Responding to Disruptive Innovation: The Resource Allocation Process as a
Filter in Pursuing a Dual-Strategy
A Case-study Research in the European Music Industry
Abstract: Many incumbent companies have proven to buckle the pattern of losing their market position in the face of disruptive innovations by opting for a dual strategy of combining sustaining and disrup-tive projects. However, it remained vague how exactly those dual strategies look like, what underlying motivations for investing in disruptive projects were, and how conflicts between the strategies were overcome. The resource allocation process was placed as a central factor of this research as it largely determines the actual strategy and can act as a filter by blocking initiatives. The study adopted a case-study approach and investigated nine European music labels. It was revealed that the dual strategy rather is imposed upon the labels than being freely chosen and that smaller labels were able of pursu-ing a dual strategy by outsourcpursu-ing. Still, both small and medium labels made respective investments due to opportunities which are impossible to achieve within the boundaries of the old business model and are offered by the new one. The role of the leader and the upper management also is emphasized in ensuring the endowment of disruptive projects through staying close to the process. Finally, upris-ing tensions between conflictupris-ing strategies can be kept at bay by craftupris-ing activities complementupris-ing both strategies.
Rune Koehn (S2924226)
MSc Business Administration: Strategic Innovation Management
Supervisor: Amber Geurts Co-assessor: Thijs Broekhuizen
University of Groningen Faculty of Business and Economics
20th June 2016
1 Introduction
The term ‘disruptive innovation’ has been around for about 20 years now and has provoked a lot of theoretical and managerial interest. It explains why properly managed incumbent firms could not facil-itate their position when such an innovation changed the rules of the game as it introduces “a different set of features and performance attributes” (Christensen, 1997; Govindarajan & Kopalle, 2006, p. 190). The most important disruptive innovations doing so are either of technological nature (e.g. smaller hard drives enabling PCs (Christensen, 1997)), a fundamental change in the business model (e.g. no-frills airlines (Yu & Hang, 2010)) or both (e.g. Netflix’s movie flat rate (Markides, 2006)). Especially with uprising information and communication technology (ICT) – most notably the internet – disruptive innovations spread across industries, Zetad the incumbent players and lead to the rise of new ones. Recent examples are tourism, newspapers, and music (Guttentag, 2014; Karimi & Walter, 2015; Moreau, 2013). The theory states that incumbents are unable or unwilling to respond due to strategic, organizational, or technological inertia (Bergek, Berggren, Magnusson, & Hobday, 2013). Still a remarkable number of incumbents defended their position in the face of disruptive innovation (Ansari & Krop, 2012; Danneels, 2004). Consequently several researchers investigated how the in-cumbent firms survived against the odds of the theory (e.g. Markides & Oyon, 2010; Sandström, Magnusson, & Jörnmark, 2009; Taylor & Helfat, 2009) and the theory was further refined (Christen-sen, 2006).
The literature has already addressed by which methods incumbents could reply and gives rec-ommendations. Research also shows that in most cases firms tend to balance the new and the old busi-ness model for some time being (e.g. Charitou & Markides, 2003; Karimi & Walter, 2015). Hence, the firms pursue a dual strategy. Despite likely conflicts between both models this strategy seems to be possible and even is the most popular option. Still, the literature stays on the surface and it remains underresearched how those dual strategies in particular look like and how both business models are managed alongside.
2 Hence, the purpose of this study is to refine the current understanding of the resource alloca-tion process and its role as a filter in the context of responding to disruptive innovaalloca-tions. From a theo-retical perspective the understanding of how firms respond to disruptive innovations and why they chose a particular option will be deepened. Managerial implications will feature recommendations how (small) incumbents can respond and overcome inhibitors in allocating sufficient resources to dis-ruptive initiatives. The central research question can subsequently be split in two:
How do incumbents respond to disruptive innovations? Why are resources allocated to the respective strategies?
The sub-questions especially deepen and organize the second central question: How do (resource limited) firms balance two or more business models? By which criteria are disruptive projects assessed?
What are inhibitors of allocating resources to disruptive projects and how are they overcome?
In order to answer these questions the study makes use of a case-study approach for crafting grounded theory (Eisenhardt, 1989). The setting is the record music industry of Germany, the Netherlands, and the UK. Managers of nine different record labels were interviewed for gathering data. In this particular industry incumbents first struggled with adapting to the new form of digitized music, but finally man-aged to defend their position, though having to undergo severe changes of their businesses (Moreau, 2013; Rogers, 2013). Additionally, yet another disruption has hit the industry with the rise of stream-ing services (Ansari & Krop, 2012). Hence, this settstream-ing is appropriate and promisstream-ing for investigation. The remainder of the study is organized as follows. First the theoretical background is outlined to explain disruptive innovation, resource allocation, strategy and how these concepts are tied. Further potential inhibitors in allocating resources to disruptive innovations and pursuing dual strategies and respective solutions are discussed. The second section features a precise description of the methodolo-gy used by this study. Section three presents the results of the interviews. Following is the discussion of the results and how this matches and expands theory. This section also features propositions. Final-ly, a conclusion is drawn and theoretical as well as managerial implications are provided.
Theoretical Background Disruptive Innovation
The concept of disruptive innovation1 was first elaborated comprehensively by Christensen (1997) and underwent further refinement in the following years (e.g. Christensen, 2006; Christensen & Raynor, 2003; Govindarajan & Kopalle, 2006; Markides, 2006; Schmidt & Druehl, 2008). The concept distin-guishes between sustaining and disruptive innovations. Sustaining innovations target high-end
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3 tomers by delivering a better performance than previous products/services. Disruptive innovations provide different values and typically underperform according to the mainstream market’s criteria (Christensen & Raynor, 2003). The product/service usually is simpler, cheaper in production and also sold at a lower price. A new value network2 is introduced accompanied by new performance metrics to compete along. This different set of features, performance, and price attributes only are attractive to a niche market esteeming those new values (Govindarajan & Kopalle, 2006; Moreau, 2013). The disrup-tive innovation either starts at the low-end of the existing market by directly attacking the most price-sensitive or most over-served customers or it introduces a whole new market, where it overcomes non-consumption (Christensen & Raynor, 2003). Over time the innovation increases in performance and subsequently also is able of fulfilling the minimum requirements of the mainstream market. Finally, the old product gets obsolete, because the disruptive innovation serves all functions valued previously plus entailing new ones (Christensen, 1997). Hence, the innovation “change[s] the game” (Assink, 2006, p. 217).
