Innovative ambidexterity and the efficiencycentered and the novelty-centered businessmodel : effects of exploitation, exploration and technological innovation

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Innovative ambidexterity & the

efficiency-centered and the novelty-efficiency-centered business

model

Effects of exploitation, exploration and

technological innovation

Amsterdam, June 29, 2015

Liebei Ku, 10399976

Programme: Economics & Business – Specialisation Business Administration Bachelor Thesis: The Business Model Concept

Supervisor: Dr. Stephan von Delft Second supervisor: Dr. Carsten Gelhard Academic year: 2014-2015

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Statement of originality

This document is written by student Liebei Ku 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.

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Abstract

The business model concept is getting more and more attention from academic researchers and practitioners. Building further onto the business model concept and adding to its more general understanding, this article is based on the activity-based business model, in specific the efficiency-centered and the novelty-centered business model. It introduces the importance of innovative ambidexterity for efficiency-centered and novelty-centered business model designs. Through reviewing existing literature, it looks at the relation and effect exploitation and exploration have on the two different but related business models. It further looks at the moderating effect of external technological change. We build a conceptual model that suggests that exploitation and exploration separately create less value (i.e. transaction efficiency and transaction novelty) than when firms combine the two concepts through innovative ambidexterity. Innovative ambidexterity is furthermore desirable when firms face external technological change.

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Foreword

This paper is written for my Bachelor degree in Business studies at the University of Amsterdam. First, I want to thank my supervisor, Dr. S. von Delft, who guided me through the process of writing this thesis. He has transmitted his passion for the business model concept to me and I fully enjoyed the knowledge gaining process. I therefore hope that this thesis spikes up the curiosity in others toward this concept. Secondly, I want to thank my family and friends for always supporting me. Finally, I want to remind those who are reading this thesis to always ‘Sapere aude’, which means: ‘Dare to know’. To those who have the courage to always chase whatever it is that excites them.

I hope you enjoy reading my thesis!

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1. Introduction

In recent years, the term ‘business model’ has surged into the management vocabulary, getting attention from a wide range of disciplines (Shafer, Smith, & Linder, 2005), such as e-business (Amit & Zott, 2001; Morris, Schindehutte, & Allen, 2005), entrepreneurship (Morris et al., 2005), and innovation management (Hedman & Kalling, 2003). Business models are used for several purposes that are often interrelated, for instance explaining sources of value creation, possible ways to respond to disruptive innovation, and sources of competitive advantage (Johnson, Christensen, & Kagermann, 2008). While practitioners and academic researchers agree on the relevance of business models, academic research on business models seems to lag behind practice (Zott, Amit, & Massa, 2011). No generally accepted definition of the term ‘business model’ has emerged, thus challenging what actually constitutes a business model (Morris et al., 2005).

What is lacking in established literature is the potential role the environment plays in relationship to the business model. Existing literature does mention the upsurge of interest in strategic fit, Porter (1996) stressed the importance of mutually reinforcing activities in generating and sustaining a competitive advantage. Siggelkow (2001) presented a framework about internal and external fit and its relationship with organizational inertia when a firm is challenged with environmental change. Naman & Slevin (1993) investigated entrepreneurship and fit, resulting in a normative model of fit. This paper adds onto the process of filling this gap between environment and the business model, as methods are needed for evaluating the business model’s fit with changing environmental conditions. As environment is becoming more and more turbulent (Voelpel, Leibold, & Tekie, 2004), it’s becoming crucial for firms to understand and knowing how to adapt their business model to the changing environment to remain successful and sustain competitive advantage.

This research, based on the value creation framework by Amit & Zott (2001), will specifically focus on the concept of innovative ambidexterity (i.e. exploitation and

exploration) as an antecedent and the efficiency-centered business model (ECBM) and novelty-centered business model (NCBM) as the outcome. It will then extensively discuss technological innovation, chosen as environmental moderator, and the altering effect this component has on the selected antecedents, and then again their effect on the ECBM and the NCBM, developing a conceptual framework.

The added knowledge about innovative ambidexterity and the ECBM and the NCBM with technological innovation acting as the environmental moderator will add to the already

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established academic research, helping the design of further business models as it draws attention to environmental change (Morris et al., 2005). Allowing researchers who examine the business model construct through different lenses to draw effectively on the work of others. Beside the relevance for academic researchers, this new framework will guide

practitioners (i.e., for managers) when being faced with environmental technological changes, to help keeping their firms on the right track and prevent being ‘out ruled’ by not being able to adapt. It will help managers better understand business models.

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2. Literature review

In this section, the existing literature related to the research problem surrounding the business model concept will be addressed in order to define the research around ambidexterity and its relation/effect to the different business model design themes in the context of environmental change. First the emergence of the business model is reviewed, followed by the problem surrounding the business model. Then the literature concerning the different business models established by scholars and its commonalities are discussed. Finally, the importance of the business model will be emphasized and definitions of what the business model is not are provided.

2.1 Definition

The interest in business models is relatively recent; it has been getting substantial attention from both academics and practitioners (Zott, Amit, & Massa, 2011), but the business model concept is not new; its first use in the literature can be traced to Lang (1947)

(Markides, 2013). Although business models have been known to be integral to trading and economic behavior (Teece, 2010), the interest in the business model concept has grown exponentially in the past few years (Markides, 2013), mainly due to the boom of the Internet in the mid-1990s (dramatic increase in the incidence of the term in the period 1995-2000) and the rise of e-commerce in emerging markets (Zott et al., 2011). Shafer, Smith, & Linder (2005) mention that approximately 27% of Fortune 500 firms used the term “business model” in their 2001 annual reports; companies of all sorts in virtually every industry now rely on the concept. Up to December 2009, the term business model had been included in 1,202 articles in academic journals, with non-academic articles following a similar trend (Zott et al., 2011). However, indicated by Zott et al. (2011); Ghaziani & Ventresca (2005), is that academic research on the business model concept seems to lag behind practice.

