine building blocks canvas (Osterwalder, Pigneur, & Tucci, 2005b)
In short, a business model explains the foundation of the firm and evaluates the firm’s level of competiveness by reconfiguring the firm into several components founded on either, value creating or value capturing aspects, in order to asses the logic fit between these components and the environmental fit of the sum of those components.
A business model will create an overview of the firm’s different components and their relations. Therefore, a business model will make it possible to see in which component sensed information can best be implemented and evaluated how this change will influence other components. The process of business model innovation will actually evaluate the current business model in comparison with the environment and sensed opportunities or threats. Business model innovation is a reconfiguration of activities in the existing business model of a firm that is new to the product/service market in which the firm competes” (Santos, Spector, & van der Heyden, 2009). Due to the holistic
approach in business model innovation all components of the business model will be assessed and not solely a single component (Zott & Amit, 2010). “Innovation becomes business model innovation when two or more elements of a business model are
reinvented to deliver value in a new way”(Zhenya et al., 2009). This way the concerned business units, related to the affected components, can be assessed and stimulate collaboration in order to fully seize the opportunity or handle the threat. Furthermore, weak components or components with potential can be evaluated in the business model and will stimulate innovation. Reconfiguring these, into a better business model is the main result of the process of business model innovation. The main advantages of business model innovation is avoiding competition and find new, better business
concepts to create value to the market or find new markets (D. J. Teece, 2010; Zhenya et al., 2009).
Business model innovation is not only about reconfiguring assets already possessed by the firm, as a possible outcome of business model innovation is optimizing the use of assets of partners, suppliers and customers (Zott & Amit, 2007). For example,
developing a more efficient transaction process with suppliers, which can lead to a decrease of transaction costs. Information-‐flow is critical in order to be informed about opportunities and threats. Experimentation plays an important role in business model innovation, as experimentation produces new knowledge, which is required for
improvement or innovation (Thomke, 2003). In general business model innovation is a process offering management an overview to analyse the potential opportunities and threats of each component along with the logic fit between those components and the environment, which can result in a new business model.
Limitations business model innovation
A general accepted limitation is the absence of competition defence (Morris et al., 2005a; D. J. Teece, 2010). However, in an Schumpeterian conception, firms are constantly
seeking to create new combinations and rivals are continuously attempting to improve their competences or to imitate the competence of their most qualified competitors. Rivalry to develop new competences or to improve existing ones are crucial in a Schumpeterian world (D. Teece & Pisano, 1994).
Zhenya et al. are emphasizing business model innovation will be more difficult than product innovation, because of common pitfalls as failure in portfolio bloat (too many uncoordinated, bottom-‐up innovations), failure to scale up (not willing to invest more), pet ideas (no exits of no value creating projects), isolated efforts (new concept is to distant from the firm’s business), internal focus (new concept has a lack of customer needs) and historical bias (over value of past models) (Zhenya et al., 2009).
Chesbrough identifies three barriers for firms choosing business model innovation; the conflict between the new business model and old business model including the used resources/assets in the old business model, a disruptive technology can interfere with the business model innovation, and subjective information can influence the corporate decision making in business model innovation (Chesbrough, 2010). In order to
overcome these barriers experimentation with new business model will increase the change to succeed. For example, experimentation with conceptual tools as the nine building blocks of Osterwalder (Osterwalder & others, 2004). Secondly, internal leaders must manage experimentation and so middle line manager must be addressed to
conduct the experimentation in good senses. Middle line management must be discrete in giving information to top management and giving information backed up with
empirical data can do this. Thirdly and most importantly, organizational culture must be open for experimenting and change.
In static environment or markets firms do not emphasize innovation. However, this does not implicate firms in static environments do not benefit from business model
innovation as business model innovation can increase the firm’s efficiency.
Theoretical framework
The importance of continuous evaluation of the business model
Business model innovation must be secured in the fundamental processes inside the firm, as business model must continuously be evaluated (D. J. Teece, 2007). First, a business model must continuously be evaluated in order to maintain environmental fit (Greiner, 1972). A threat from competition, new entrants, substitution by innovation, power by market and power by suppliers, will always lurk, also just moments after a new business model (Porter, 1979). Business model innovation will maintain
environmental fit. Evaluating environmental fit is an on-‐going process, which requires the possible need for business model innovation. Secondly, a new deployed business model must be smoothed in order to resolve the flaws (Sosna, Trevinyo-‐Rodriguez, & Velamuri, 2010). Experiences from previous business model will be implemented in the new business model (Sosna, Trevinyo-‐Rodriguez, & Velamuri, 2010). If the firm ignores feedback from previous business model and does not include this in the new business model, the success rate of the new business model will decrease and will be less likely the firm will engage in business model innovation again.
Dynamic capabilities as antecedents for business model innovation
Antecedents are required in order to indicate the moment to engage in business model innovation. The management of value creation and value capturing is indicated by Leih et al. as a key dynamic capability (Leih et al., 2014). Business model innovation is an important process to increase value creation and value capturing. Engaging in business model innovation will divide the firm into components in order to improve the
collaboration between the components and to assess, incremental or radical, innovation per component. Leih et al. are stating that dynamic capabilities lie at the foundation for
business model innovation and “enable a firm to identify and orchestrate the necessary resources for designing and implementing a business model”. In other words, strong dynamic capabilities can be antecedents for business model innovation. Strong dynamic capabilities are deeply embedded in to the firms’ processes and are continuously in use. Dynamic capabilities, or S-‐S-‐R activities, will make the firm capable in evaluating
environmental fitness and future environmental change (D. J. Teece, 2007). Possible opportunities, or threats, and misalignment with the environment are identified by dynamic capabilities. In order to restore environmental fit and to be prepared for opportunities, change within the firm is required. Dynamic capabilities will determine the priority of change and will therefore possibly influence decision-‐making in starting business model innovation. Therefore, the need for engaging in business model
innovation will be indicated. The need for a new business model will continuously be assessed due to the continuous application of dynamic capabilities. Therefore, the continuous evaluation of the current business model is guaranteed by dynamic capabilities and business model innovation is secured.