Incumbent firms regularly face problems of adapting to the new rules of the game. The inno-vation does not appeal to its recent customers initially and some of the well developed competences may become obsolete (Bergek et al., 2013). Thus incumbents often invest in sustaining innovations as this serves recent customers and competences are still applicable. Once the disruptive innovation ulti-mately has reached the point to replace the old model incumbents will have a tough time catching up with the new entrants who pursue the new model for long (Danneels, 2004). Following this mecha-nism disruptive innovations are predicted to overthrow the incumbents and replace them by new en-trants (Christensen, 2006).
Strategy and the Resource Allocation Process
The most feasible definition of the term strategy for this study is Mintzberg’s (1978, p. 935) opera-tionalization of strategy as a “pattern in a stream of decisions.” Decisions in turn are commitments to action, which usually means commitment of resources (Mintzberg, Raisinghani, & Theoret, 1976). Porter (1996) follows a similar direction by seeing the essence of strategy in the activities pursued by an organization. Mintzberg and Waters (1985) also make the important distinction between strategies being fully deliberate on one extreme of the continuum and strategies being fully emergent on the other. The first requires a strategy to be executed exactly as intended by all members of the organiza-tion and the latter requires a consistency in acorganiza-tion in the absence of intenorganiza-tion. However, those two ‘perfect’ models are nearly impossible to expect in the real world and mixtures will occur.
Resource allocation is the decision making process about where and how to apply a firm’s scarce resources (Bower & Gilbert, 2005). In the context of innovations human and financial resources
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The context within which a firm “identifies and responds to customers’ needs, procures inputs, and reacts to
4 are regarded as the most important ones (Christensen & Bower, 1996). Bower and Gilbert (2005) see the process as the focal factor in determining the realized strategy. Christensen and Raynor (2003) follow the same approach and crafted a model which places the resource allocation process as the filter – approached by intended and emergent strategy – determining which actions will be endowed with resources and subsequently which strategy is followed. The actual strategy in turn influences the in-tended and emergent strategy again. The pivotal role of the process stems from the simple fact that no disruptive project can ever be pursued without sufficient resources allocated to it (Bergek et al., 2013; Christensen & Raynor, 2003). The resource allocation process – placed at the heart of the strategizing process here – is an endogenous factor lying in the control of the management and part of the incum-bent’s configuration (Ansari & Krop, 2012; Assink, 2006; Bower & Gilbert, 2005). As Yu and Hang (2010) put it most of the problems in responding to disruptive innovation lie in the incumbent itself rather than in the environment and context. It also is to note that the resource allocation process is not limited to the senior executives of a company. Rather, allocating resources happens at every level and every day. The strategy is merely crafted by formal thinking procedures at the headquarter but by what really gets done (Bower & Gilbert, 2007).
Proposed strategies for incumbents facing a disruptive innovation are (1) invest in the old business (2) ignore the new business (3) disrupt the disruption (4) play both games at once (5) fully embrace the disruption. According to the literature most companies opt for strategy (4) (Charitou & Markides, 2003; Karimi & Walter, 2015). This dual strategy involves catching the ‘disruptive wave’ while simultaneously keeping the mainstream business competitive and profitable. Following this approach of exploiting the recent business while exploring new businesses – in this case even disrup-tive businesses – is known as ambidexterity and it is a prerequisite of long-term success and firm du-rability (O'Reilly & Tushman, 2013; Raisch & Birkinshaw, 2008; Turner, Swart, & Maylor, 2013). Hence, resources need to be allocated to sustaining and disruptive innovations parallel (Christensen & Raynor, 2003). How resources are balanced ultimately shapes the particular strategy of the firm (Bower & Gilbert, 2005). However, these two approaches can be contradicting and conflicts between the business models are to expect (Christensen & Overdorf, 2000). In consequence, firms not only need to overcome inhibitors entailed by disruptive innovations but also solve tensions and face trade-offs between the business models (Assink, 2006; Charitou & Markides, 2003; Raisch & Birkinshaw, 2008; Yu & Hang, 2010).
Inhibitors of Allocating Resources to Disruptive Innovation
5 be crucial in making the sustaining project win the fight over scarce resources and hamper the pursuit of a dual strategy.
Organizational factors are of internal origin. One of the most powerful inhibitors are deeply embedded routines and processes. Those commonly are not suited for pursuing the disruptive innova-tion and need to be adapted (Macher & Richman, 2004; Nelson & Winter, 1982). For this topic rou-tines and processes especially refer to the ones applied for the evaluation of new initiatives (Assink, 2006). Disruptive projects often do not fulfill the company’s expectations in terms of market size or return and are much more uncertain. If disruptive projects are assessed by the same criteria on a rou-tinized basis they might get sorted out prematurely (Christensen, 1997, 2006). Routines are able of securing efficiency in a stable environment but show weaknesses when changes are happening and the old routines do not entail efficiency but inflexibility (Nelson & Winter, 1982). Once relevant routines and deeply embedded processes can prove to become obstacles decreasing the manager’s ability in responding to disruptive innovations (Adner & Snow, 2010; Henderson, 2006). Another major inhibi-tor is the fear of cannibalization. It refers to the effect of a firm’s products directly diminishing the returns of another firm’s product (Schilling, 2010). The willingness to execute projects possibly entail-ing this effect is described as the “extent to which a firm is prepared to reduce the actual or potential value of its investments” (Chandy & Tellis, 1998, p. 475). If company leaders are not prepared to do so and the fear of cannibalizing own sales, assets or organizational routines prevails the introduction of disruptive innovations will be delayed (Christensen, 1997; Christensen & Rosenbloom, 1995). This fear has been proved to be prevalent though a higher willingness of cannibalization is positively relat-ed to disruptive innovation (Gilbert, 2005; Govindarajan, Kopalle, & Danneels, 2011). On a different basis this also reaches out to the top and middle management who might fear their positions to become obsolete (Denning, 2005).The organizational culture and its values can also constitute a major inhibi-tor. If the culture of the company and its leader generally are risk adverse bold new projects are un-likely to be pursued wholeheartedly (Assink, 2006). Also, corporations can be political battlefields between the managers in terms of who is in charge of the most resources. If applying standard criteria it is likely that the manager serving the current successful business also will have the most resources to allocate (Henderson, 2006; Hill & Rothaermel, 2003).
Structural factors apply to external influences on the internal process. The most discussed one in the literature is the influence of current customers (Christensen, 1997; Christensen & Raynor, 2003; Danneels, 2004; Tellis, 2006). This argument was derived from resource dependence theory3 and em-phasizes that companies are caught by their best customers – namely those who promise the most prof-its – and find it difficult to engage in projects not fulfilling the needs of this group (Christensen & Bower, 1996; Slater & Mohr, 2006). Emergent customers often do not value the same criteria as
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6 current ones do, comprise a much smaller group and do not promise the same profits (Govindarajan & Kopalle, 2006; Tellis, 2006). In an empirical study Govindarajan et al. (2011) found that disruptive innovations only were positively related with an orientation towards emergent customers while radical innovations were related positively with a focus on mainstream customers. Bower and Gilbert (2007) conclude that companies staying too close to their customers give them a virtual veto in the resource allocation process. Besides customers also other external groups like investors or suppliers can influ-ence the process (Denning, 2005).