This upsurge of the business model concept, results in evidence that the number of potential business models is limitless (Morris, Schindehutte, & Allen, 2005). There is however a lack of consensus of what a business model really means (Voelpel, Leibold, & Tekie, 2004; Zott et al., 2011), about the key components a business model should contain (Morris et al., 2005; Osterwalder, Pigneur, & Tucci, 2005; Zott et al., 2011), and how they are created, evaluated, and sustained (Morris et al., 2005; Voelpel et al., 2004; Zott et al., 2011). A common and widely accepted language, definition or conceptual base of the business model construct that would allow researchers who examine the business model construct through different lenses to draw effectively on the work of others is yet to be developed (Zott et al.,

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2011). Morris et al. (2005) state the importance of developing an integrative framework for characterizing the business model, meaning that the framework should be working towards a generally accepted definition of the business model concept that is applicable to firms in general, but should also be one that serves the needs of the individual entrepreneur.

There is no consensus regarding the definition of the business model (Morris et al., 2005). Timmers (1998) referred to the business model as an architecture, primarily containing product, service and information flows, but also sources of revenues and value (suppliers) network. Dubosson-Torbay, Osterwalder, & Pigneur (2002) also defined the construct as an architecture (Zott et al., 2011). Magretta (2002) on the other hand has described the business model as a story that explains how the enterprise works. According to Teece (2010, p. 179), “a business model articulates the logic, the data and other evidence that support a value proposition for the customer, and a viable structure of revenues and costs for the enterprise delivering that value”. Weill & Vitale (2001) argue that a business model defines the roles and relations among a firm’s network (i.e. consumers, customers, allies, and suppliers) that identifies the flows of product and/or service, information and revenue streams. A commonly used business model concept in business practice is that of Osterwalder & Pigneur (2010). The business model canvas consists of nine building blocks that form a shared language for describing, analyzing and designing the business model. The building blocks are customer segments, value propositions, channels, customer relationships, revenue streams, key

resources, key activities, key partnerships, and cost structure (Osterwalder & Pigneur, 2010). Zott et al. (2011), through their literature review, identified four common themes surrounding the business model construct. Several scholars have distinguished the business model as a new unit of analysis, may it be explicitly or implicitly, as it spans or bridges firm and industry boundaries (Morris et al., 2005; Zott et al., 2011). It connects traditional units of analysis (Zott et al., 2011) that put their focus of analysis specifically on the business unit, the industry/environment or the firm (Bettis, 1998). The business model for example links the firm and its network (e.g. suppliers, partners and distribution channels) (Zott et al., 2011). Casadesus-Masanell & Ricart (2010) view the business model more centered on the focal firm, but its boundaries are broader than those solely of the firm. They see a business model as a reflection of a firm’s realized strategy; the logic of the firm, the way of operating, but also the way it creates value for its stakeholders. Others place their analysis closer to the network, e.g. Tapscott, Lowy, & Ticoll (2000) suggest a business model representing all key participants surrounding the firm (i.e. partners, customers, and suppliers) and the value

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creation relationship between them. For others, analysis lies between the firm and the network (Amit & Zott, 2001).

The second common theme identified by Zott et al. (2011) is the holistic and

systematic perspective towards the business model construct. A business model is portrayed as not only what businesses (should) do, but emphasizing on how they do it (Zott et al., 2011). Morris et al. (2005) illustrated this by developing a business model representation consisting of three specific decision-making levels, namely a foundation, a proprietary, and a rules level. At the foundation level decision-making is generic on what businesses do. This level consists of six components (i.e. value proposition, customer, internal processes and competencies, external positioning, money, entrepreneur’s personal/investor factors), some of which focus more on how to exactly e.g. create value, make money, and competitively position ourselves (Morris et al., 2005). After the foundation level, businesses should enable development of unique combinations among decision-making variables, which in return results in marketplace advantage or in the creation of sustainable competitive advantage (Morris et al., 2005). The how to do business aspect of the systematic perspective towards the business model construct (Zott et al., 2011) in the framework by Morris et al. (2005) is shown by creating unique combinations through innovation. The last level, rules, consists of guidelines that provide clearer principles that will guide the firm in a more positive competitive position (Morris et al., 2005).

Thirdly, it is found that most of the business models contain the notion of activities, performed by firm and/or by its partners (Zott et al., 2011). Zott et al. (2011) state that in established business model definitions, the activity perspective is recurrent, either implicitly or explicitly. Afuah (2004) directly includes activities in its conceptualization of the business model construct, concentrating on the what, who, and how of business activities and how these activities are connected (Morris et al., 2005). Similar, Hedman & Kalling (2003) proposed a conceptual business model that includes seven components. These components (i.e. customers, competitors, the offering, activities and organization, resources, and factor market interactions) address the importance of potential resources and diffusing them in activities (Hedman & Kalling, 2003). Scholars also imply activities indirectly by for example pointing to processes, functionalities, or transactions in the business model construct (Zott et al., 2011). The earlier mention business model framework by Morris et al. (2005) is an illustration of implying activities indirectly by pointing to processes. Alt & Zimmerman (2001) too have pointed to processes, proposing a business model with the following six components: mission, structure, processes, revenues, legalities, and technology (Morris et al.,

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2005). Likewise, Johnson, Christensen, & Kagermann (2008) mentioned that a successful business model has four interlocking elements, namely customer value proposition, profit formula, key resources, and key processes (levering its key resources). The first two

components define value (creation) for the customer and the company and the later describe how that value will be delivered to both customer and company (Johnson et al., 2008). Another way that the notion of activities is shown in the business model is through

functionalities that support the firm’s processes and/or activities (Zott et al., 2011). The view of the business model as an activity system is pointed out through transactions (Zott et al., 2011); by Amit & Zott (2001) activity-based business model based on value creation in e-business. This paper is built on Amit & Zott (2001) business model definition, as will be discussed later. Previously mentioned business models seem to support an activity system perspective (Zott et al., 2011).