The main purpose of business model innovation is to increase value creating and value capturing by remaining connected with the current and future environment. Dynamic capabilities will evaluate current environmental fit and will prepare the firm for future developments. Top management need to evaluate corporate strategy for environmental fit by monitoring strategic activities of the lower echelons (Burgelman, 1983). Business model innovation will affect organizational design and the organizational design will influence the effectiveness of dynamic capabilities (Leih et al., 2014). However, it is unknown how the organizational design will affect the influence of dynamic capabilities on business model innovation.
In this research the level of the organizational design is reflected in the firm’s level of centralization. Aiken et al. (Aiken & Hage, 1966) have separated the concept of centralization in two categories; hierarchy of authority and participation in decision-‐ making. At first, the boundaries in entrepreneurial activities for employees, or the hierarchy of authority. A high level of hierarchy of authority will emphasize strict boundaries in entrepreneurial activities and indicate a high level of centralization. Despite the firm’s level of centralization, managers and employees are all assigned to
perform specific task and achieve fixed targets. However, the level of centralization determines the boundaries in which employees can achieve those tasks and targets. Employees in firms with a high level of hierarchy of authority have stricter boundaries about their activities and need to perform the task specifically as assigned by top management. In contrast, corporate entrepreneurship is stimulated in firms with a low level of hierarchy, as employees will have wider boundaries, more freedom, in order to achieve the goals. Employees are motivated to experiment with newly acquired
information in firms with lower hierarchy authority. The second category of Aiken et al. in order to measure the level of centralization is the participation of employees in decision-‐making for setting goals and corresponding tasks. However, participation does not reflect the extent of power employees will have in the actual decision-‐making. In case top management easily overrules employee opinions, employees still do not have an influence on the decision-‐making. Therefore, I am suggesting openness in decision-‐ making is a better indicator for the level of centralization. According to Heller et al. (Heller, 1971) openness in decision-‐making is “the non-‐hierarchical and lateral interaction between multiple individuals with different experiences before the actual decision-‐making”. This definition is covered by the managerial preference in solving the problem with the problem-‐making parties and not with their hierarchical relations (Gupta, 1987). Roth has defined the level of openness in de decision making in a firm as the level of information-‐flow systems and cooperation among sub-‐units (Roth, 1992). The lower echelon of the firm is more closely connected to the market and it is most likely they sense the need for business model innovation (Burgelman, 1994). In firms with a low level of openness, which indicates a high level of centralization, information will only be shared with the hierarchical relations. Top management will decide which information will be shared. Information proclaimed by top management as not
interesting enough will not be shared (Chesbrough, 2010). It is possible by cognitive limits and bias of top management, a homogeneous group, potential innovation information will be retained from other business units.
Firms with a decentralized organizational design are characterized by flexibility, responsiveness and will lead to performance developments (Armour & Teece, 1978; Bartlett & Ghoshal, 1993; Jantunen, 2005; D. J. Teece, 1980, 1981, 2007). Oticon is great example in how decentralization developed dynamic capabilities and increased
innovation and performance. In 1991 Oticon revised from a centralized to a
decentralized organizational design in order to develop dynamic capabilities (Foss, 2003; Lovas & Ghoshal, 1998). This change encompasses the division of all activities over strategic work groups, which directly reported to top management. The strategic work groups were responsible for the complete development and launch for new products. After the organizational change in 1991 innovation increased, as 15 new products were launched in the period 1991 – 1999, as opposed to the launch of zero new products in the years before 1991 (Foss, 2003). Moreover, the development period of new products was reduced with 50%. The next section will explain the influence of S-‐ S-‐R activities separately on business model innovation along with the moderation effect of centralization on the separate relations.
Business model innovation, S-‐S-‐R activities, and centralization
The Boston Consultant Group has developed three steps for establishing business model innovation (Zhenya et al., 2009). These steps are intertwined with dynamic capabilities. The first step according to Lindgardt et al. is “uncovering opportunities”, which is almost tautological to sensing activities. However, the alignment with environment and the limitation of the current business model are mentioned by the authors as actions before searching new opportunities, which can be compared with reconfiguring activities. Secondly, “implementing the new model” is the second step in establishing business model innovation. In this step, potential new business models are evaluated and will result in selecting the best-‐fit business model. This business model will be implemented in the firm. Both seizing and reconfiguring activities are used in this step, seizing
activities are applied in selecting a new business model, and reconfiguring activities are used for the implementation of the new business model. The final step is defined as “building the platform and skills” and encompasses the management of business model innovation processes and experimentation. Business model innovation must be
embedded in the organizational process in order to strive for continuous application of business model innovation and ease of implementation. Thus, the continuous
application of business model innovation will develop a sustainable competitive advantage. This is the same purpose and main priority of reconfiguring activities.
