The influence of dynamic capabilities on business model innovation
and firm performance: a conceptual framework
Annabelle Truijen Bachelor’s Thesis Seminar
Student ID: 10445552 Academic year: 2014-2015
Supervisor: Stefan von Delft Semester 2, periods 2 and 3
This document is written by Annabelle Truijen 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.
Abstract
The importance of business models is continuously increasing and to create and deliver sustainable value a firm needs to innovate its business model continuously. In order to be innovative a firm needs to use its dynamic capabilities are especially useful during changing environments and innovation. In this paper the influence of dynamic capabilities on business model innovation and firm performance is examined. A conceptual model is constructed were business model innovation acts as a mediator between dynamic capabilities and firm
performance. The relationship between dynamic capabilities and business model innovation is reciprocal as well as the relationship between business model innovation and firm
performance. When a firm uses its dynamic capabilities it needs to sense, seize and
reconfigure opportunities simultaneously as well as individually in order to create and deliver as much value as possible. Furthermore, the value a firm receives needs to be reinvested in the development of new business models to create and deliver sustainable value.
Keywords: business model innovation, dynamic capabilities, firm performance, and business models.
Table of content
Abstract ... 3
Table of content ... 3
1. Introduction. ... 5
2. Literature review... 7
2.1 Business model definitions... 7
2.2 Business model innovation... 9
2.3 Dynamic capabilities ... 12
2.4 Firm performance... 14
2.5 Capabilities and firm performance... 16
2.6 Dynamic capabilities and firm performance ... 17
3. Conceptual model... 22
3.1 Dynamic capabilities and business model innovation... 22
3.2 Business model innovation and firm performance... 25
4. Discussion... 26
4.1 Contributions... 27
4.2 Limitations and future research... 27
5. Conclusion... 29
1. Introduction.
In the academic literature there has been an increasing interest on business models (Zott, Amit & Massa, 2011). However, not only scholars are intrigued by this concept, managers and executives are also aware of the increasing importance of business models (Johnson,
Christensen & Kagermann, 2008). According to IBM’s Global CEO Study published in 2008, top management is increasingly exploring the use of business models and innovation of business models to improve the ability to create and deliver value. At the moment, the frequency of disruptions is increasing tremendously and is shortening the business model lifecycle (Lindgardt, Reeves, Stalk & Deimler, 2009). The business environment is getting more and more competitive due to outsourcing, interconnectivity, and global social
constraints (Lindgardt et al., 2009). A firm can profit a lot of a successful business model, organizations such as Ryanair, Netflix, and Walmart have shown that designing an innovative new business model can be very successful (Casadesus-Masanell & Ricart, 2010). For
example, Ryanair implemented a business model that was completely different form the traditional airlines as it focused on offering the lowest-possible fares (Casadesus-Masanell & Ricart, 2010).
The emergence of the business model concept accelerated with the forthcoming of the Internet, during the mid-90s the business model concept was mentioned more and more by academics and practitioners (Zott et al., 2011). Although the business model concept has been frequently researched and the literature has stressed the important of the concept there is still not a commonly accepted definition or framework (Zott & Amit, 2008). A definition that is widely used by scholar is the definition of Amit and Zott (2001), they describe a business model as an architectural plan to create and deliver value for a firm. As the business
environment is very dynamic at the moment business models could become irrelevant due to new technological developments or changing industries (Teece, 2010). Therefore, firms need to adapt and renew business models to stay competitive (Teece, 2010).
Teece (2010) states that for a business model to be successful, activities need to be combined successfully in order to deliver value to the customer. To be able to combine those activities a firm needs dynamic capabilities (Teece, 2010). Teece (2007) sees dynamic capabilities as the foundation of combining activities and thereby create and capture value. A dynamic capability has the ability to use resources and integrate and reconfigures them to perform certain activities during turbulent periods of time (Eisenhardt & Martin, 2000).
Business model innovation needs such capabilities that adapt resources so a firm can adapt and renew existing business models (Achtenhagen, Melin & Naldi, 2013).
Teece (2007) divides dynamic capabilities into three categories;
“(1) to sense and shape opportunities and threats, (2) to seize opportunities, and (3) to maintain competitiveness through enhancing, combining, protecting and when necessary, reconfiguring the business enterprise’s intangible and tangible assets”.
(Teece, 2007, p.1390)
Although authors have identified that dynamic capabilities have an influence on business models and the development of new business models, they have not specified which factors positively influence the innovation process (Achtenhagen et al., 2013). What type of
managerial approach is needed, and what types of dynamic capabilities help the process of changing business models? In this research it will be investigated which type of dynamic capabilities of an organization are appropriate with business model innovation. The aim of business model innovation is eventually to create and deliver value, thus its aim is to enable a firm to perform better. Therefore the research question of this article is “What is the influence of dynamic capabilities on business model innovation and firm performance?”.
First, a theoretical framework will be presented to give an in-depth overview of business model innovation, dynamic capabilities and firm performance. Hypotheses will be formed according to the theory discussed in the theoretical framework. Then, the relationship between dynamic capabilities and business model innovation and the relationship between business model innovation and firm performance will be discussed. When these relationships are analyzed a conceptual model is constructed. In the next section, the contributions and limitations as well as possible future research are discussed. At last, a short conclusion will be given.
2. Literature review
The discussion of business models in academic literature has been increasing in numbers since the mid 1990s (Zott et al., 2011). The topic receives not only attention from academics, but also from practitioners from all different industries (Zott et al., 2011). Amit and Zott (2001) believe that one of the main reasons of the emergence of business models is due to the up rise of the Internet. The way organizations operate changed significantly in the 90s with the occurrence of the Internet (Amit & Zott, 2001). The Internet was one of the major
advancements in this period and provided firms the opportunity to develop new ways to create and deliver value (Amit & Zott, 2001). These new possibilities changed the way firms
operated on a fundamental basis and opened new prospects for business models (Mendelson, 2000).