The fourth common theme that Zott et al. (2011) found through their literature review is that scholars have shifted their emphasis from value capture to value creation, highlighting the latter without ignoring the former. In most predominant business model components, proposed by scholars, are related to the concept of value (e.g. profit and value-to-customer) (Zott et al., 2011). The just mentioned business model by Amit & Zott (2001) for example seeks to identify the sources of value creation to achieve and sustain competitive advantage. Or the recurrent business model component customer value proposition (Zott et al., 2011) mentioned by e.g. Johnson et al. (2008), Morris et al. (2005), and Osterwalder & Pigneur (2010). The value creation concept is evident in the business model literature surrounding the contexts e-commerce, strategy, and technology and innovation management (Zott et al., 2011).

Thus, although the recent upsurge of the business model concept has led to a limitless number of potential business models and a non-consensus regarding its definition, four common themes are identified. The business model is viewed as a new unit of analysis, as a holistic and system-level concept, centered on activities, and emphasizing value creation (Zott et al., 2011). Having identified these four emerging themes will help scholars achieve a more unified perspective of the business model concept.

2.2 The importance of the business model

The use of business models in industries by firms has been relevant for firm success (Magretta, 2002). Though a common conceptual base is missing, companies feel that designing a successful business model is all the more important for their long life and

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sustenance (Zott et al., 2011). Firms can compete through their business models (Casadesus-Masanell & Ricart, 2010). As choosing a particular business model means choosing a

particular way to compete (Casadesus-Masanell & Ricart, 2010), following a specific logic of the firm (Teece, 2010), and creating value in a particular way (Casadesus-Masanell & Ricart, 2010). The latter is mentioned by Zott et al. (2011) as the fourth common theme found between several business models that are proposed by scholars. Zott et al. (2011) also presented several outcomes and consequences of business models; e.g. rules of competition (Tapscott, Lowy, & Ticoll, 2000), total value creation (Amit & Zott, 2001; Hedman & Kalling, 2003), and firm performance (Casadesus-Masanell & Ricart, 2010; Zott & Amit, 2008). Showing that the business model is important to performance, therefore an

organization cannot afford ambiguousness around its business model construct (Magretta, 2002). Besides that there is consensus about the importance of the business model (Zott et al., 2011), scholars and practitioners agree also that business model innovation is relevant to competitive advantage (Teece, 2010). The reinvention of a firm’s existing business model when it wants to create new growth, to capitalize on a game changing opportunity, and needs to respond to a shifting basis of competition, reinforcing the business core (Johnson et al., 2008). Innovating in the business model can result in differentiation between how one firm performs from another (e.g. firms that are positioned in the same market/industry), making it hard for (potential) competitors to replicate the model; which is critical as business

environment changes constantly (Casadesus-Masanell & Ricart, 2010). According to Zott et al. (2011) firms that were financial outperformers put twice as much emphasis on business model innovation as did underperformers.

Thus, the business model and a possible alteration of the business model can help firms in attaining firm success and competitive advantage. The business model can induce firms in reinventing their company and/or industry (Voelpel et al., 2004), making the development of a common and widely accepted language of the business model that more necessary.

2.3 Business model and strategy

Despite the absence of a commonly accepted definition of the business model

construct, with scholars’ attempts at conceptual refinement as some mentioned earlier, it has helped define what business models are not (Zott et al., 2011). The business model is e.g. not a network structure (Tapscott et al., 2000), a marketing model or strategy (Timmers, 1998), business processes (Shafer et al., 2005), a product market strategy (Zott & Amit, 2008). The

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business model does not include a simple path to value creation, focusing solely on the firm, but instead value creation is complex, relying on the interconnected set of exchange

relationships and activities among multiple players (Zott et al., 2011). The common theme of the business model as an activity system as identified by Zott et al. (2011) leads to believe that the business model is not reduced to issues concerning the internal organization of firms, but instead spans firm boundaries. Magretta (2002) states the importance of that the business model is not the same as strategy. The business model refers to the logic of the firm and provides information that demonstrates how the business creates and delivers value to its customers (Teece, 2010). Strategy on the other hand refers to the choice of business model through which the firm will compete in the marketplace (Casadesus-Masanell & Ricart, 2010). A business model is thus more generic than a business strategy (Teece, 2010). To understand the concept of strategy, Porter (2000) looks at strategy with an outside-in view, putting the focus of the firm on the industry to position itself to achieve superior performance. Porter (2000) defined strategy through three key principles. “Strategy is the creation of a unique and valuable position, involving a different set of activities” (Porter, 2000, p.3). Zott et al. (2011) mention that the business model is not corporate strategy as it does not describe or prescribe the areas of business in which a firm becomes active. “Strategy requires you to make trade-offs in competing – to choose what not to do” (Porter, 2000, p.3). Choosing to perform activities differently is the essence of strategy (Porter, 2000). Though many scholars and practitioners use the terms interchangeably nowadays, the business model and strategy are two related but not equal (Magretta, 2002) and often confused concepts (Zott et al., 2011). Similar to Porter’s first and second strategy principle, Zott & Amit (2008) state that the business model is not a product market strategy, as it does not describe in which areas of business its firm becomes active. They suggest that the two are complements, not substitutes. Besides the outside-in view, the business model does not refer to e.g. differentiation strategies that take on an inside-out view, in order to position its firm in the market (Zott & Amit, 2008). Porter’s third key principal regarding strategy is that is involves creating fit among a company’s activities (Porter, 2000). The issue of fit lies between a firm and its environment, strategy, structure, and processes (Naman & Slevin, 1993).

Morris et al. (2005) mention that the translation of the business model components into actual operational decisions is a concerning challenge. Thus, understanding the difference between strategy and the business model and how they interconnect and affect each other can guide firms into new profitable ways of competing (Casadesus-Masanell & Ricart, 2010) and protection of its competitive advantage (Teece, 2010).

