The role of organizational capabilities in business model innovation (BMI) for incumbent firms: A single case study of Philips
Author: Sonja Katharina Schmitz Student ID: 13398059
Date of Submission: 24 June 2022 - Final Version
Qualification: MSc. In Business Administration - Digital Business Track Institution: University of Amsterdam
EBEC approval number: EC 20220331010327 Supervisor: Fatemeh Mashikhah
Statement of originality
This document is written by Sonja Katharina Schmitz who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract:
The digital age and disruptive technological innovations require firms to continuously innovate their business model. Especially for incumbent firms that are oftentimes slowed by structural inertia and legacy processes, business model innovation (BMI) becomes essential for survival.
Based on an exploratory single case study of the Dutch health technology company Philips, this inductive research explores how specific organizational capabilities enable incumbent firms in their BMI efforts and how these capabilities differ per organizational tribe. Drawing on 17 interviews with employees from Philips’ Digital Marketing & E-Commerce department (DMEC), this research proposes a process model comprising of seven dynamic, strategic, and operational capabilities as well as their micro foundations which are essential to strengthen an incumbent firm’s BMI. The findings have several theoretical contributions as well as practical implications and provide a fruitful research agenda for future studies.
Table of Contents
1. Introduction ____________________________________________________________ 5 2. Literature Review _________________________________________________________ 7 3. Research Methodology ____________________________________________________ 15 4. Findings _______________________________________________________________ 20 5. Discussion ______________________________________________________________ 41 6. Conclusion _____________________________________________________________ 47 References ________________________________________________________________ 49 Appendices _______________________________________________________________ 53
1. Introduction
The digital age has fueled rapid technological innovations that put companies worldwide in front of a wide range of opportunities as well as challenges. This evolution is especially challenging for incumbent firms that have been able to operate their traditional product business models and have not had to fear disruptive competition due to their sheer advantages in scale. However, purely digital players have changed the competitive landscape with the introduction of disruptive new business models that threaten incumbent firms’ traditional ways of creating, delivering, and capturing value for consumers. If incumbents seek to remain relevant in today’s consumer landscape, they need to explore new innovative business models that can pace with constant innovation and adhere to rapidly changing consumer demands.
Several studies have highlighted that especially incumbent firms struggle with business model innovation (BMI) as they are often slowed by legacy systems, siloed processes as well as complex, hierarchical structures that do not allow for strategic flexibility and experimentation (Cozzolino et al., 2018; D. J. Teece, 2010; Warner & Wäger, 2019). Therefore, this study seeks to explore how specific organizational capabilities support incumbent firms in their BMI process. A study by Cozzolino et al. (2018) investigates how incumbent firms adapt their business model after disruptions. The authors find that disruptive technologies and disruptive business models are the main drivers for BMI which as a result spurs a firm’s ability to sense opportunities and threats and causes BMI through experimentation and alliances or acquisitions (Cozzolino et al., 2018). Warner & Wäger (2018) uncover the diverse contingency factors that enable incumbent firms to develop dynamic capabilities needed for digital transformation.
They identify agility as the core mechanism for strategic renewal of a firm’s business model (Warner & Wäger, 2018). Building on the strategic agility framework that stresses strategic sensitivity, leadership unity & resource fluidity to make an organization more agile, Doz &
Kosonen (2010) develop concrete leadership actions which can strengthen a firm’s ability to
renew its business model. Surprisingly, business model innovation has solely been researched on an organizational level and has failed to uncover how BMI efforts differ per organizational department or tribe.
This research aims to fill the gaps in the literature by asking the following research questions:
How do incumbent firms employ organizational capabilities in order to innovate their business model?
And how do these capabilities differ per organizational department?
Thereby this study makes several academic and practical contributions. In view of the academic contributions, firstly this research aims to complement and expand the understanding of BMI and organizational capabilities literature by highlighting the contribution of different organizational capabilities to BMI and how these innovation efforts differ per organizational tribe. Secondly, by shedding light on the BMI process of incumbent firms, this paper intends to uncover how to avoid business model fixation and getting trapped by legacy systems and processes. Looking at managerial implications, by studying how an incumbent firm such as Philips innovates its business model, the process model developed in this paper can serve as a guide for managers to focus on the right organizational capabilities to support BMI in their respective organizations. In addition, by uncovering organizational capabilities related to successful BMI, this research can focus managers on the necessary capabilities to consider and have in place before proceeding with the firm’s particular transformation.