2.1 Business model definitions
Although the concept of business models is widely used in the business literature, there is still not one general definition (Osterwalder, Pigneur & Tucci, 2005). In the literature the term business model is used to refer how a company does business or as a conceptual model to reduce the complexity of how a business operates (Osterwalder et al., 2005). As the significance of business models is increasing, so is the need of a general definition. Since a universal definition is not present at the moment, a few widely accepted definitions will be discussed. Several authors made an attempt to clarify the concept of a business model (Osterwalder et al., 2005). One of the main confusions of business models is that some researchers use the terms strategy and business model interchangeably, at the same time some researchers consider the terms as very distinctive concepts (Zott & Amit, 2008). A business model is an architectural plan on how a firm interacts with customers and suppliers and how to connect to its products and the market (Zott & Amit, 2008). A strategy is the chosen plan of action to achieve a specific ambition (Casadesus-Masanell & Ricart, 2010). The aim of a business model is more how to perform certain actions in an organization set by the business strategy (Casadesus-Masanell & Ricart, 2010). However, even if a firm does not have a strategy it still haves a business model, because a firm makes choices every day (Casadesus-Masanell & Ricart, 2010). Therefore, a business model is more generic than a business strategy, as unintentionally every firm has a business model but not a strategy (Casadesus-Masanell & Ricart, 2010). However, to create competitive advantage business strategy and business models must be coupled together (Teece, 2010).
As mentioned before a business model and a business strategy are not the same (Casadesus-Masanell & Ricart, 2010). The fundamental aim of a business model is to create value and capture value (Johnson et al., 2008). Teece (2010) has build a definition on the foundation that a business model consists of capturing value and delivering value:
“A business model articulates the logic, the data and other evidence that support a value proposition for the customer; and a viable structure of revenue and costs for the enterprise delivering that value”.
Teece (2010) p.179
To achieve the creation and deliverance of value a business model should consist of four interlocking elements; customer value proposition, profit formula, key resources and key processes (Johnson et al., 2008). The first element of customer value proposition is of great importance as in the stage of creating value (Johnson et al., 2008). The customer value proposition entails targeting customers and solves a problem or need of the target customer through an offering (Johnson et al., 2008. Then a profit formula must be constructed to ensure value is delivered to the company (Johnson et al., 2008). A profit formula consists of a
revenue model, a cost structure, a margin model and, resource velocity (Johnson et al. 2008). Further, a company needs to be able to distinguish their key resources and key processes from the generic ones as these provide a firm with a competitive advantage (Johnson et al., 2008). All the different elements of this framework are interdependent on each other, so attention must be paid that when one element changes, it will thereby influence the other elements (Johnson et al., 2008). For example, if a key resource changes the proposed value of a
company and profit formula will change (Johnson et al., 2008). Thus, a firm must be aware of the different elements and how they can interact (Johnson et al., 2008). Companies with a successful business model, design it in such a way that the elements are coupled in a way that is stable, consistent and complementary (Johnson et al., 2008).
Osterwalder et al. (2005) provide also a business model concept based on 9 building blocks; value proposition, target customer, distribution channel, relationship, value
configuration, core competency, partner network, cost structure and revenue model. In alignment with this conceptual model they propose the following definition:
“A business model is a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating marketing and delivering this value and relationship capital to generate profitable and sustainable revenue streams.”
(Ostenwalder, Pigneur & Tucci, 2005, p.17-18).
For some people the concept of a business model is quite abstract and therefore, Magretta (2002) makes an attempt to clarify the concept especially for managers. Magretta (2002) explains a business model as a story that explains how organizations work. The business model concept of Magretta (2002) is similar to the concept of Johnson et al. (2008) as they use similar elements. However, Magretta (2002) makes them more applicable by using questions people need to answer, such as who is the customer? What does the customer value? How do we make money in the business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost? Although these questions give a better sense of what a business model is precisely, it just presents a broad overview of the concept.
Every firm has a different business model, but they all represent the logic of the firm and how it operates in order to create value for its stakeholders (Demil & Lecocq, 2010). If a business model is successful, it can explain firm performance, as a firm knows how to create and deliver value (Zott et al., 2011). Firm strategies are developed to achieve certain goals and these goals can shift during a period of time and another goal may only be achieved through a different strategy (Casadesus-Masaell & Ricart, 2010). The same yields for business models, a concept that works now may not work in the future (Casadesus-Masanell & Ricart, 2010). Therefore, a firm must constantly renew its business model to stay competitive (Teece, 2010). In the next section, the importance of business model innovation for a company is explained (Teece, 2010).
2.2 Business model innovation
To stay competitive, organizations need to adapt their models properly to their competitive environment (Teece, 2010). Over time organizations must innovate their business models to stay competitive due to changing markets, technological innovations or new legal structures
(Teece, 2010). Successful new business models or adaptations of existing business models result in either lower cost or increased value to both the firm and customer (Teece, 2010).
A successful business example of business model innovation that focuses on the cost side is Southwest Airlines. The founder of the airline identified, that the value customer proposition of most customers was to have direct flights, low costs, reliability and good customer service, without the frills of traditional airlines (Casadesus-Masanell & Ricart, 2010). This business model was completely different from the business models the traditional airlines used and disrupted the whole industry (Teece, 2010).
Sometimes, the need for new business models is pushed more as a necessity rather than a choice. The banking industry is such an example, before the economic crisis in 2008 the business model used by banks was classified as a very successful business model. However, the business model that was used by all investment banks disappeared when the crisis hit the entire investment banking industry. Suddenly the banks were obliged to abandon a stable business model used for over a 20 years and make significant changes in their
business model just to survive (Teece, 2010).
Changes in the environment are one reason for companies to innovate their business models (Demil & Lecocq, 2010). However, renewing an existing business model is only necessary when the changes in the environment are structural (Demil & Lecocq, 2010). Once a new business model is implemented, many elements of the model are transparent for competitors and thus are easy to imitate (Teece, 2010). The time span the business model is imitated differs between a few years to only a few months (Teece, 2010). Consequently, a successful business model often turns into a ‘shared’ business model by numerous
competitors (Teece, 2010). This may be a consequence of firms imitating business models or because a particular technology, that firms use to develop a new business model, has been acquired from a firm who licenses its technologies to every interested party (Gambardella & McGahan, 2010). However, even with the same technology business models can differentiate themselves by the way it uses the technology (Gambardella & McGahan, 2010). The desirable design of a business model to achieve a competitive advantage is to have differentiated and hard-to-imitate architecture, while it’s being effective and efficient at the same time (Teece, 2010). It is quite essential to design a business model that is hard to imitate, as it is very unlikely that a business model qualifies for a patent that excludes other firms to imitate, even though certain design aspects could be eligible (Teece, 2010). According to Teece (2010) three factors are important in preventing firms to imitate a business model. First, systems and processes can be designed that are hard for competitors to replicate (Teece, 2010). Second,
seeking a high level of opacity to make it difficult for competitors to have a detailed
understanding of the business model. Third, even if the business model is easy to imitate, if it involves cannibalizing other factors of a company, they may be reluctant to replicate the business model (Teece, 2010).