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3. Conceptual framework

3.1 Activity-based perspective on the business model

This paper focuses and follows one business model definition, namely the activity-based perspective of Amit & Zott (2001). They attempted to fill in the theoretical gap by seeking to identify the sources of value creation by developing a value creation framework. This framework is based on already established theories, namely transaction cost economies, Schumpeterian innovation, resource-based view, and strategic networks. The transaction cost economies theory is related to transaction efficiency. A transaction occurs when a good or service is transferred across a technologically separable interface (Amit & Zott, 2001). By applying transaction efficiency, the costs of those transactions (e.g. time spent by managers searching for customers) will decrease, which is a major source of value (Amit & Zott). Schumpeterian innovation can be seen as creative destruction; Amit & Zott (2001) affirm that it is the theory of economic development and new value creation through the process of technological change and innovation. Here innovation is the value creation source. The resource-based view building onto the Schumpeterian innovation theory is about value creation through resources and capabilities. Resources and capabilities should be valuable, rare, imperfect imitable, and non-substitutable for them to be able to sustain competitive advantage (Barney, 1991). The last theory that Amit & Zott (2001) use to built their value creation framework are strategic networks. Stable organizational relations are important to participating firms (e.g. alliances). Thus value is created through network structure (e.g. sharing knowledge between participants). By integrating the various frameworks, Amit & Zott (2001) identified four sources of value creation: efficiency (transaction efficiency increases when the costs per transaction decreases), complementarities (among resources and capabilities, e.g. a bundle of activities together provides more value than the total value of having each of the activities performed individually), lock-in (extent to which customers and strategic partners are motivated to engage in repeat transactions, e.g. increasing switching costs), and novelty (creating value through innovation by e.g. new participants or new

transactional structures). These four sources of value creation form an activity system as they focus on the interdependence of the activities centered on the focal firm and its partners (Zott & Amit, 2010). Managers create this interdependence among activities by shaping and designing both the organizational activities and the transactions that weave the activities together into a system (Zott & Amit, 2010). The exact business model definition (Amit & Zott, 2001): “the content, structure, and governance of transactions designed so as to create

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value through the exploitation of business opportunities” (Zott et al., 2011, p.1024). The three design elements of content, structure and governance even go beyond the interdependencies among activities or the network structure (Zott & Amit, 2010). Transaction content refers to the goods or information that are being exchanged and the resources and capabilities required enabling the exchange. Transaction structure refers to the parties that participate in an

exchange and how they are linked to each other. Transaction governance refers to how the flows of information, resources, and goods are controlled by the relevant parties (Amit & Zott, 2001).

Although a consensus regarding the definition of the business model is missing, the business model definition of Amit & Zott (2001) is chosen as the base of this research paper, as it contains the common themes surrounding the business model construct identified by Zott et al. (2011). It is chosen due to the advantage of being established in academic literature and thus will help give shape to the theoretical anchorage of the business model. The value of their concept is that it analyzes not a single theoretical framework (e.g. RBV), but instead an integration of the various frameworks. It links strategic management and entrepreneurship theories of value creation. Value creation and its sources are one of the most, if not the most important for businesses in today’s dynamic environment to sustain competitive advantage (Amit & Zott, 2001) and firm performance (Zott & Amit, 2008). As mentioned, Zott et al. (2011) found common themes through established business model literature. Under which the activity perspective is recurrent and the shifting of the business model emphasis from value capture to value creation (Zott et al., 2011). Amit & Zott’s (2001) value creation framework contains these two common themes, besides proposing the business model as a unit of analysis. The framework serves thus as a solid base for further building onto the business model concept, to add to its more general understanding, and to serve as a building block for other researchers.

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3.2 Efficiency-centered and novelty-centered business model

With the value creation framework of Amit & Zott (2001) forming the base of this paper, it is chosen to focus solely and specifically on the efficiency and novelty aspects of their business model concept. Zott & Amit’s (2008) research is based around the question of how the business model and its product market strategy interact to impact firm performance. They selected the efficiency-centered business model and the novelty-centered business model as their independent variables and distinguished them as clearly representing two different ways of how firms engage within their network (e.g. customers and partners) when implementing a transaction. By randomly sampling 170 firms on their business model characteristics and product market strategy, Zott & Amit (2008) identified 13 items for novelty and 11 items for efficiency using scales. Items belonging to the efficiency-centered business model for example are the low numbers of errors made within a firm and the decreasing inventory costs for all firm’s participants. While items belonging to the novelty-centered business model are for example the new combinations of products, services, and information (Zott & Amit, 2008). These items lead to a more specific definition of the efficiency-centered and the novelty-centered business model. Further, the efficiency and novelty-centered business model are chosen by Zott & Amit (2008), because they correspond (on the business model level) to product differentiation and cost leadership (on the product market strategy level).

The novelty-centered business model refers to the conceptualization and adaption of new ways of conducting economic exchanges among various transaction participants (Zott & Amit, 2008). Finding innovative ways of conducting transactions (e.g. finding new

participants (Amit & Zott, 2001; Zott & Amit, 2008). Or as mentioned, new transaction structures, new transactional content, and new transaction governance of the activity system, for each resources and capabilities are required (Amit & Zott, 2001). Thus innovating the selection of activities, how activities are linked, and who performs or governances these activities (Zott & Amit, 2010). The higher the degree of novelty, the higher the switching costs for a firm’s customers, suppliers, and partners as alternatives of doing business may not be available (Zott & Amit, 2008). When customers perform marketing and sales activities (e.g. eBay’s activity system), due to a new transaction structure that leads to strong network externalities, they appoint higher switching costs to changing to another service provider (Zott & Amit, 2010). Zott & Amit (2008) found through their research that emphasis on a novelty-centered business model would have a positive affect on the total number of transaction types, the price that a customer pays for a good acquired in transaction or the right to participate in

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the transaction. Though emphasis on a novelty-centered business model leads to a negative affect concerning the costs for a focal firm when collaborating with its partners (e.g. supplier).