This study employs a single case study approach of the Dutch health technology company Philips, reflecting the need for an in-depth analysis of this unexplored topic. In total 17
interviews have been conducted with tribe leaders, agile coaches, portfolio managers and product owners of Philips’ Digital Marketing & E-Commerce (DMEC) department. The data collection process has been guided by insights derived from an extant literature review (section 2). The methodology is explained further in section 3, followed by an overview of the main findings (section 4). Sections 5 discusses the findings with the illustration of a process model, the practical and academic contributions, and the limitations of this research as well as its implications for future research. The conclusion can be found in section 6.
2. Literature Review
In order to understand the need for firms to develop or employ certain organizational capabilities to innovate their business model, it is crucial to first comprehend these concepts.
Next, organizational capabilities in relation to different types of business model innovation are explored, illustrating that traditional approaches to organizational capabilities are not always transferable to support incumbent firms in their process of business model innovation. These illustrations are based on the existing literature. The current contributions and gaps in literature on these topics will be highlighted and discussed in the following literature review.
2.1 Business Models and Business Model Innovation
The literature provides diverging definitions of a business model and explanations of what a business model constitutes of. Most definitions describe a business model in regards to how a firm engages with consumers to create and capture value (Baden-Fuller et al., 2017; Cozzolino et al., 2018). Teece (2010) elaborates on these dimensions of value and describes a business model as “the design or architecture of the value creation, delivery, and capture mechanisms of an organization” (p.172). According to Barney’s (1991) traditional resource-based view, value is derived from a firm’s challenge in identifying relevant products and services for consumers and bringing those to market efficiently and profitably. One of the most used
strategic management tools to describe a firm’s business model is the business model canvas developed by Osterwalder (2004). According to Osterwalder’s (2004) conceptual model, a business model can be divided into nine building blocks: key partners, key activities, key resources, cost structure, value propositions, customer relationships, customer segments, channels, and revenue streams. Most literature has examined value creation & capture from a supply-side and firm resources perspective and has only recently shifted attention to the demand-side, especially to how businesses should create value in the eyes of the consumer (Baden-Fuller et al., 2017). Looking at a business model from a customer perspective opens up different ways to create and capture customer value, than solely focusing on a specific firm and its resources or activities. This concept is elevated in a paper by Baden-Fuller et al. (2017) who distinguish between dyadic and triadic theoretical business models. The first dyadic type is the traditional product business model where consumer value is created after purchase and independently from the producer. The second dyadic type is the solution business model where value is co-created with the producer, meaning that the consumer is more involved and hence the solution business model carries more disruptive potential than the product one. Baden- Fuller et al.’s (2017) triadic business models leverage value creation by connecting the original consumer to others. In the matchmaking business model, value is amplified by a “match- maker” that reduces the search efforts for the consumer, whereas in the second multisided triadic business model consumer value is created as the product, solution or service is connected to a third-party by the platform owner (Baden-Fuller et al., 2017). Technological innovations and environmental disruptions, such as the COVID-19 pandemic, have served as accelerators for these triadic platform business models as traditional offline businesses had to increase their online presence to remain in contact with their customers. Furthermore, technological disruptions have been found to require firms to innovate their business models (Y. L. Doz & Kosonen, 2010). This required BMI can be especially challenging for incumbent
firms which are more likely to be affected by inertial processes which have an influence on an organization’s agility (Cozzolino et al., 2018; Warner & Wäger, 2019) as well as the likeliness that disruptive technologies are predominantly introduced by new entrants (Ansari et al., 2016).
Disruptive technologies tend to move from the low end to the high end of the market as the fundamental technologies improve faster with time than the improvements demanded by customers (Cozzolino et al., 2018). Hence, incumbent firms tend to disregard certain disruptions as niche products that do not pose a threat to the firm’s historically proven products, technologies or business models that serve current customer needs (Hsu & Cohen, 2022). This inability of incumbent firms to recognize the threat of technological disruption and successfully respond to it has been termed the “incumbent’s dilemma” by Hsu & Cohen (2022). This logic explains why new entrants have an advantage in commercializing disruptive technologies, whereas incumbents tend to be confined in maintaining mature technologies (Christensen &
Bower, 1996). Incumbent firms need to radically adjust their business model in terms of value creation and value capture if they do not want to trail behind competitors in the face of technological disruption.