In the existing literature scholars frequently discuss that business model innovation is one of the key drivers of success within a company (Sosna et al., 2010). However, designing an innovative business model guarantees not immediate success, it is often a process of trial and error learning (Sosna et al., 2010). The right business model will not be achieved during the first try, it is process of learning and adjustments will be necessary to actualize a
successful business model innovation (Sosna et al., 2010). Consequently a firm must experiment in business model innovation in order to identify which business model will be successful (Sosna et al., 2010). Doz and Kosonen (2010) presented a few aspects on which a firm must consider during the process of developing a new business model. According to Doz and Kosonen (2010) a firm must analyze its strategic sensitivity, leadership unity and resource fluidity. Strategic sensitivity can be achieved by being aware of the environment, possibilities in the future, and sense if there is a need for business model innovation (Doz & Kosonen, 2010). Such actions must be handled by management, who must create a context to develop new business models through building interdependencies and aligning interests in the firm (Doz & Kosonen, 2010). In order to achieve business model innovation resources must be flexible, so they can used in several ways and adapting and renewing a business model can be done on a continuous basis (Doz & Kosonen, 2010). Teece (2010) also propose a framework to guide firms what type of business model they need to use and to which extent they need to develop business models individually. This framework is the Profiting from Innovation framework and helps entrepreneur and strategists to design an appropriate business model (Teece, 2010). The framework has two extremes; at one end of the continuum is the
integrated business model (Teece, 2010). The firm is responsible for the whole value chain and bundles the innovation and product together, when it adopts an integrated business model (Teece, 2010). On the other end of the continuum stands the outsourced business approach where a business model is licensed (Teece, 2010). A licensed business model means that someone else’s business model is used with the consent of the licensee (Teece, 2010). In between this continuum are hybrid approaches; they are the most common but demand strong management skills (Teece, 2010).
The primary reason for organizations to engage in business model innovation is because of major changes in the environment (Sosna et al., 2010). When organizations decide
to design a new business model they must take into account its competitors and especially the degree of imitation of their business model (Teece, 2010). Furthermore, entirely new business models are not created at once; it is a process of learning and adjusting (Teece, 2010).
Nevertheless, organizations should be aware that even successful business models will become obsolete at some point and the process of business model innovation will be repeated (Teece, 2010). Demil and Lecocq (2010) believe that the cycle of business model innovation is very short. In fact they state that business models are in a constant state of transitory
equilibrium (Demil & Lecocq, 2010). This concept views business models are in a permanent state of evolution, as the world nowadays is always changing so is the business environment (Demil & Lecocq, 2010).
In a turbulent environment a firm must adapt and innovate a business model, capabilities that are especially used in a turbulent environment are dynamic capabilities (Teece, 2007). In the next section, this paper will further explain dynamic capabilities.
2.3 Dynamic capabilities
The field of dynamic capabilities is very broad and complex, but the aim of dynamic capabilities is to understand how an organization can maintain its competitive advantage, while responding to environmental change (Teece, 2007). Therefore, dynamic capabilities are related to business model innovation, as both concepts try to create sustainable competitive advantage in a turbulent environment (Teece, 2010). The concept of dynamic capabilities contains ideas of the resource-based view, as it is also views the capabilities of a firm as a potential to achieve a competitive advantage (Helfat & Peteraf, 2009). Helfat et al. (2007) define a capability as:
“The capacity of an organization to purposefully create, extend, and modify its resource base’
(Helfat, Finkelstein, Peteraf, Singh, Teece & Winter, 2007, p.4)
The authors meaning of the term ‘resource base’ includes the ‘tangible, intangible, and human assets, which the firm owns (Helfat & Peteraf, 2009).
Another explanation of dynamic capabilities comes from the authors Eisenhardt and Martin (2000) who define dynamic capabilities as:
‘The firm's processes that use resources-specifically the processes to integrate, reconfigure gain and release resources-to match and even create market change. Dynamic capabilities thus are the organizational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve, and die.’
(Eisenhardt & Martin, 2000, p. 1107)
Furthermore, Eisenhardt and Martin (2000) discuss that dynamic capabilities have a direct effect on competitive advantage, and thus on firm performance (Helfat & Peteraf, 2009). A firm can create a competitive advantage through dynamic capabilities, because they give the opportunity to change resources in such a way that is superior to a competitor (Eisenhardt & Martin, 2000). Moreover, through resource configuration, it also has an indirect effect on firm performance and competitive advantage (Helfat & Peteraf, 2009).
Examples of dynamic capabilities are; difficult-to-imitate enterprise capabilities required to adapt to changing customer and technological opportunities, development of new products, development of new processes, capacity to architect the ecosystem it employs and last but not least design and implement business models (Teece, 2007).
Two factors can be identified for calibrating capabilities ‘technical’ fitness and
‘evolutionary’ fitness (Helfat et al., 2007). Technical fitness is characterized how effectively a capability performs its task (Helfat & Peteraf, 2009). Evolutionary fitness is defined as how well an organization can make a living by creating, extending or adjusting its resource base (Helfat et al., 2007). Dynamic capabilities are especially important in achieving evolutionary fitness, as they help shape the environment (Teece, 2007).
Teece (2007) has designed a framework that presents an overview of the most critical dynamic capabilities a firms needs to sustain the technical and evolutionary fitness of an organization and thereby create a sustainable competitive advantage. In this framework literature was apprehended from the strategy literature, as well from innovation literature (Teece, 2007). Teece (2007) identifies three specific types of dynamic capabilities: sensing, seizing, and reconfiguring. Sensing new opportunities is the first step is the first step of the process and focuses on identifying opportunities. To identify such opportunities, companies must scan, search, create, learn and explore across technologies and markets (Nelson & Winter, 1982). When opportunities are identified, entrepreneurs and managers must determine how to interpret certain events or developments and how to pursue technologies (Teece, 2007). Additionally they should evaluate the information and assess how competitors and
customers will respond to it and when (Teece, 2007). The actions of outsiders can shift the whole nature of the opportunity and therefore how the competition will develop (Teece, 2007). Once an opportunity is sensed, the next step is to invest in these opportunities (Helfat & Peteraf, 2009). Teece (2007) defines this step as ‘seizing’ the opportunity. In this stage, selecting or designing a business model is crucial (Teece, 2007). The function of the business model is to design a plan how a firm can capture and deliver value (Johnson et al., 2008). Thus, the business model designs the architectural plan of how a firm can seize the opportunities it identified in an earlier stage (Teece, 2007). Provided that a firm has successfully identified technological and market opportunities and has selected the
appropriate product attributes and business models, growth, profits and competitive advantage will be positively affected (Teece, 2007). However, to sustain these successes firms must not forget the recombine and reconfigure assets and organizational structures over time.