Efficiency-centered business model refers to the measures a firm may take to achieve transaction efficiency; they do not refer to the outcome (efficiency) itself (Zott & Amit, 2008). Transaction efficiency is thus reducing transaction costs for all relevant participants, and this reduction can derive from several activities (achieve efficiency in areas such as product and/or service selection range, symmetric information, scale economies, and speed) (Amit & Zott, 2001). Zott & Amit (2008) found that the use of efficiency-centered business model lead to a decreasing affect on both costs for focal firm generated though collaboration and providing its own resources for transaction. Putting a focus on transaction efficiency when in a collaboration means mutually reinforcing the focus of managers on the efforts on cost savings across transactions. If a firm provides its own resources for transaction it will become more skillful at reducing costs over time, thus leading to a decreasing costs effect (Zott & Amit, 2008). Efficiency-centered business model does lead to an increase in the average number of transactions of each transaction type, because new customers will find it more appealing to make some sort of transaction with the firm and existing customers may transact more frequent (Zott & Amit, 2008). The efficiency-centered business model namely increases the reliability and simplicity of a transaction, while reducing the asymmetry of information among transaction participants, and it speeds up transactions, increasing the average number of transactions of each transaction type (Zott & Amit, 2007).

Thus, the reason for choosing the efficiency-centered and the novelty-centered

business model as dependent variables is that the two can be seen as two ends of a continuum (Zott & Amit, 2008). The former being more focused on firms’ internal transaction efficiency and thus approving of what already exits, while the later focuses on creative destruction and is in search of the new (Amit & Zott, 2001). This leads to the following two dependent

variables:

DV1: Efficiency-centered business model (ECBM) DV2: Novelty-centered business model (NCBM)

Being two separate dependent variables, doesn’t exclude the connection between the

efficiency and novelty centered business model. Zott & Amit (2007) argue that efficiency and novelty, though being on two ends of a continuum, are not mutually exclusive but instead are complementary. Interaction among the two business models could have a positive effect on firm performance (Zott & Amit, 2007). More value creation is possible when simultaneously pursuing both as increasing novelty may enhance the firm’s position to appropriate the extra

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value created through increased efficiency (Zott & Amit, 2007). Similarly, increasing the focus on the efficiency-centered business model design may enhance the return on design novelty. By for example attracting a new range of customers that appreciate lower transaction costs (Amit & Zott, 2001). However, other scholars argue that designing a business model for both efficiency and novelty can lead to an adverse affect (Zott & Amit, 2007). It could lead to unsatisfactory resource allocation or poor firm performance as it misses out on the

opportunity to become more skilled in one business model design (Zott & Amit, 2007).

3.3 Ambidexterity

The two dependent variables of this paper’s conceptual framework are the novelty-centered business model, which focuses on finding innovative ways of conducting

transactions, and the efficiency-centered business model, referring to the measures a firm may take to achieve transaction efficiency. Based on these two dependent variables, we chose to focus on ambidexterity as the independent variable; in specific we choose innovative

ambidexterity as the antecedent, which will be discussed later in the paragraph. The reason for this is that the concept around ambidexterity is important for firms to understand as it is receiving increased attention in managerial practice and prior literature supports that certain aspects of ambidexterity, such as balancing strategic flexibility and operational efficiency, can support sustainable competitive advantage (Kortmann, Gelhard, Zimmerman, & Piller, 2014). Kortmann (2014, p.2) defines the term as the ability of organizations to “simultaneously balance different activities in a trade-off situation”. Strategic flexibility allows organizations to continuously create and combine resources in new ways and is thus associated with high investment- and opportunity costs. While operational efficiency is associated with cost and time savings that generate financial benefits in the short run (Kortmann et al., 2014). Strategic flexibility and operational efficiency are, as Kortmann (2014) defined ambidexterity, different activities that result in a trade-off situation, and are thus aspects of ambidexterity. Persistent in organizational literature is that successful firms are ambidextrous, meaning that they are aligned and efficient in managing their demands while concurrently adaptive to changes in the environment, also known as the term organizational ambidexterity (Raisch & Birkinshaw, 2008). O’Reilly & Tushman (2008, p.188) describe organizational ambidexterity as a “senior team capability that may act as a key discriminator between those firm that thrive as

environments shift versus those that do not”. Thus ambidexterity bridges the gap between the organization and its environment by means of strategic decisions that are ambidextrous (Kortmann, 2014). Previous research has stressed that organizations have to pay attention to

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certain roles with the rise of ambidexterity (Raish & Birkinshaw, 2008). Gibson &

Birkinshaw (2004) for example suggested that ambidexterity arises from the business unit’s organizational context, namely how individuals (e.g. managers) within a firm add to

ambidexterity. This research addresses the relation and effect that innovative ambidexterity has on the novelty-centered and efficiency-centered business model. Specifically, how exploitation and exploration, the two components forming innovative ambidexterity, affect the two dependent variables. Innovative ambidexterity will be discussed in the next

paragraph.

3.3.1 Innovative ambidexterity (exploitation and exploration)

The focus of research is specifically on innovative ambidexterity. Kortmann (2014) analyzed the mediating role of innovation orientation and cost orientation on the relationship between ambidexterity-oriented decisions and innovative ambidexterity. Ambidexterity-oriented decisions, related to strategy formulation, embrace the capability of top management teams to manage opposing strategic directions, namely adaptability and alignment (Kortmann, 2014). Adaptability-oriented decisions define the extent and effectiveness to which a firm adapts to changes in the environment through focusing on managing innovative decisions. It gives organizations the flexibility, also mentioned as strategic flexibility by Kortmann et al. (2014), to respond quickly to changes in the environment (Kortmann, 2014). Kortmann et al. (2014) found that strategic flexibility is a positive antecedent for innovative ambidexterity, which can result in operational efficiency. Alignment-oriented decisions on the other hand specify how internal activities can be aligned efficiently to support overall firm objective (Kortmann, 2014). A balance between adaptability and alignment can be the instrument to achieving sustainable competitive advantage, though dependent on its strategy

implementation (Kortmann, 2014). Kortmann’s research (2014) found support for

ambidexterity-oriented decisions preceding innovative ambidexterity and that it supports both innovation orientation and cost orientation. These two strategic orientations denote two cultural implementation mechanisms that mediate the direct effect between ambidexterity-oriented decisions and innovative ambidexterity (Kortmann, 2014). Both cost orientation and innovation orientation are relevant to simultaneously develop discontinuous and incremental innovations (Raisch & Birkinshaw, 2008). While the first enhances efficiency in all parts of the value chain and is focused on the exploitation of already existing product-market

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Innovation orientation, despite its exploratory nature, is found (Kortmann, 2014) to help firms develop both discontinuous and incremental innovations.