Proposed Solutions
Organizations need to ensure that disruptive initiatives are endowed with sufficient resources and the constraints just discussed are overcome (Christensen & Raynor, 2003). In other words, the resource allocation filter needs to be made permeable for disruptive initiatives. Only if this is achieved an or-ganization can pursue a dual strategy genuinely. Scholars recommend to either make use of internal or external measures depending on the fit of the organization’s processes and values with the new busi-ness model (Christensen & Overdorf, 2000; Danneels, 2004). The weaker this fit is the more it should be opted for an external approach.
As part of the internal approach a firm needs to inhere or to be able to develop a ‘disruptive innovation capability’ (Assink, 2006)4
.What promotes this capability is experience with previous tran-sitions and disruptive innovation (Hill & Rothaermel, 2003; King & Tucci, 2002) and clear and logical reasoning. If there is an opportunity yielding a financial return and the incumbent is capable of invest-ing in it, there should be no reason for not doinvest-ing so (Henderson, 2006). What should follow from the capability are different values and a different culture for the organization. Plans need to be long-term-oriented, experimentation and inevitable failure need to be accepted and a general risk-taking culture needs to be present (Govindarajan & Kopalle, 2006). The leaders of an organization play a crucial role in following those ideas (Christensen & Overdorf, 2000). They must enforce difficult decisions against rigidities, delegate sufficient resources, and setup the spaces for the development of new processes and values (Christensen & Raynor, 2003; O'Reilly & Tushman, 2011; Paap & Katz, 2004). Still, besides having this capability as a company several scholars argue for drawing new boundaries around the team pursuing the disruptive innovation (e.g. Christensen & Raynor, 2003; Yu & Hang, 2010). This can be achieved by assigning ‘strategic buckets’ to different types of initiatives or by handling each project as an isolated mini-project (Chao & Kavadias, 2008; Hogan, 2005). One step further would be the set up of an internal venture which is a separated structure within an organization (Macher & Richman, 2004). When setting up a new business unit internally it is important to grant autonomy in terms of being separated from the normal decision-making process to not making it compete for
4
This capability is defined as: The internal driving energy to generate and explore radical new ideas and
7 sources with projects of the mainstream organization (Christensen & Overdorf, 2000; Markides & Oyon, 2010). Consequently, different measures can be applied to assess projects.
External options offered by Christensen and Overdorf (2000) are either a spin-off or an acqui-sition. The core idea is to overcome the incumbent’s dilemmas by having an autonomous organization (Christensen & Raynor, 2003) and almost all succeeding cases studied by Charitou and Markides; Christensen (2003; 2006) followed this strategy. Much like for internal ventures it is important to en-sure enough autonomy for the separated organization (Danneels, 2004). Therefore the separated part of the company needs to have its own budget and employees in order to develop its own processes and values (Govindarajan & Kopalle, 2006; Karimi & Walter, 2015). Besides those two opportunities of-fered some scholars also highlighted the possibility of alliances (Ansari & Krop, 2012; Hill & Rothaermel, 2003), i.e. joint-ventures (Macher & Richman, 2004). Alliances in general offer access to resources needed with less risk than acquisitions (Markides, 2006) and also are especially useful when the partners do have complementary resources (Hill & Rothaermel, 2003). Especially a joint venture has the effect of being endowed with own resources and does not compete with other projects. Also it can develop its own processes and values (Macher & Richman, 2004).
Special Conditions Regarding Small and Medium Sized Firms
Typically smaller firms are not endowed with too many resources and some innovations might become unattainable (Christensen, 2006). Especially if playing both games at once there are fewer resources which can be shifted between the two business models (Hill & Rothaermel, 2003; Sandström et al., 2009). Accordingly, ambidexterity theory suggests small firms to rather pursue sequential ambidexter-ity instead of a complex strategy involving a simultaneous pursuit (O'Reilly & Tushman, 2013; Raisch & Birkinshaw, 2008). However, for overcoming those resource constraints small incumbents can use research spillovers or engage in alliances to combine complementary resources (Chandy & Tellis, 2000; Rothaermel, 2001). Additionally, small firms already have what large incumbents try to create by internal ventures or spin-offs. They have smaller and flexible business units and can more easily embrace new practices and values (Macher & Richman, 2004; Yu & Hang, 2010).
8 Methodology
The theory of disruptive innovation is assessed as not being fully fledged yet due to the factors just presented. Hence, theory development/refinement and not theory testing is the applicable approach in this field (van Aken, Berends, & van der Bij, 2012). Multiple case studies are used to have a more solid base for theory building (Yin, 2014). For doing so the study follows the ‘roadmap’ for building theory from cases as proposed by Eisenhardt (1989).
Case Description
The setting for this study is the music industry of Germany, the Netherlands, and the UK. Since its emergence around 1906 the industry had to deal with technological shifts permanently (Moreau, 2013). With changing technology also the activities performed by record labels changed throughout the century. The major activities of record labels till the dawn of digitized music have been recording5, promotion and distribution of music and previous shifts in technology (e.g. radio, CD) were not able of eroding their strong position in these domains (Moreau, 2013). Besides, record companies already integrated into the lucrative stage of publishing and took over most of the publishers marketing activi-ties (Mol, Wijnberg, & Carroll, 2005). But when digitization eventually occured the industry was shaken up severely. Record labels lost their strong position in distribution as this was now possible for nearly zero costs and new digital recording technologies broke down this small barrier left for artists, too(Abhijit, 2010). Finally, the ease with which piracy could be executed and an uncertain legal status in the beginning weakened copyrights (Mol et al., 2005).