Barreto (2010) had a similar view on categorizing dynamic capabilities. According to Barreto (2010), dynamic capabilities should be categorized into four main dimensions; the propensity to sense opportunities and threats, the propensity to make timely decisions, the propensity to make market-oriented decisions, and the propensity to change the resource base. The dimensions presented by Barreto (2010) are quite similar to the three types presented by Teece (2007). However, there are small differences as Barreto (2010), distinguishes in the process of seizing opportunities between market-oriented decisions and timely decisions. However, as Jantunen, Ellonen and Johansson (2012) argue that both concepts are quite similar in their approach on dynamic capabilities. Teece (2007) and Barreto (2010) emphasize that dynamic capabilities need to sense, decide and reconfigure. In this article, the dynamic capabilities concept of Teece (2007) will be used, as it is a clear framework.
2.4 Firm performance
In the concepts mentioned above, business models and dynamic capabilities, the literature has stated that they are connected to firm performance (Teece, 2010). Govindarjan and Fisher (1990) state that firm performance is the outcome of a firm’s activities. The outcomes of these activities can be financial or non-financial (Ittner, 2008). The measurement of financial performance is used most often, as financial performance can easily be measured and is widely available (Chenhall & Langfield-Smith, 2007). Firm’s accountant report every year its figures such as sales growth and revenue (Chenhall & Langfield-Smith, 2007). However, a firm’s balance sheet can also be misleading, as it only shows particular values of a company, which may only show the strengths of a firm (Chenhall & Langfield-Smith, 2007). Therefore,
a firm also needs to consider its non-financial performance (Hyvönen, 2007). Examples of measurements used to determine non-financial performance are operational key performance indicators, market share, innovation rate and customer satisfaction (Hyvönen, 2007). Most companies use both financial and non-financial measures to assess firm performance
(Langfield-Smith, 1997). Nevertheless, firm performance always needs to be measured with a link to corporate strategy (Langfield-Smith, 1997). A firm’s strategy is linked to firm
performance, as a result of the outcome of organizational activities through specific organizational means (Govindarjan & Fisher, 1990).
According to Barney (1991), a firm competes in the market with resources and when a resource is better than that of a competitor, it creates a competitive advantage. A competitive advantage means it performs in one or more ways better then the competition (Barney, 1991). Barney (1991) argues that this perspective, known as the resource-based view, explains how a firm can make a profit. If a firm has an advantage over its competitors it will attract more customers and earn more profits, thus perform better than its competitors (Barney, 1991).
The aim of a business model is to create and deliver value for a firm (Johnson et al., 2008). Business model innovation is also focused on the performance of the firm, and a business model needs to be renewed or adapted to provide a sustainable competitive advantage (Teece, 2010).
The theory on business model innovation is not quite extensive, but academics agree that the dynamic capabilities and business model innovation are aligned with each other as the both concepts are particularly used when the business environment is turbulent and both aim at firm performance (Teece, 2010; Teece, 2007).
At the moment, in the academic literature the focus is on clarifying, those concepts and its relationship with firm performance (Achtenhagen et al., 2013). Publications have explained what business models are and have made theoretical foundations of the business model concept (Achtenhagen et al., 2013). However, there are still some inconsistencies in the assumptions and propositions, this can be related due to the multifaceted ways of the business model concept (Baden-Fuller & Morgan, 2010). The next step in this field of research is from understanding what business models are to what business models are for (Achtenhagen et al., 2013).
Scholars are mainly interested in the theory of business models and dynamic capabilities, as they have the potential to influence firm performance (Drnevich & Kriauciunas, 2011). When looking at the business model concept, recent studies have
a business model needs to change over time (Achtenhagen et al., 2013). So in order for a company to achieve sustained value creation, it must engage in business model innovation (Achtenhagen et al., 2013). In the literature on dynamic capabilities, research has been done on the relationship between dynamic capabilities and firm performance and whether it is a direct or indirect effect (Lin & Wu, 2014). Many researchers believe a direct relationship exists between dynamic capabilities and firm performance (Wilden, Gudergan, Nielsen & Lings, 2013). Nonetheless the results are inconsistent and some results implicate that the relationship between dynamic capabilities and firm performance is indirect (Achtenhagen et al., 2013).
To clarify these relationships, they will all be examined in detail to see which effects, both direct and indirect ones, are significant and based on the literature.
2.5 Capabilities and firm performance
There is extensive literature on resources and its relationship on firm performance (Lin & Wu, 2014). The research between resources and firm performance started with the development of the resource-based view theory (Lin & Wu, 2014). Barney (1991) suggested, that for firms to create a competitive advantage, they needed to perform an internal analysis and identify its strengths and weaknesses. Many scholars in that period mainly focused on the external analysis by analyzing the competitive environment with Porter’s five forces model (Barney, 1991). However, Barney (1991) focused on the resources of a firm and how those could create a competitive advantage and therefore, positively influence firm performance. The resource-based view uses the VRIN framework to measure resources within a firm (Barney, 1986). The VRIN framework stands for valuable, rare, inimitable and non-substitutable resources (Barney, 1986). If a resource possesses one or more of these criteria, a firm can create a competitive advantage and a competitive advantage is positively related to
performance (Lin & Wu, 2014). This view that organizational capabilities are a great source of firm performance is widely accepted by scholars (Barney, 1991). Previous research has identified various types of capabilities and conceptualized them (Drnevich & Kriauciunas, 2011). The various capabilities that exist are generic capabilities, organizational capabilities, ordinary capabilities, dynamic capabilities, heterogeneous capabilities and homogeneous capabilities (Drnevich & Kriauciunas, 2011). An important conclusion from all the previous research is, that all these capabilities operate in various ways and all influence a firm in a different way and therefore, influence differently on a firm’s competitive advantage and performance (Leiblein & Madsen, 2009).