Innovative ambidexterity, an ambidextrous operational capability (Kortmann et al., 2014), thus captures the ability of firms to simultaneously develop discontinuous, aiming at entering new product-market domains, and incremental innovations, aiming at improving existing product-market positions (He & Wong, 2004). It is based on the two dimensions of innovation, namely exploratory and exploitative (Kortmann et al., 2014). Exploration entails firm behaviors characterized by search, discovery, experimentation, risk taking and

innovation, while exploitation entails refinement, implementation, efficiency, production and selection (He & Wong, 2004). Exploitation is also associated with structures that are more mechanic, routinized and bureaucratic, while exploration is more organic and autonomic (He & Wong, 2004). Both constructs were giving four items that are adopted from Jansen et al. (2009) to better understand the concept of innovative ambidexterity (Kortmann, 2014). The four items for exploratory innovations are that the organization responds to demands that go beyond existing products and services, it commercializes products and services that are completely new to them, frequently seek out new opportunities in new markets, and it regularly uses new distribution channels. The four items for exploitative innovations are as followed: the organization makes small adjustments to their existing products and services, continuously improves their production’s efficiency of products and services, continuously increases economies of scales in existing markets, and frequently expands services for existing clients (Kortmann, 2014; Kortmann et al., 2014).

It is chosen to focus specifically on innovative ambidexterity as the antecedent, consisting of two constructs, exploitative and exploratory innovations. This because recent innovation management and strategy literature emphasize the relevance of combining the two constructs for sustainable superior performance (Kortmann, 2014). Prior literature have shown that exploration and exploitation are fundamentally different logics that often create tensions, but an appropriate balance between the two is found to be critical for firm survival and prosperity (He & Wong, 2004). Markides (2013) mentions that if we want individuals within a firm (e.g. managers) to display ambidextrous behaviors in an organization, we must first create the appropriate organizational context for such behaviors to emerge. The

organizational context in this research is the efficiency-centered and novelty-centered business model. Thus, this paper seeks to build a profounder understanding between innovative ambidexterity and its relation/effect on the efficiency-centered and novelty-centered business model in a changing environmental context.

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3.3.2 Dynamic capability

Kortmann (2014) describes dynamic capability as a capability that does not directly affect the firm’s output, but indirectly contributes by having an impact on its operational capabilities. Often dynamic capabilities are described vaguely as ‘routines to learn routines’ (Eisenhardt & Martin, 2000). They describe it as the firm’s ability to integrate, build, and reconfigure internal and external resources, emphasizing the key role of strategic leadership, to address rapidly changing environments, helping it to sustain competitive advantage. Dynamic capabilities include specific activities that foster coordination and organizational learning, such as alliances (O’Reilly & Tushman, 2008). Contrasting to dynamic capabilities, operational capabilities are business-level processes, giving a firm contemporary advantage (O’Reilly & Tushman, 2008).

Kortmann et al. refer to various activities in a trade-off (e.g. flexibility and efficiency) as ambidextrous operational capabilities (2014). O’Reilly & Tushman (2008) state that the linkage found between firm performance and ambidexterity is only an illustration of the benefits of exploration and exploitation, it does not essentially mean the presence of a dynamic capability. Ambidexterity can only become a dynamic capability if managers are consciously able to arrange firm resources in a repeatable way. They did however found through their research, based on existing empirical evidence, that the conditions under which organizational ambidexterity is likely to be successful are also the foundational elements for it to be seen as a dynamic capability (O’Reilly & Tushman, 2008). Eisenhardt & Martin (2000) similarly suggest that dynamic capabilities require a blend of two different strategic logics, namely exploration and exploitation. He & Wong (2004) state that exploration and

exploitation form a dynamic path of absorptive capacity. Although Kortmann et al. (2014) refer to ambidextrous operational capabilities, it is mentioned that ambidexterity-oriented decisions associated with strategic process theory, consisting of both strategy formulation and strategy implementation have a dynamic relationship that is constantly coevolving

(Kortmann, 2014). Innovation and cost orientation are mechanisms that are contradictory and complex. Managers can dynamically shift between the two strategic postures in one

organizational unit (Kortmann, 2014). Gedajlovic et al. (2012) state that ambidexterity

dynamically balances organizational renewal and operational efficiency, as well as radical and incremental forms of innovation (Kortmann et al., 2014).

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3.4 Innovative ambidexterity and the efficiency-centered business model

Zott & Amit (2008) found based on their research that placing a firm’s emphasis on a cost leadership business strategy decreases the price that a customer pays for a good acquired in a transaction and increases the average number of transactions of type t made. It also decreases the costs for the focal firm for providing its own resources for a transaction and for collaborating with a supplier or partner in a particular transaction. Of which the last three consequences have the same affect on the efficiency-centered business model. The decrease in price and increase in average transactions per type made can be linked to scale economies, a subcomponent of the efficiency source of the value creation business model (Amit & Zott, 2001).

The four items for exploitative innovations mentioned earlier by Kortmann (2014), for example the continuous improvement of an organization’s production’s efficiency of products and services can lead to costs reduction through economies of scales. He & Wong (2004) mention that exploitative innovation may affect product innovation performance through emphasizing incremental improvements of existing products, which can reinforce efforts on cost savings across transactions.