This disruption of the music business, namely by downloads attacking physical sales, fulfilled the criteria of a disruptive innovation and changed the game for the industry. Compared to physical sales downloads had a worse sound quality and came without additional material. Also the internet speed, quality of listening devices and of the download platform in general was unsatisfying at best. Initially, they were only seen to be appealing to a low-end and over-served niche market; i.e. a young audience with low purchasing power, which valued traits of digitized music such as portability, shareability and easy recommendation systems. Though promising a higher margin per song sold than common album sales offered higher total profits (Moreau, 2013). Nevertheless, the technology took its ‘predicted’ path and finally matched with its physical counterpart, offered new values and was not pursued successfully by any of the major record labels in the beginning (Ansari & Krop, 2012). The digitization created the new activity of digital distribution and added new ways of promotion (e.g. social networks, recommendation systems). Also, the drastic decline in revenues of the traditional music industry (BVMI, 2016) led to the necessity of rethinking current business models (Goel, Miesing, & Chandra, 2010). Formerly non-core activities like selling merchandise or booking had to be added for keeping the business viable in some cases. With uprising streaming services the industry
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9 was impacted yet again. Through very low revenues generated per stream and new ways of promotion (i.e. pushing songs in popular playlists by third parties) the record labels had to transform their busi-ness models (Ansari & Krop, 2012).
Current data [2015] for the UK and the Netherlands shows a 54,1% to 45,9% and a 52% to 48% split of revenues generated by digital and physical sales, respectively (BPI, 2016; Washenko, 2016). Regarding Germany the ratio between digital and physical is at 31,4% to 68,6%. Though digital revenues only make up for about a third they are growing remarkably. From 2014 to 2015 digital rev-enues soared by 30,8% (BVMI, 2016). Thus, record labels in all three markets need to embrace digit-ized music and cannot ignore it.
Case Selection
Considering overall revenues Germany ranks as the 3rd, the UK as the 4th and the Netherlands as the 11th largest music market of the world and all countries host a vast number of record labels (RIAJ, 2015). The music market is an oligopoly and consists of three major labels accounting for 73,2% (Statista, 2016) of the market’s revenue and many small to medium inGamma companies. According to Sandström et al. (2009) it is important to distinct between large and small incumbents when as-sessing their ability of responding to disruptions. On the one hand resource constrained firms will have a much more challenging job in doing so effectively; especially if opting for dual strategies. On the other hand they show higher degrees of flexibility. From a methodological point of view the process of allocating resources is easier to uncover in a smaller organization. Hence, the first criterion was to only include inGammas, which typically are of a much smaller size than the majors. Nevertheless, labels should have a reasonable size for delivering more meaningful results. Due to the number of employees or revenues being inaccessible for most labels, the number of artists was chosen as a crite-rion. Labels needed to work with at least 30 artists. Second, firms had to allow for uncovering patterns of incumbent survivors of disruptions. Third, firms should have been founded before or in 2004 when iTunes got introduced in all three markets studied in order to have witnessed the times of factually living from physical sales (BVMI, 2016). Table 1 shows the final cases selected.
Primary and Secondary Data Collection
For creating a more sophisticated theory not only multiple case studies but also multiple sources of data are used. By executing this triangulation of sources the biases of single instruments will be re-duced (Eisenhardt, 1989; van Aken et al., 2012).
10 besides the ones from Heta Records have been at their respective companies when transitions took place.
The secondary data consists of newspaper articles, reports and the label’s homepages. The information found was used to develop pre-field case studies. The aim was to familiarize with the cas-es before the interviews and reduce the interviewee and retrospective bias by asscas-essing the reliability of the given answers (van Aken et al., 2012). The pre-field case studies were then enhanced with the information gathered with the interviews.
Table 1: Case Study Selection
Label Country Foundation Employees Interviewee(s)6 Genre
Beta Records (BR) GER 1961 6 Mr. Beta
(CEO/HoL/DM)
World
Iota Media (IM) GER 2002 1 Mr. Iota (F/CEO) World
Rho Records (RR) GER 1994 10 Mr. Rho (F/CEO) World
Delta Media (DM) GER 2004 20 Mr. Delta (L&BA) EDM Gamma Records +
Pi7 (GR)
GER 1999 7 Mr. Gamma
(F/LM)
EDM
Heta Records (HO) UK 1996 17 Mr. Heta (DM)
Mr. Koppa (LM)
EDM
Mi Music (MM) GER 1999 10 Mr. Mi (DM) EDM
Zeta Records In-ternational (ZR)
NL 1994 25 Ms. Omega (PM)
Mr. Sampi (F/CEO)
Classic
Omikron (OM) UK 1980 9 Mr. Omikron
(CEO)
Classic
Data Collection
Apart from Mi Music all interviews were taken via telephone and lasted from 30 to 65 minutes. The interviews were recorded and transcribed. The interviewees received the transcript to check it for pos-sible misunderstandings and to give their approval. This reduces the potential researcher bias (van Aken et al., 2012). In three cases (BR, GR, RR) the interviewees were called again for clarifying some topics. For further reducing researcher bias the semi-structured interviews followed a variable guide-line which can be found in Appendix I. This allowed the researcher to deepen certain aspects as it felt necessary and still keep the common theme in mind. The guideline was developed with orientation by the works of Boyce and Neale; Yin (2006; 2014) and featured three sections. The first section deliv-ered an introduction by asking the interviewee about his professional background and clarifying cer-tain aspects about the label which could not be found elsewhere. The second section delivered some opening questions to enter the topic in general. It was asked how the digitization of music first ap-peared on the agenda of the labels and how it generally was perceived. The questions then approached
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Abbreviations: CEO=Chief Executive Officer; DM=Digital Manager; F=Founder; HoL=Head of Licensing; L&BA=Legal & Business Affairs; LM=Label Manager PM=Product Manager
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11 the core of this research. To analyze the labels’ strategies it was asked about activities and investments pursued. To then uncover aspects of the resource allocation process it was questioned why resources were allocated to a certain strategy; whether it was deliberate or emerging, by which criteria different projects were assessed, whether there have been conflicts and if how they were overcome. The last section functioned as a conclusion by asking how the interviewees see the future of their organization or the industry as a whole. Sections two and three only featured open ended questions. During the whole process of collecting data memos were written for ensuring controllability (Corbin & Strauss, 2008).
Data Analysis
The data analysis followed the concepts proposed by Corbin and Strauss; Eisenhardt; Gioia et al. (2008; 1989; 2013). First, single case studies of every label investigated have been developed to get an intimate understanding (Eisenhardt, 1989). For crafting those case studies – which can be found in Appendix III – the interview data was combined with the data gathered previously. Alongside the data was coded. First, deductive codes were set up based on the literature (Fereday & Muir-Cochrane, 2006). Then the interviews were screened by using ‘open codes’ (Corbin & Strauss, 2008). In this procedure the vast amount of data is broken into smaller parts but a myriad of codes do emerge and little is undertaken to shrink this amount (1st order concepts) (Gioia et al., 2013). This process resulted in the emergence of some inductive codes (Fereday & Muir-Cochrane, 2006) and the addition of an ‘opposite findings’ column in which findings contradicting the deductive codes were placed.