2.6 Dynamic capabilities and firm performance
As mentioned before organizational capabilities have the potential to create competitive advantage and firm performance. Thus, dynamic capabilities can have a positive influence on a firm’s performance (Drnevich & Kriauciunas, 2011). Dynamic capabilities are those
capabilities that can be used to extend, modify, change and create ordinary capabilities (Collis, 1994). The relationship between dynamic capabilities and firm performance is discussed in many articles (Barreto, 2010). Both short-term performance and long-term performance, as a consequence of competitive advantage, is discussed and whether the effect of dynamic capabilities is an indirect effect or direct effect (Barreto, 2010).
In 1997, Teece, Pisano and Shuen proposed dynamic capabilities as an extension of the resource based view. They proposed the concept of dynamic capabilities to explain
competitive advantage, financial performance and thereby the success or failure of a company (Teece et al., 1997). Therefore, the first intention of the dynamic capabilities was to explain a direct relationship between dynamic capabilities and firm performance (Teece et al., 1997). Teece (2007, p.1320) further build on this view by stating that “the ambition of the dynamic capabilities framework is nothing less than to explain the sources of enterprise-level
competitive advantage over time” and that “dynamic capabilities lies at the core of enterprise success (and failure). Makadok (2001) also argues for a direct relationship between dynamic capabilities and firm performance. However, such a relationship can only exist when the firm is in the possession of resources on which dynamic capabilities can act (Makadok, 2001). According to Makadok (2001), if a firm is in control of such resources, a dynamic capability can affect the profitability of a firm through increasing the productivity of the other resources of the firm. In the literature many ways are given how dynamic capabilities can positively influence firm performance (Wilden et al., 2013). For example, dynamic capabilities can identify and respond to new opportunities through new developments such as new processes, products or services (Zou, Fang, & Zhao, 2003). Another way, firm performance can be positively affected is by improving the operating speed, effectiveness and efficiency of a firm and how it will respond to changes in the environment (Hitt, Bierman, Shimizu & Kockchar, 2001). Dynamic capabilities can also offer entirely new set of options for the firm by the means of sensing opportunities and reconfiguring opportunities (Eisenhardt & Martin, 2001). Through offering a new set of decisions options, a firm can create a new competitive
advantage and its performance will be positively affected (Eisenhardt & Martin, 2001). According to Gudergan, Devinney, Richter and Ellis (2012) even found results that indicated
that dynamic capabilities positively affect alliance performance. Thus, dynamic capabilities could not only positively affect the performance of the firm itself, but also the performance of other firms simultaneously (Gudergan et al., 2012). Wang et al. (2015) identified that
dynamic capabilities had positive effect on one particular aspect of a firm’s performance, to be specific a positive effect on a firm’s financial performance.
Next to identifying which aspects of firm performance is influenced by dynamic capabilities, studies have also try to identify what types of dynamic capabilities influence a firm’s competitive advantage and its performance (Lin & Wu, 2014). Teece et al. (1997) divides in their article dynamic capabilities into three types: dynamic integration, dynamic learning and dynamic reconfiguration capability. Lin and Wu (2014) analyzed in their article with an empirical research how these types of dynamic capabilities influence firm
performance. They found that in general dynamic capabilities have a direct positive effect on firm performance, but the effects of the types of dynamic capabilities differed (Lin & Wu, 2014). The results implicated that of the three dynamic capabilities; the dynamic learning capability is most significant (Lin & Wu, 2014). Besides the study of Lin and Wu (2014), another study also founded empirical evidence of dynamic capabilities having a strong positive impact on firm performance (Schilke, 2014). In the research of Schilke (2014), two types of dynamic capabilities were tested, alliance management capability and new product development capability. Both dynamic capabilities indicated a positive direct effect on competitive advantage (Schilke, 2014). The effects of the two dynamic capabilities differ between the levels of environmental dynamism (Schilke, 2014). In a moderate dynamic environment the effect of the dynamic capabilities on competitive advantage is the highest, when the levels of environmental dynamism are low or high the effect is lower (Schilke, 2014). Hence, in the literature there is a lot of evidence that substantiates the idea that dynamic capabilities have a direct effect on firm performance (Wang et al. 2015).
However, there are also many scholars that believe that the link between dynamic capabilities and firm performance is not a direct one (Barreto, 2010). For example, Eisenhardt en Martin (2001, p.1106) state in their article that “dynamic capabilities are necessary but not sufficient, conditions for competitive advantage”. They consider dynamic capabilities not as heterogeneous resources, as they share common features across firms (Eisenhardt & Martin, 2000). When dynamic capabilities are not heterogeneous capabilities, it is not possible for firms to create a competitive advantage with those capabilities (Eisenhardt & Martin, 2000). According to them, a competitive advantage is not created by relying on dynamic capabilities, but rather on the configured resources due to dynamic capabilities (Eisenhardt & Martin,
2000). A firm can create a competitive advantage with dynamic capabilities by “using dynamic capabilities sooner, more astutely, more fortuitously than the competition” (Eisenhardt & Martin, 2000, p.1117).
Zott (2003) shares the similar view of dynamic capabilities not having a direct link to firm performance. He argues, that by adapting existing bundles of resources or routines dynamic capabilities can influence firm performance (Zott, 2003). Although this view (Zott, 2003) is quite similar to that presented by Eisenhardt and Martin (2000), there is one big difference between the two views. Whereas Eisenhardt and Martin (2000) argue that a firm must surpass its competitors in speed to achieve competitive advantage, Zott (2003) argues that firms can achieve different levels of performance, even though they posses the same identical dynamic capabilities. According to Zott (2003) firms can build different bundles of resources the same set of identical dynamic capabilities. As these bundles are different, a firm can also react differently, thus having an effect on the firm’s performance (Zott, 2003).
Next to theories provided by Zott (2003) and Eisenhardt and Martin (2000), there is also literature available that provides empirical data that the link between dynamic
capabilities is indirect (Barreto, 2010). Zahra, Sapienza and Davidson (2006) suggest that the relationship between dynamic capabilities and firm performance is indirect. Zahra et al. (2006) provide a framework were dynamic capabilities are a mediator of the relationship between substantive capabilities and organizational knowledge. Because organizational knowledge has a direct effect on firm performance, dynamic capabilities has in this manner an indirect effect on firm performance (Zahra et al., 2006).