Proposition 1a: Exploitation has a positive relation to efficiency-centered business model design.

As mentioned, costs for the focal firm can decrease through collaborating with

supplier or partner in a particular transaction, which can be seen as exploration e.g. using new distribution channels as mentioned as one of the four items for exploratory innovations. Exploration refers to learning gained through processes of variation and discovery, which can be done by alliancing with a partner in a new market (Raisch & Birkinshaw, 2008). This learning from another organization can mean transaction risk reduction and speeding up a transaction (Amit & Zott, 2001), which can mean a positive relation to the efficiency-centered business model. Also Kortmann et al. (2014) found that strategic flexibility positively

influences innovative ambidexterity that again positively influences operational efficiency, which can be cost or time based.

However, seeking out new opportunities and going beyond existing product and services can be costly, and can increase time spent by managers searching for customers (Amit & Zott, 2001). Zott & Amit (2008) looking at differentiation strategy could not clearly explain how product differentiation would affect the marginal effect of an efficiency-centered

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business model. Though differentiation can be done efficiently (Kortmann et al., 2014), the price that a customer pays for a good acquired or the right to participate in a transaction increases, thus increasing the transaction costs distinctive of an efficiency-centered business model (Zott & Amit, 2008). Assuming the costly process of exploration:

Proposition 1b: Exploration has a negative relation to efficiency-centered business model design.

3.5 Innovative ambidexterity and the novelty-centered business model

Making small adjustments to existing products and services, continuously improving production efficiency, increasing economies of scales in existing markets and frequently expanding services for existing clients are all characteristics of exploitative innovations (Kortmann, 2014). All these characteristics mean an increased efficiency in the use of resources (Kortmann, 2014); furthermore it can enable part of the resources, physical or human, to be freed up and thus available for developing new projects. The excess capacity can be used in diversification movements or for innovation in new value propositions (Demil & Lecocq, 2010). It can for instance exploit new transaction structures and transactional content, thus relating exploitation positively to the novelty-centered business model.

Zott & Amit (2008) also expect a positive joint effect of cost leadership, related to efficiency itself, which in return can affect transaction efficiency, and the novelty-centered business model. Consider lowering prices charged to customers when following a cost leadership strategy that can enable tackling new segments with customers highly sensitive to price (Zott & Amit, 2008); new transaction structure.

Proposition 2a: Exploitation has a positive relation to novelty-centered business model design.

Exploration, the search for new knowledge, we assume has a positive relation to the novelty-centered business model. Zott & Amit (2008) mention that innovation can lead to an increase of the total number of transaction types, which may be related to an increase of transaction content. By employing innovation energy among managers it can help in

delivering new products and services to customers in new ways. The four items of exploratory innovations (Kortmann, 2014) are all linked to creative destruction developing new value creation opportunities (Amit & Zott, 2001). We thus assume:

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Proposition 2b: Exploration has a positive relation to novelty-centered business model design.

3.6 The moderating effect of external technological change

With a lacking in established literature of the potential role the environment plays in relation to the business model, technological innovation is chosen as the environmental moderator. Looking at technological innovation will help the firm to understand how to adapt the efficiency-centered and the novelty-centered business model to this changing business environment where technologies are rapidly developing. Al-Debei & Avison (2010) argue that an organization’s understanding of its business model is crucial in the emerging, turbulent, and digital business environment. Demil & Lecocq (2010) suggest that the environment has the potential to influence both cost and value components of the business model (e.g. affecting the value of firm resources).

A major driving force behind the rapid and unpredictable change in the business environment includes technological changes (Voelpel et al., 2004). Recently there have been discussions of how technology has changed traditional business models (Voelpel et al., 2004). External technological change is chosen, as it is a quest into the unknown, concerning firm’s ability to adapt to a technological turbulent environment and the search of new business opportunities (Teece, 1996). An external technological change, shift or advancement results in a turbulent business landscape, making the need for sustainable competitive advantage higher (Voelpel et al., 2004). Siggelkow (2001) states that changes in the environment negate the value of the organization’s assets and firms may have difficulty adapting to these changes because of a tightly coupled organization.

By appointing external technological innovations related to its business as the

moderator, the aim is to find the affect of technological changes on the relationship between innovative ambidexterity and the efficiency-centered and the novelty-centered business model. Achieving a better understanding of the two activity-based business models as to how to navigate with such an environmental change, taken into account exploitation and

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3.6.1 External technological change; moderating effect on the relation between innovative ambidexterity and the ECBM

O’Reilly & Tushmann (2008) state that the more dynamic a firm’s environment is (e.g. due to technological changes), the higher the likelihood of ambidexterity, thus balancing exploitation and exploration. In the previous propositions regarding the ECBM we assumed that exploitation has a positive relation and that exploration has a negative relation to the ECBM. Technological innovation means that firms have to adapt its existing processes and activities to achieve or sustain competitive advantage as technological innovations often create new opportunities (Voelpel et al., 2004). Exploitation is associated with mechanistic structures, tightly coupled systems, control, and stable technologies. Thus adapting to the turbulent technological innovation may be difficult and costly for an organization (He & Wong, 2004). Therefore we assume that achieving transaction efficiency is challenging when trying to adapt to technological innovation; affecting the positive relation assumed in

proposition 1a.

Exploration on the other hand is generally associated with more organic structures, loosely coupled systems, path breaking, autonomy and chaos, and emerging technologies (He & Wong, 2004). Emerging technological innovation therefore fits easier with exploration activities. As assumed in proposition 1b, exploration has a negative relation to the ECBM due to the costs associated with exploring the new. With technological innovation as moderator more exploration is assumed necessary, adding onto the negative relation with transaction efficiency. We thus propose the following:

Proposition 3: External technological change has a negative moderating affect on the relation between innovative ambidexterity and the ECBM.