Following cross-case analyses were executed in order to uncover patterns between the cases (Eisenhardt, 1989). The groups for cross-case analysis were set up based on the genre the label is ac-tive in. This classification can be used due to the big influence the genre has on the label’s customer base and thus on the state on transition from physical to digital (see table 2). A second approach emerged from the data analysis and systemized the cases by grouping the ones which did invest re-markable sums and those which did not (see table 2). Simultaneously the large amount of codes was reduced based on similarities and differences to receive 2nd order concepts (Gioia et al., 2013). Also some dimensions were erased from the final code book to focus on aspects of the labels’ strategies and the role of the resource allocation process as a filter (Corbin & Strauss, 2008). The final codebook can be found in Appendix II. The whole process was conducted in an iterative manner by permanently checking the raw interview data for making sure to not drift away from it.
Results Environmental Developments and Perceptions
12 and MusicNet) (Donohue, 2001) there was no service with a viable business model till iTunes took off in 2003. The founder of Iota Media was employed by one of the majors during that time and described Napster as being a “rudimentary and abysmal” system. Even after the foundation of Iota Media in 2002 P2P-filesharing or legal offerings have not been such a big topic for German indie labels. Mr. Omikron describes the situation to be similar for Omikron as there simply was no offering able of supplying adequate quality and Mrs. Omega from Zeta Records was in the same vein with saying “Since the P2P networks only offered bad quality music, our target audience did not make use of these platforms, and thus we remained focused on our traditional business.” However, the illegal offerings were ahead of their legal counterparts. The label manager of Gamma Records stated to have always seen a certain potential, but illegal business models just were faster. Still, due to serving a more special audience Mi Music, Rho Records and Gamma Records only started to really be impacted by declining sales from 2003 onwards.8
Approaching the emergence of iTunes in Germany, the Netherlands and the UK in 2004 per-ception started to shift. Both the managers of Delta Media and Beta Records said to not really have been hit by surprise as the peak of CD-sales was already reached in 1997 and iTunes was known from the USA. Mr. Gamma from Gamma Records explained the impact of iTunes with being the first ser-vice making it easy to combine hardware and software. Mainly all labels acknowledged the inevitabil-ity of the development and their inabilinevitabil-ity of changing it. This was best framed by Beta Records’s CEO stating, “This is a development where we have no influence. The technology set the framework“, and “You need to recognize the mood of the times.” Hence, it would be misguided to fear the develop-ments. No label reported to have witnessed an overall negative attitude towards digitization. If so it was limited to single employees in the cases of Heta Records, Omikron and Zeta Records. Omikron’s CEO said “We realized straight away that digital was going to potentially revolutionize distribution of music and be an important part of what Omikron does.“ Mi Music also expressed a positive attitude towards the topic: “We […] have always been quite open to changes. […] Surely this is a change, but we just try it.” The same attitude can be ascribed to Iota Media (“I had nothing to lose”).
Streaming services – most notably Spotify launched in Sweden 2008 – were the next major technological development. In this case perception was not as positive as it has been for the last transi-tion. Mi Music reported to have been a bit reserved due to the uncertainty the new business entailed. However, from a fan-perspective the interviewee stated to eventually have “understood how digital exploitation of music can work. It was the first business model we also used ourselves.” The inter-viewees from Heta Records expressed the same and added not pursuing streaming would be “swim-ming against the tide.” This notion is emphasized by Beta Records acknowledging “Again the tech-nology set the frame.” Delta Media underlines and extends this by stating “Downloads just were a transition till it was technologically possible to stream music.”
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13 Figure 1: Timeline of the Label‘s Activities
Organizational Responses
Referring to figure 1 it becomes clear that no label was part of the earliest digital developments in the music industry. Mr. Beta from Beta Records acknowledges this fact by stating: “It took quite a while
14 till we realized that we have to care about it. […], but in a case like that decisions need to mature first.” As the previous paragraph has shown the labels eventually started to engage when technology set an adequate frame for downloads first and for streaming later. Figure 1 also shows that the re-sponses were quite homogenous on the surface. The times of entry are more dispersed for streaming than for downloads. Still, the labels entering last did so when a sufficient service [Spotify] emerged and cannot be regarded as having missed substantial opportunities. Hence, all labels adapted a dual strategy regarding the digitization of music. Accordingly, the question of how the labels engaged in detail and what the underlying motives for allocating resources – besides inevitability and a rather positive attitude – were is more promising.
The different extends of dedication become apparent when looking at OM and figure 2. Rho Records can be placed in the upper left corner by stating, “We still do all our activities in the classic way.” Though the label is present on social media, has its own YouTube channel and its own online shop no remarkable investments for the digitized world were made. This position gets underlined by the founder stating, “I always invest in my old business model.” Besides, Rho Records engages in the tour and booking business since its foundation. Like for four other labels – which are placed among the ‘non’-investing in OM – digital distribution is outsourced and only the supply of distributors with metadata is done in-house. Streaming can be pursued with the same outsourcing strategy and Rho Records mainly was just signed up to it as the digital distributor decided to engage.
Though Iota Media acknowledged that changes are coming, that new activities will be necessary (regard-ing downloads & stream(regard-ing) and be(regard-ing the first German label of this sample to sell music through a download platform [OD2; 2004] the label is not especially pursuing new activities so far. It uses possibilities offered by digit-ization but regarding the core activities its head said, “In the first 10-15 years […] there was no possibility to pre-fer physical or digital.“ Regarding streaming Iota Media withdrew all music after 1/2 year and only
entered again after a break of a year due to having the feeling that the streaming services exploited the record labels for scaling up their own business initially. Iota Media also is the most extreme case in terms of adding non-core activities. Its founder admitted that the label would not be viable with tradi-tional activities only for about 10 years now. Only by subsidizing it with own earnings in consultancy and by integrating into tour business and booking it is kept alive.