The dynamic capabilities – performance relationship can be influenced indirectly, not only through using dynamic capabilities in a different way or indirectly through
organizational knowledge, also the conditions under which a firm uses its dynamic capabilities to enhance performance must be considered (Wilden et al., 2013). Shamsie, Martin and Miller (2009) argue that developing dynamic capabilities does not assure the improvement of performance but the context wherein dynamic capabilities are used
influences performance. In the article of Shamsie et al. (2009), the factors that can influence the relationship between dynamic capabilities and firm performance are organizational structure and competitive intensity. The view that conditions influence firm performance is similar to the contingency theory, which suggest that firm performance depends on how the organization is positioned in the environment and how organizational factors conform to each other (McKee, Varadarajan, & Pride, 1989).
Besides finding an indirect effect, they also argued that when dynamic capabilities are used when it is not necessary, dynamic capabilities can damage a firm’s performance rather than improve (Zahra et al., 2006). This view is supported by results found by Drnevich and Kriauciunas (2011). Instead of finding a positive effect between dynamic capabilities and firm performance as many authors mentioned before did, Drnevich and Kriauciunas (2011) results indicated that dynamic capabilities negatively affects firm performance. A possible reason for this negative relationship is that dynamic capabilities are very hard to manage (Drnevich & Kriauciunas, 2011). Especially when dynamic capabilities are not used as often its complexity increases (Drnevich & Kriauciunas, 2011). Furthermore, the effectiveness of dynamic
capabilities decreases when the use of them is infrequent and thereby, decreases the potential revenue of a firm (Leonard, 1992). Other potential problems are mismanaging the dynamic capabilities or not fully incorporate them in the firm and thereby, not reach their full potential (Drnevich & Kriauciunas, 2011). The difficulties of managing these dynamic capabilities and associated costs can counterbalance the potential increase in a firm’s performance (Drnevich & Kriauciunas, 2011).
The literature on dynamic capabilities suggests, that the positive relationship between dynamic capabilities and firm performance can be direct or indirect (Barreto, 2010).
Furthermore, scholars argue that there is also a possibility of dynamic capabilities having a negative influence on firm performance if the capabilities are not managed in a proper way (Drnevich & Kriauciunas, 2011). The argument of scholars that support the view that
dynamic capabilities indirectly influence firm performance through organizational knowledge (Zahra et al., 2006), context (Shamsie et al., 2009), bundling resources faster (Eisenhardt & Martin, 2000), or using resources in a different way than competitors (Zott, 2003).
Thus, so far in the literature, researchers have identified that several factors influence the relationship between dynamic capabilities and firm performance indirectly, but no concrete plan has been presented to guide this process (Zott, 2003). In this research this gap will be filled with a conceptual model. In order for dynamic capabilities to influence firm performance all the factors mentioned before must be handled in a correct way and this is possible with the means of a business model. A business model provides a firm a tool in which different elements can be combined and used to create value and deliver value to a firm (Osterwalder et al. 2005). With the help of a business model, dynamic capabilities can be monitored easier and thereby will the chance decrease of a firm being damaged by using dynamic capabilities (Drnevich & Kriauciunas, 2011).
Besides dynamic capabilities being monitored dynamic capabilities also need to be continuously developed to stay competitive and a business model can manage this process (Drnevich & Kriauciunas, 2011). Furthermore, a business model can provide guidance on the positioning of a firm in accordance with the competitive intensity and the structuring of the organization (Shamsie et al. 2006).
Thus, dynamic capabilities do affect firm performance but in order to only have a positive effect on performance the relationship must be mediated through the use of a business model (Drnevich & Kriauciunas, 2011). Hence the relationship between dynamic capabilities and firm performance is indirect (Drnevich & Kriauciunas, 2011)
Demil and Lecocq (2010) state that business models are nowadays in a continuous state of transitory equilibrium. In order to achieve firm performance, firms must constantly adapt, renew and reshape its business model (Demil & Lecocq, 2010). The process of
renewing an existing business model is assisted through dynamic capabilities (Achtenhagen et al., 2013). The dynamic capabilities, such as sense, seize and reconfigure, help the process of business model innovation through assessing when to design a model and what to design (Achtenhagen et al., 2013). Furthermore, dynamic capabilities provide a firm with resources that can be implemented in the business model design (Achtenhagen et al., 2013). The relationship, is even bidirectional, as a particular business model design can help a firm to develop new dynamic capabilities (Achtenhagen et al., 2013). This relationship will be examined in this article and thereby the following hypothesis is presented:
Hypothesis 1: The relationship between dynamic capabilities and business model innovation is a bidirectional relationship.
As is mentioned before, the aim of a business model is to deliver and create value and thus, its aim is to create firm performance (Johnson et al., 2008). However, only a successful; business model will provide the firm with a positive firm performance (Achtenhagen et al., 2013). Therefore the following hypothesis is:
Hypothesis 2: The relationship between business model innovation and firm performance is a positive relationship.
In the following section, these relationships will be discussed and analyzed, as well as a conceptual will be constructed
3. Conceptual model
3.1 Dynamic capabilities and business model innovation
As dynamic capabilities are evolutionary, they are helpful in analyzing business model innovation, as its aim is to adapt, reshape and renew business models (Achtenhagen et al., 2013). Teece (2007) identified three types of dynamic capabilities: sensing, seizing and reconfiguring opportunities. In this research, these types of dynamic capabilities are used to help clarify the relationship between dynamic capabilities and business model innovation. According to Achtenhagen et al., (2013) there are three critical dynamic capabilities linked to business model innovation, those capabilities are (1) identifying and experimenting with and exploiting business opportunities, (2) using resources in a balanced way, and (3) achieving coherence between active leadership, culture and employee commitment. These capabilities are constructed through different organizational activities (Achtenhagen et al., 2013). All these activities can be used in a different way and trigger business model innovation, which will then lead to the creation of sustained value (Achtenhagen et al., 2013).