3.6.2 External technological change; moderating effect on the relation between innovative ambidexterity and the NCBM

Exploitation as assumed in proposition 2a, has a positive affect on the NCBM, this because exploitation can free up resources and this excess capacity can be used for new transaction content, structure and governance. With technological innovation as the moderator, by performing exploitation activities, resources are made available to adapt to these technological innovations. Hence we assume that technological innovation has a positive affect on the relation between exploitation and the NCBM.

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Exploration and the NCBM as propositioned in proposition 2b are positively reinforcing. Exploration as mentioned is associated with more loosely coupled systems, making it easier to adapt to technological innovation (He & Wong, 2004). With the NCBM creating value through innovation and exploitation and the moderator also having their focus on innovation, the relationship between the three variables is assumed to be positively reinforcing.

Proposition 4: External technological change has a positive moderating affect on the relation between innovative ambidexterity and the NCBM.

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4. Discussion

Throughout the review, we proposed several relations between exploitation and exploration and the efficiency-centered and novelty-centered business model. Proposed was that

exploitation has a positive relation to efficiency-centered business model design. As exploitation implies innovation within firms existing business capabilities, focusing on refinement, implementation, and overall efficiency. The positive relation shows through, as exploitation entails the continuous improvement of firm’s production efficiency of products and services, resulting among other things in the lowering of costs, economies of scales, and the increase of the speed of transactions, all characteristics of the efficiency-centered business model. Though focusing solely on efficiency, can apply that firms miss certain business opportunities, as it does not innovate with the changes in the business environment. Further, we proposed that exploration has a negative relation to efficiency-centered business model design. Exploration entails searching for the new and seeking out new opportunities in new markets, and is often linked with higher investment- and operational costs. Increasing costs and variance-increasing activities are negatively related to the efficiency-centered business model. It would need exploitation to balance exploration activities out, leading to the

established importance of innovative ambidexterity. The second proposition, part a, proposed that exploitation would have a positive relation to the novelty-centered business model. As performing exploitation activities within a firm leads to resources that are being freed up, that in return can be used for novelty activities. But exploitation and novelty are naturally two different concepts, and confirmed is that the novelty-centered business model needs exploration to fully create value, as both are focus on innovation outside the firm’s already known knowledge. Which leads to the proposition that exploration has a positive relation to the novelty-centered business model. Although this is supported by literature, exploration is often characterized with failure, thus having too much exploration can be costly and too high of a risk level. There is need for a balance between exploitation and exploration, innovative ambidexterity that can offer firms a positive short-term financial performance through

exploitation, but also the possibility to be fruitful through exploring the new and thus forming a base for future competitive advantage. With the moderating effect of external technological change it is also recognized that innovative ambidexterity, combining and balancing

exploitation and exploration, leads to a higher level of value creation then when focusing on the two concepts separately. Exploration will make it more flexible for a firm to adapt to an

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external technological change, but can in return lead to failure. To avoid failure, exploitation is needed, as it is more safe and variance reducing. Similar, innovative ambidexterity can be beneficial for the efficiency-centered business model when encountered with external technological change.

The conceptual framework developed in this paper can provide scholars with a better understanding surrounding the efficiency-centered and novelty-centered business model. How they are affected by exploitation and exploration, but most importantly that innovative

ambidexterity is needed to achieve optimal value creation. This paper contributes to the ambidexterity literature, as well as to the business model construct literature. Future researchers can build upon this conceptual framework. Implications for practice are that managers should focus not solely on exploitation or exploration, but instead combine the two and work towards an ambidextrous organization. When managers put the focus on efficiency and/or novelty, they should have the right resources and capabilities to perform both

exploitation and exploration to achieve and sustain competitive advantage.

A limitation of this paper is that it is exclusively based on literature. Having developed and proposed the conceptual framework, further research should test this model statistically, through for example a bibliometric analysis or meta-analysis. A more practice research can be done, by handing out surveys to managers in a particular firm or several firms, to see the relation between exploitation and exploration and its effect on the efficiency-centered and the novelty-centered business model. This paper focused on external technological change as its moderator, future research should look at the environment and how environmental aspects (e.g. internal and external changes) affect the relation between innovative ambidexterity and the efficiency-centered and the novelty-centered business model. Focusing on the concept of strategic fit.

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5. Conclusion

The term ‘business model’ has surged into the management vocabulary, getting a wide range of attention from several management disciplines. Although the literature around the business model concept suggests a missing consensus about its definition, business models are

valuable as they for instance explain sources of value creation and sources of competitive advantage. Taking the activity system of Amit & Zott (2001) as a base, specifically focusing on the efficiency-centered and the novelty-centered business model, we looked at exploitation and exploration and its effect on the two business model designs. Developing a conceptual framework in which exploitation has a positive relation to the efficiency-centered business model, in the sense that exploitation, being focused on continuously improving its existing activities, leads to transaction efficiency, characterizing the efficiency-centered business model. Though focusing solely on exploitation means that the firm misses business

opportunities that are achieved when performing exploration. Also, exploration alone seems to have a negative relation to the efficiency-centered business model. Creative destruction and searching for the new lead to increasing costs, which is contradictory to the

efficiency-centered business model where costs related to a transaction, are reduced. Balancing exploitation and exploration simultaneously, or innovative ambidexterity, is the resolution towards a positive relation with the efficiency-centered business model. Exploitation further has both a positive and negative relation to novelty-centered business model design. It can free up resources due to continuously improving its transaction activities, which then can be used for reinventing transaction content, structures, and governance. But it is also argued that focusing firm activities on efficiency and variance reduction drive out variance increasing or novel activities. Exploration in an obvious way has a positive reinforcing effect on the novelty-centered business model, as both are in the search of the new. Although, exploration often lead to failure and putting the focus only on exploration puts the firm at risk. It is thus important for managers to pay more attention to innovative ambidexterity, balancing exploitation and exploration simultaneously to add to a higher level of value creation, to create a beneficial relation to both the efficiency- and novelty-centered business model, and assist in creating and sustaining competitive advantage.

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