Table 2: List of the Labels’ Activities Label
/Activities
Traditional New Music New Alternative Outsourced Ratio digital /
Physical9
Employees 10
Iota Media A&R / Publishing / Promotion
Digitization of Back Catalogue / Deliver-ing Metadata to Distributor
Booking/Tour / Busi-ness Consultancy (Physical + Digital) Distribution 20/80 1 ‚N on ‘-In v es ti n g Beta
Re-cords A&R / Publishing / Promotion / (Phy.) Distribution
Digitization of Back Catalogue / Deliver-ing Metadata to Distributor / Multiple Versions per Release
/ Digital Distribution / (Extensive) Promo-tion / Sales (Webshop) 20/80 6 Rho Re-cords A&R / Recording / Publishing / Promotion / Tour
Digitization of Back Catalogue /
Deliver-ing Metadata to Distributor Sales (Webshop)
(Physical + Digital)
Distribution 20/80 10
Gamma
Records A&R / Publishing / Promotion
Digitization of Back Catalogue / Deliver-ing Metadata to Distributor / Multiple Versions per Release
Sales (Webshop) (Physical + Digital)
Distribution 50/50 7
Heta
Re-cords A&R / Publishing / Promotion / Merchan-dise
Digitization of Back Catalogue / Deliver-ing Metadata to Distributor / Specialized Promotion for Digital / Multiple Versions per Release
Sales (Webshop) / Events & Parties
(Physical + Digital) Distribution 76/24 17 In v es ti n g
Omikron Recording / A&R / Publishing / Promotion
Digitization of Back Catalogue / Digital
Distribution Sales (Webshop)
(Physical)
Distributi-on 20/80 10
Mi Music A&R / Publishing / Promotion / (Phy.) Distribution
Digitization of Back Catalogue / Digital Distribution / Specialized Promotion for Digital / Multiple Versions per Release
Sales (Webshop) / 50/50 10 Zeta Re-cords Recording / A&R / Publishing / Promotion / (Phy.) Distribution
Digitization of Back Catalogue / Digital Distribution
Sales (Webshop) /
Streaming Platform / 60/40 25
Delta
Me-dia Publishing / Promotion / (Phy.) Distribution
Signing Catalogues / Digital Distribution / Multiple Versions per Release
Exploitation of other Media Content / Tech-nical Services
/ 75/25 20
9
‘Non’-Investing: Ø (ratio) = 27,5 / 72,5; Ø (employ.) = 6
10
16 In the case of Beta Records Mr. Beta is seeing digitized music very positive, but the label did not embrace it as others did. The label had to lay off employees due to declining revenues and realized that “the digital distribution can barely be conducted by a small label.” Besides, this is the only label of the sample which has even outsourced the additional activity of an own online shop. Gamma Rec-ords even thought about launching its own niche-specialized download service but the idea was reject-ed due to uncertain prospects and feeling too small. The label’s eventual reaction was less triggerreject-ed by the digitization itself but by piracy. Its label manager used the following analogy “If you have a store in which suddenly 20% of your goods are stolen regularly […] you do not think how you can expand. […] First you need to resolve your shoplifting problem.“ His strategy, which led to the temporary closing of the label, was to fight this problem by offering his products to favourable conditions. After reopening and eventually selling the label the new boss shifted the strategy and now tries to focus on special physical editions of the releases while not offering too cheap prices anymore. Overall, Gamma Records is a bit concerned if a viable value chain can develop and hopes for a model of different stag-es of exploitation – similar to movistag-es – to develop. Thus only teaser tracks are published on streaming platforms and whole albums are withheld for three months. Accordingly, all labels mentioned so far reported to not need to make remarkable investments.
Heta Records is placed in between the two groups of OM. Though the label also outsourced its distribution it immediately invested in a staff member caring about the new business (“The company has always been pretty hot on that.”). Apart from that, Heta Records is only one of two cases al-ready pursuing specialized streaming activities on a ‘big’ scale and hence invests resources here. They actively address Spotify and try to convince them of putting their music into popular playlists. They also pursue to sell merchandise – which can be classified as being on a bigger scale than for other la-bels – and organize events. Besides, one interviewee from Heta Records especially cares for making the physical product as appealing as possible.
The other four labels pursued the aggregation and distribution of the music themselves and can be found in the lower half of OM. Delta Media immediately began to sign whole catalogues for reach-ing a “critical mass” and started to develop its own distribution service. Eventually this activity was sourced out for a short time before the service was bought and since then is an integral part of the la-bel. This distribution service also supplies the streaming platforms. Additionally, Delta Media recently [2013] even started to engage in the distribution of eBooks and Movies with the aim of becoming a media rather than a pure music company.
17 metadata, booklets, translations etc. and everything can be opened in one application while listening to the music. “We have a high integration and we respect the idea that just because people may choose to download it does not mean they should expect anything less than is supplied with the physical prod-uct.” On the other hand Omikron is the only label of this sample refusing to engage in streaming and will do so as long as there is no influence in determining the price of the music. This new form is in-compatible with investing high sums in the traditional activity of recording. In the early days of streaming Mi Music uses its published releases with a delay. However, this practice was ceased short-ly after. Though the label starts to understand that promotion for streaming needs to be different it onshort-ly slightly started to invest time and resources for it. Because being founded with a specialization in vinyl this business still gets remarkable funding; e.g. the label is famous for the cover artwork created in-house. Finally, Zeta Records is the only label that has invested in streaming excessively and develops an own platform specialized on their niche since 2012. For that reason it is placed as being the label most engaged in the digital business in figure 2.
Evaluation of Projects
In the way the labels evaluated the transitions to downloads or streaming as a business no essential differences can be observed between investing and non-investing ones. Accordingly, assessments are presented jointly. This is feasible because the category of ‘non’-investing labels also committed re-sources and had to assess those commitments. Investments just were not as high as for the others.
The market size of downloads before the introduction of iTunes just was not appropriate as the CEO of Iota Media described it, “Revenues were ridiculously low in the beginning, because simply nobody used it.” Beforehand the digitization of music simply was not relevant in Germany. Even with iTunes taking off size only started to increase slowly and gained in attractiveness. However, with a growing market digitized music offered new metrics along which the initiatives now could be meas-ured. The range of the offering increased to a global scale if considering the most important markets. “We have seen that you were able to reach a much higher range. […] Previously, if you wanted to sell albums in Brazil it was a huge effort to somehow get a few of them there via the USA. In the digital world this has vanished” (Delta Media). Also, digitized music made every day business much easier. Despite this ease Omikron Records and Zeta Records reported to have had employees being reluctant to make the step. While Omikron managed to make the shift with them, Zeta Records took more dras-tic measures and replaced employees who were too reluctant with younger ones. “A number of em-ployees were replaced by younger, IT-focused individuals.” An overarching fear of cannibalization was not found for the first transition. Rather downloads were perceived to be an ‘add-on’ as the inter-viewee of Delta Media put it.
18 Omikron Records. Due to its special type of customers single track sales are not popular and albums are as popular as before and the same measures can be applied for both businesses. Apart from that many of the labels’ managers complain about a general devaluation of music through the dawn of digital downloads. Still, weighing this against the reduced costs which come hand in hand with the digitization (no storage cost, reproduction and distribution at no costs, no detours) all managers acknowledge that downloads also offer chances in financial terms for the labels. For example Mr. Beta Records’s CEO stated, “[…] if considering the whole picture the seemingly disadvantages in revenues get compensated mostly” and for Mi Music downloads are an “easy business” and a “dream format.” With regard to the reduced costs Delta Media even reported to have gone through a phase were they wanted to conduct as less business as possible physically and Rho Records expressed that the digitiza-tion made a lot of small companies ‘healthier.