Firstly, dynamic capabilities of the type of sensing opportunities in alignment with business model innovation will be discussed (Teece, 2007). In the dynamic and competitive business environment, it is essential for firms to be aware of all the current changes in the present and the future (Teece, 2007). Firms need to constantly scan, search and explore the environment, market and its technologies (Nelson & Winter, 1982). The process of retrieving information can be achieved by benchmarking other companies (Jantunen et al., 2012). Through monitoring technological developments, markets and competitors, relevant information can be gathered to be aware what kind of innovations will possibly create
sustainable value (Achtenhagen et al., 2013). Next to retrieving information, a firm must keep its competitors, suppliers and customers in mind and assess how and when they will respond to the information (Teece, 2007). If this is done correctly, a firm can create new opportunities due to new information (Teece, 2007). Shamsie et al. (2009) argued that creating a perfect context for dynamic capabilities, especially the construct of an organization, impacts the process of sensing opportunities. Achtenhagen et al. (2013) argue that a firm must provide a culture where it is encouraged to explore new ideas and with the notion that these ideas can lead into new projects. If such a culture is embedded in the firm, and innovation is
encouraged, employees are more eager to be on the look out for new opportunities (Wilden et al., 2013). Thus, when designing a new business model, an organizational structure must be constructed in such a manner, that encourages the exploration of new ideas (Achtenhagen et
al., 2013). This means that the environment of the firm must give employees the opportunity to make mistakes, assuming that they will learn from it (Achtenhagen et al., 2013).
A decentralized structure is a more appropriate structure for supporting innovation within a firm (Rindova & Kotha, 2001). In a firm with an organic organizational structure there are many aspects that facilitate the process of sensing opportunities (Wilden et al. 2013). For example, in a decentralized firm employees are inspired to participate, be creative, be loyal, and response to changing market conditions (Schminke, Ambroze, & Cropanzo, 2000). Although a centralized organizational structure has its advantages with planning, such a structure will hinder flexible information-processing behaviors (Wilden et al. 2013).
Therefore, decentralization is favored, as top management is more in touch with technological developments, competitors, and customers (Teece, 2007). By encouraging employees to sense opportunities a virtuous cycle is created, as sensing new opportunities will influence business model innovation and those innovations could be the development of new dynamic
capabilities (Wilden et al., 2013). Besides this positive relationship, Wilden et al. (2013) founded results of organizational structure to positively moderate the relationship of dynamic capabilities and firm performance and therefore, supports the thought of taking the
organizational structuring into account during the design process of a business model. When possible opportunities are sensed, the next step is to address them through new products, processes, or services (Teece, 2007). During this process a firm must likely invest in technological developments (Teece, 2007). If a promising opportunity is sensed, it does not necessarily lead to successful innovation (Teece, 2007). When a firm fails to invest or act appropriately on the sensed opportunity, a firm will fail to innovate (Teece, 2007). Therefore, it is important for a firm to use resources in a balanced way (Achtenhagen et al., 2013). It is a critical dynamic capability to be able to use resources such as financial, human, or
organizational knowledge in a comprehensive way (Achtenhagen et al., 2013). Resources must be allocated in a balanced way in order to use them optimally (Achtenhagen et al., 2013). Next to balancing existing resources, a firm must emphasize on the continuous development of all resources to continue the innovation process (Achtenhagen et al., 2013). By means of a steady cash flow this can be achieved, as with financial resources it is possible to invest in new business opportunities, which initiates activities that will develop resources (Achtenhagen et al., 2013). Besides having the financial means to invest and develop resources, a firm must have the human ability to guide and choose how to balance those resources (Achtenhagen et al., 2013). Thus, an appropriate manager and leadership style is necessary to guide the process of balancing resources (Achtenhagen et al., 2013). According
to Teece (2010) designing a business model is an art on its own. A manager must assess all available information and make a choice how to proceed further (Teece, 2010). The chance of implementing a viable business model innovation design is greater when a manager has a deep understanding of user needs, analyze the value chain exhaustively, are good listeners and fast learners (Teece, 2010). Sosna et al. (2010) also mention, that for a business model
innovation to be successful, an organization will go through a process of trial-and-error learning. According to Argyris (1976), a leader that assesses business model innovation must be skilled in double-loop learning. When a manager encounters a situation, it must evaluate it afterwards and hold on to the information that is helpful and renounce the information that is not (Argyris, 1976). If a firm is able to seize the opportunities, it can implement the
opportunities found during the sensing process and thereby, innovate the business model (Teece, 2010).
The last type of dynamic capability of reconfiguring opportunities must not be
forgotten, as it plays a crucial role in business model innovation and firm performance (Teece, 2010). Even, if all the previous steps are taken appropriately, sustainable profitability can only be achieved when the business model is reconfigured on a continuous basis (Teece, 2007). A firm grows constantly as well as markets and technologies transform over time (Teece, 2007) Hence, a business model must be reconfigured accordingly to assure sustained value is created (Teece, 2007). According to Helfat and Peter (2003) there are two types of
reconfiguring capabilities; sharing capabilities between the old and the new, and transferring capabilities geographically between markets. The role of managers in this stage of business model innovation is to achieve semi-continuous asset orchestration, which includes to align, to realign, and to redeploy assets (Teece, 2007). A firm must continuously manage and adapt the complementarities of its offers such as products, systems and structures (Teece, 2007).
The relationship between dynamic capabilities and business model innovation is explained through the three types of dynamic capabilities sensing, seizing and reconfiguring dynamic capabilities (Achtenhagen et al., 2013). However, it must be considered that to achieve sustainable competitive advantage and performance all these capabilities must be developed and enforced simultaneously (Teece, 2007). In order to reconfigure a business model in a successful way, a firm must be aware of its environment and therefore, the capability of sensing opportunities is very important (Teece, 2007). Further, an opportunity sensed must be seized in an appropriate manner to create sustainable value (Teece, 2007). Thus, dynamic capabilities and business model innovation exist in a virtuous cycle, and all dynamic capabilities are interlinked and complement each other to ensure a firm adapt and
renew their business models and so facilitate even more the creation of sustained value (Teece, 2007).
3.2 Business model innovation and firm performance
As Johnson et al. (2008) explain in their article, the fundamental aim of a business model is to create and deliver value to a firm. Whereas the essence of business model innovation is to establish that sustainable value is created and delivered (Teece, 2010). A successful business model will provide a firm with a competitive advantage and thus, improve its performance (Teece, 2010). However, a firm must keep in mind that a successful business model is only temporarily successful and even successful business models must be adapted or even abandoned at some point (Teece, 2010). The financial resources obtained from successfully creating value must be reimbursed in the business model innovation cycle to assure that a firm stays profitable (Achtenhagen et al., 2013). Especially during the stage of seizing
opportunities, it is important to have the available resources available to invest in new opportunities and in this way renew the business model (Teece, 2010). Besides investing in renewing a business model, the investments can also be used to develop new dynamic capabilities (Achtenhagen et al., 2013). Such an investment also effects indirectly business model innovation and is a good suitable action of sustaining the business model innovation cycle. Thus, the relationship between business model innovation and firm performance is also reciprocal just as the relationship between dynamic capabilities and business model
innovation. The conceptual model therefore is as followed (Figure 1).
Figure 1. A conceptual model of for business model innovation and its influence on firm performance through dynamic capabilities.
Dynamic
capabilities
Firm
performance
Business Model
Innovation
4. Discussion
In the previous section a conceptual model was constructed to provide a clear overview of the influences of dynamic capabilities on business model innovation and firm performance. First was determined that the effect of dynamic capabilities on firm performance was indirect and that this relationship is mediated through business model innovation.
Then the relationship between dynamic capabilities and business model innovation was examined. The distinction of dynamic capabilities made by Teece (2007), sense, seize and reconfigure opportunities, was used to analyze the relationship. All these types need to be enforced simultaneously, but independently they also effect business model innovation (Achtenhagen et al., 2013).
The first type of dynamic capabilities, sensing opportunities, helps a firm to be aware of the environment and so determine, where a firm needs to renew or adapt its business model (Achtenhagen et al., 2013). Factors that can enhance the sensing opportunities in a positive way are through an organizational culture, that allows creativity and trial-and-error learning (Shamsie et al., 2009), and through an organizational structure that is decentralized (Wilden et al., 2013). These factors therefore, need to be designed in during business model innovation.
When a firm has sensed opportunities, the next step is to seize those opportunities (Teece, 2007). The decision-making process is crucial during this stage and important design factors for this reason are acquiring a manager, who is able to allocate resources in a balanced manner (Achtenhagen et al., 2013), and who comprehends which sensed opportunities a firm needs to invest in (Teece, 2007).
The final type of dynamic capabilities, reconfiguring opportunities, is imperative for a firm to create sustainable business model innovation (Teece, 2007). A manager needs to share different capabilities and transfer capabilities geographically
In order for a firm to successfully use dynamic capabilities, a business model needs to be designed in a way that also improves the development of dynamic capabilities
(Achtenhagen et al., 2013). If a firm designs a business model in a way that a virtuous cycle between dynamic capabilities and business model innovation, innovation can happen on a continuous basis (Achtenhagen et al., 2013). Therefore, the first hypothesis that the relationship between dynamic capabilities and business model innovation is reciprocal is supported.
The relationship between business model innovation and firm performance was
relationship was singular, but it was found that the relationship is reciprocal. If a firm performs better, it has the ability to invest new capital in the innovation process and this in turn influence firm performance again.
4.1 Contributions
The theory on dynamic capabilities and business model innovation is still in the early stages of development (Johnson et al., 2008). The aim of many articles on these concepts is to provide a clear definition on those two (Zott et al., 2011). In this article it is discussed not only what a business model exactly is, but also what a business model can do. The same yield for dynamic capabilities, in this paper it was identified that the relationship between dynamic capabilities and firm performance is indeed indirect and business model innovation acts as a mediator between dynamic capabilities and firm performance. With the help of a conceptual model this paper illustrates that business model innovation creates sustainable value,
especially when dynamic capabilities are used in the design process. The conceptual
framework contributes to the theory in stressing the importance of dynamic capabilities and business model innovation on firm performance. The different dynamic capabilities and its influence on business model innovation were also discussed independently. This study contributes to the literature, as it clarifies a lot of inconsistencies in the literature due to including research from different fields of research such as marketing, accounting, strategy and information management. Further, conceptualizing the findings enhances the
understandability of the concepts and not only helps academic literature, but also managerial practitioners. Another managerial implication of this study is, that firms are made aware that it should focus more on dynamic capabilities and business model innovation, as it has a considerable impact on firm performance. Specific suggestions for the improvement of firm performance according to this conceptual framework is, that a firm needs to focus on
designing a decentralized structure to increase innovation and keep a constant eye on business model innovation to create sustainable value.
4.2 Limitations and future research
Although this study has many contributions both on a theoretical level as a managerial level, there are a few limitations. The main limitation of this study is, that this study is very
descriptive. Most of the assumptions made in this are build on descriptive studies.
Furthermore, the conceptual model that is constructed in this study has not been empirically tested. In further research the model needs to be tested empirically to examine the validity.
The model can be tested as a whole, or the influence of the dynamic capabilities can be tested individually. Future research could analyze, which type of dynamic capability is most
influential, sensing opportunities, seizing opportunities or reconfiguring opportunities. This study focused on providing a general conceptual model that is generally
applicable to the business environment. In future research different industries could be tested such as retail industry, information industry or telecommunication industry. The model could also be tested on various growth stages of firms and industries (Gambardella & McGahan, 2010). Future research could examine, if there are differences between mature industries and innovative industries (Gambardella & McGahan, 2010).
In the future, the limitations of this study could be examined separately or
5. Conclusion
The concept of business models and especially of business model innovation is relatively new, both for academic scholars and managerial practitioners (Zott et al., 2011). The same yields for dynamic capabilities, in the literature many definitions exist and various ideas of the influences of dynamic capabilities (Helfat & Peter, 2009). Therefore, the aim of this study was to answer the question: “What is the influence of dynamic capabilities on business model innovation and firm performance?” A conceptual model was constructed to clarify the concept of business model innovation and the implications of dynamic capabilities on the concept and how business model innovation influences firm performance.
First the business model concept, business model innovation and dynamic capabilities are explained with a literature review to provide a clear overview of the topics. A business model creates and delivers value for a firm and has a central role in explaining firm performance (Zott et al., 2011). Secondly, it was discussed that for a firm to continuously create and deliver value to a firm, it must adapt and renew its business model (Teece, 2010). Business model innovation is especially necessary because of developments in environments, markets, technologies or legal structures (Teece, 2010). Further, it was argued that capabilities must particularly be used for the innovation of existing business models are dynamic
capabilities (Teece, 2007). Dynamic capabilities are especially used for innovation during turbulent environments and therefore are especially helpful for business model innovation (Teece, 2010).
After providing a better view on the concepts of dynamic capabilities and business model innovation and its influence on firm performance a conceptual model was constructed. The concept of business model innovation acted as a mediator for dynamic capabilities and firm performance. Furthermore, the relationship between dynamic capabilities and business model innovation was found to be reciprocal. The relationship between business model innovation and firm performance also turned out to be reciprocal.
The conceptual model actually works as a virtuous cycle, as business model innovation can reinforce the development of dynamic capabilities, and firm performance provides the resources to be able to innovation business models continuously.
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