Just as for downloads the streaming market initially has been too small to be attractive for the incumbents. Iota Media only generated double-digit amounts and consequently left the business again. Again the market needed some time to develop and being able of providing its participants with the possibility of at least generating some revenues, if pro-actively engaging in respective activities. Still, small companies face problems due to the fact of not having signed any superstars who generate mil-lions of clicks on the streaming portals. “Especially for small bands […] you cannot scale the audi-ence as you wish” (Gamma Records). Also, it takes much longer for the labels to recoup their invest-ments. However, though it takes longer to make profits in the beginning exploitation of tracks goes on for years, including the back-catalogue which is already paid for. Two other widely cited positive ef-fects are the promotion effect originating from streaming (e.g.“The most important reason for engag-ing in streamengag-ing was the promotion effect,” Iota Media) and even more important than for downloads the accessibility of customers who were excluded from the market previously – especially applying for the younger audience – (e.g. “if you still are withholding your music from Spotify, than you are miss-ing out on a huge amount of listeners, who only listen to music on Spotify,” Heta Records) while also fighting piracy (e.g.“Streaming has the big advantage of getting the big illegal mass back in,” Delta Media).
Iota Media, Gamma Records, and Rho Records reported to experience streaming to cannibal-ize physical sales. Mr. Rho sees this new business destroying the old one yet again, “They found a new way of destructing their own business, like the analog people did before. It is for some reason man just likes self destruction.” The remaining labels saw the business of digitized music and streaming partic-ularly more as an add-on. Like the quotes have shown it offered to reach a group of customers exclud-ed previously. Additionally, different groups of customers were describexclud-ed to be quite separatexclud-ed by Heta Records. “Between those people there tends to be little crossover. So it does not really come to cannibalization.”
19 money in streaming.” Antipathy was observed at Heta Records as well. “[…] [I]t almost felt you were giving the music away, compared to I suppose years and years of download sales suddenly to be get-ting paid pennies per stream.” However, this slight resistance stemmed from two older employees. Coincidentally those members were replaced at about the same time streaming really emerged which helped breathing “a bit of fresh life into it.” Besides Omikron Records no other label has rejected the idea strictly. Partly this is due to the reasons presented in the previous paragraph. Additionally, the labels with a more positive attitude towards streaming acknowledge streaming to be a completely dif-ferent BM right away and hence applied difdif-ferent criteria. E.g. Beta Records and Iota Media compared streaming revenues to revenues generated by the radio and not to downloads. In general, all labels underlined the importance of differentiating between the owning of music and once listening to it or as Mr. Delta from Delta Media put it, “It is like comparing apples and oranges.“
Conflicts Between the BMs
The most labels’ strategy can be condensed into the phrase ‘cover every base’ expressed by Mr. Heta from Heta Records. It is accepted that there are specific customer groups who will mostly purchase their music via a preferred channel. Thus to serve every group every channel has to be kept open. Del-ta Media follow the approach to “not […] educate people how to listen to music.” Rather “[t]hey should listen to it like they wish and it is our task to deliver it to the preferred channels.” So, there is a general agreement that running two or more business models alongside is necessary.
20 Clear Roles and the Leaders
As all labels analyzed are small or medium there are no teams to be found with new boundaries around them. Nevertheless, Beta Records, Delta Media, Heta Records, Gamma Records and Mi Music have relatively clear roles. Employees are assigned to specific tasks whether it may be for pursuing physical or digital activities. However, as in the case of Mi Music in the previous paragraph all labels reported to experience some kind of synergistic effects. In Omikron’s team everything is mixed up and you cannot identify anyone pursuing digital activities specifically. Considering Rho Records activities regarding the digital business are executed on the side anyway and this is reflected in the team’s tasks.
Due to not having specialized and separated departments the leaders of the firms also are quite close to the resource allocation process. They are able of supervising most activities and can intervene if something is not according to their intentions. The study also found some important traits inherited by the leaders. The bosses of Heta Records have proven to be progressive as the interviewee described them to always “have been very on it and upfront.” And Mr. Omikron from Omikron stated to follow long-term goals with his investments. Still, the direction of some companies (BR, HO, OM) common-ly is discussed with the whole team if ideas emerged from this level. The most autonomous process probably could be observed at Mi Music, where it mainly was up to Mr. Mi to set up the digital busi-ness, “I had free rein.” Hence, he fulfilled the leading role from a lower level.
Discussion
This study analyzed how inGamma record labels respond to disruptive innovation and uncovered un-derlying motives. Additionally, it was researched how the firms managed to balance between the busi-ness models as this is essential for following a dual strategy. To explain their actions the resource allo-cation process and its role in being a filter were placed as the pivotal factor of the study like suggested by Christensen and Raynor (2003). All labels have embraced physical and digital music to some ex-tent. This is in line with previous research which has shown that most companies opt for pursuing a dual strategy (Charitou & Markides, 2003; Karimi & Walter, 2015). However, what this previous re-search does not account for is how the dual strategy actually looks like, what motivated variations and how it is dealt with conflicts between the strategies.
disrup-21 tion. Omikron is the only label of this study to reject the most recent development of streaming, but even its CEO admits that he cannot withstand streaming forever. Mintzberg and Waters (1985) also argued that a strategy can be imposed on an organization by the environment rather than being chosen freely in the face of technological developments. This sheds new light on the spectrum of possible responds offered by Charitou and Markides (2003). According to the findings of this study the spec-trum mainly is reduced to a dual strategy or fully embracing the disruption. Considering the value the old business model still has (see OM, column 6) and its important role in financing the setup of the new the latter option vanishes, too. Additionally, Adner and Snow (2010) propose the possibility of withdrawing from the disruptive innovation to a defensible niche, but this is not believed to last forev-er. The disruption will be established sooner or later and the niche loses attractiveness. Hence, compa-nies operating in industries closely intertwined with technological advancements on which they have little to no influence do not have a choice whether to pursue possibilities opened by those technologi-cal advancements or not if they want to stay in business in the long-term.
Proposition 1: Companies operating in industries highly Gamma on environmental developments are likely to embrace disruptive innovations as they occur.
22 – with their limited capacities by sourcing out core activities. Consequently the resource allocation process barely acted as a filter in hampering a dual strategy, because there is the possibility of engag-ing without havengag-ing to commit too much.
Proposition 2: Organizations with resource constraints are likely to pursue a dual strategy of sustain-ing and disruptive innovation by sourcsustain-ing out activities.
This strategy naturally decreases the importance of other motives for the ‘non’-investing labels as expenditures are comparably low. However, engaging cannot be explained by this solely and other factors need to be considered, too. Though the focus of this paragraph is on those labels which invest-ed remarkable sums the previous labels cannot be neglectinvest-ed. This is because the pure possibility of being able to engage – may it be by sourcing out or simply having enough resources – is not sufficient in explaining the engagement. The resource allocation process still can act as a filter.
The results show that the labels first assessed the market as not being relevant in terms of its size and fewer profits were expected due to sales of single instead of albums. The same was observed with regard to streaming. The market was considered as being too small initially and revenues were feared to decrease rapidly with the new business model. Nevertheless, these concerns were upset by the chances offered. For downloads chances were an ease of running the business through digitization in general, a higher reach through digital sales, and most and for all an easier business itself through less capital freezing activities. Hence, the first transition even brought to light some striking ad-vantages, if considering the whole picture. Consequently, the new business could withstand compari-son to the old and resources were allocated. The chances streaming offered were the exploitation of the back-catalogue, fighting piracy and most important accessing customers who were excluded from the market previously. The second’s transition advantages were a bit harder to grasp, but slight antipathy towards it was overcome, too. This mainly was achieved by not comparing it to previous business models, but assessing it in isolation. Christensen (1997, 2006) repeatedly stated inert routines of as-sessing new projects to have a major influence in allocating resources. The focus especially was put on financial measurements by which disruptive projects cannot live up to the expectations of sustaining ones (Danneels, 2004; Yu & Hang, 2010). However, the previous paragraph has shown that both as-sessments yielded opportunities which would have been impossible with the old business model and investments had to be made to participate. Thus inertia was broken up by the prospect of inherent chances.
Proposition 3: Resources are allocated to disruptive projects if they offer opportunities impossible to achieve within the boundaries of the old business model.
De-23 velopments like downloads and streaming were rather seen as an add-on and audiences are believed to be set in their preferences of purchasing music. Thus this perception largely blocked the emergence of that fear and resources could still be allocated without fierce resistance.
Deducted from resource dependence theory Bower and Gilbert (2007) also demonstrated a virtual veto companies might give their current customers and which can steer the resource allocation process towards sustaining projects. However, as noted before every new channel which emerged was perceived as serving just another group of customers. Moreover, these new and previously excluded customers would not purchase products via the old channels. Accordingly, the sheer perception of a big group of excluded customers made it possible to not only allocated resources to the current ones.
Still, it is not sufficient for a proper funding that opportunities just are existent. Like the para-graphs about fear of cannibalization and resource dependence already implied the company needs to perceive the opportunities as such and they need to be put forward by someone. As the cases studied all featured rather small companies (max 25 employees) the CEOs or leading employees were very close to all facets of the resource allocation process. Also, no company made use of spin-offs or inter-nal ventures. At best there were different departments for digital or physical activities, but boundaries were fluid. Pairing those two observations emphasizes the role of the leaders. It was their task to in-here and to spread throughout the organization what Assink (2006) called ‘disruptive innovation capa-bility’. Some of the labels were explicitly described as being upfront in their thinking and made in-vestments with regard to long-term goals. This created a culture open for pursuing a dual strategy. Besides, the leaders were able of thoroughly understanding the chances described in the previous par-agraph and executed necessary actions in the company. If necessary, also employees who hampered the progress due to fear for their positions were dismissed. This adds up to the literature emphasizing the role of the leaders (O'Reilly & Tushman, 2011; Paap & Katz, 2004) and calling them to be vision-ary in nature (Christensen & Overdorf, 2000; Tellis, 2006). Additionally, this study emphasizes the role of rationality as proposed by Henderson (2006). Through inhering certain traits and being able of soundly analyzing the environmental developments resources were allocated to disruptive projects. This study adds to these traits by showing that a direct involvement of the leaders throughout the lev-els of the company fosters the allocation of resources to disruptive projects.
Proposition 4: Resources are allocated to disruptive projects if the leaders are able of controlling resource allocation as they intend.
24 one of the strategies but yielded value for both. Hence, synergies emerged from investing in one or the other. In turn, this reduced conflicts and investments were made more eager.
Proposition 5: A dual strategy is more likely to be run genuinely if the activities necessary create overall value rather than for each strategy in isolation.
Conclusion
The declared goal of this study was to shed light on how in particular incumbents respond to disrup-tive innovation, why it is done and how balanced is accomplished if pursuing a dual strategy. The piv-otal factor of this study was the resource allocation process, because strategy ultimately is grounded in the way resources are allocated. Also this process can act as a filter and hence is capable of investigat-ing why it was invested and how balance was achieved. For refininvestigat-ing the theory of disruptive innova-tion the study used case studies for building grounded theory (Eisenhardt, 1989). The setting was the Dutch, German and British music industry. The results have shown that the overall strategy of running dual business models rather was imposed on the labels by the technological developments. Those de-velopments widely were perceived as being inevitable and managers acted accordingly. All labels adopted a dual strategy. However, those dual strategies were not totally homogenous. Labels with resource constraints managed to follow a dual strategy by sourcing out certain activities (i.e. digital distribution) and only invested in pursuing less expensive actions. Others invested and followed more expensive actions themselves. Both types of sub-strategies were endowed with resources due to do similar motives, actions and leaders’ traits: (1) The new business models were able of offering oppor-tunities which are impossible to achieve within the boundaries of the old business model (e.g. higher range, exploitation of back-catalogue). (2) By staying close to the resource allocation process the companies’ leaders and upper-level managers could ensure that disruptive projects are endowed with sufficient resources. (3) The leaders were characterized by being visionary and following long-term success instead of short-term profits. (4) Uprising tensions between conflicting strategies can be kept at bay by crafting activities complementing both strategies.
25 threat (Hill & Rothaermel, 2003; Macher & Richman, 2004). This study is – to the best of the author’s knowledge – the first to acknowledge the possibility of outsourcing in this specific context.
Managers finding themselves in similar positions like the cases studied need to try to stay ra-tional and thoroughly analyze new business models on the one hand. This means to examine it from all angles. By this approach first reasons for following the approach might be uncovered. On the other hand managers should not lose their vision and long-term orientation. Some disruptive projects will be hard to justify initially even if the methods just described are applied. Hence, one should not fall for short-term profits only. Also the possibility of engaging in the disruptive innovation without having to commit too much by outsourcing should be present in the repertoire of responses. Finally, managers should try to craft activities able of aiding not only one of the business models and conflicts can be alleviated.
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