Innovative business models have increasingly gained attention in the academic research over the past years. This development has been driven by disruptors such as Amazon or Airbnb who have established new ways of value creation by establishing digital platform business models.
Digital platform businesses are connected business environments that employ digital technologies to create a network of interdependencies (Kopalle et al., 2020). By leveraging these interdependencies, platform ecosystem players are able to generate revenue not only from the customer, which in turn increases the overall value of the ecosystem. The use of digital technologies allows ecosystem players to increase their understanding of customer needs and tailor their products and services accordingly (van Alstyne et al., 2016). Therefore, many
legacy firms that traditionally started out as non-technological companies are struggling to keep up with digital natives such as Amazon or Airbnb. Nowadays, many of the world’s most valuable companies such as Microsoft or Apple are choosing digital ecosystems as a type of business model, which comes as no surprise, as companies that have more than 50% of their revenues coming from digital ecosystems have 32% higher revenue growth and 27% higher profit margins than industry average (Weill & Woerner, 2015).
Digital technologies have also given rise to several other business models, such as servitization business models (e.g., Amsterdam Schiphol airport is receiving LED lighting-as-a-service by Philips to increase their sustainability efforts) or subscription business models (e.g., Netflix’s monthly video on demand model) (Warner & Wäger, 2019). However, many incumbent firms are still operating a traditional product business model and it is therefore challenging for them to experiment with new business models.
2.2 Organizational Capabilities
Building on Barney's (1991) resource-based view of competition, an organization’s capabilities (OC) are key intangible assets which makes it hard for competitors to copy them and therefore significantly contribute to a firm’s competitive position. The digital era and advances of IT result in an even greater importance of intangible resources such as an organization’s capabilities over physical ones (Schreieck et al., 2021). Smallwood & Ulrich (2004) define organizational capabilities as “the collective skills, abilities, and expertise of an organization”
that determine the orchestration of people and resources to accomplish tasks and contribute to an organization’s identity (Smallwood & Ulrich, 2004, p.119). In their theoretical framework, Smallwood & Ulrich (2004) distinguish between individual and organizational levels of analysis as well as social and technical skills. Only when a company is able to bring together the competencies and abilities of its employees, organizational capabilities can emerge. On an
organizational level of analysis, technical skills refer to a firm’s core competencies whereas social skills refer to OC in regards to a firm’s DNA or culture, such as innovation or speed (Smallwood & Ulrich, 2004). This framework is supported by Teece et al. (2016) who measure a firm’s technical skills by the strength of a firm’s ordinary capabilities (D. Teece et al., 2016).
These ordinary capabilities allow firms to produce and sell static products and services and are the “how we earn a living now” capabilities (Winter, 2003). However, they are unable to help the organization to respond to unexpected changes in its business environment and therefore contrast with what have been termed “dynamic capabilities” by D. J. Teece et al. (1997).
Nowadays business environments are becoming increasingly dynamic and the viability of incumbent firms is highly dependent on continuous innovation (D. J. Teece, 2018). This technological disruption results in capability gaps for incumbent firms, because they are faced with new technological knowledge, new ways of conducting organizational activities, and new ways of value creation (Karimi & Walter, 2015).
Hence, next to their technical and ordinary skills, it becomes essential for firms to create and develop their dynamic capabilities which can support them to respond to unforeseen changes.
2.2.1 Dynamic Capabilities: Sensing, Seizing & Transforming
As suggested by the dynamic capabilities (DC) framework of Teece et al. (2016), strong dynamic capabilities are essential to strengthen the organizational agility necessary to navigate uncertainty and provide firms with greater robustness. Uncertainty is omnipresent in today’s interconnected economies, that frequently experience different types of disruptions. Therefore, it becomes vital for incumbent firms in traditional industries to develop the capability to rapidly innovate their business model (Karimi & Walter, 2015; D. J. Teece, 2018; Warner & Wäger, 2019). These capabilities support a firm in navigating within dynamic environments and exploiting opportunities by integrating and combining internal and external knowledge of partners (Abbate et al., 2021). Teece divides DC into a firm’s ability to sense, seize & transform
(Teece et al., 2016). Sensing refers to a firm’s ability to scan its environment in order to recognize opportunities, such as new technologies, competitors, market needs or customer preferences (Abbate et al., 2021; Rangaswamy, 2021). On an organizational level, firms can task specific units with environmental scanning. This can include software development teams that have knowledge about emerging technologies or departments that monitor or are in contact with the market such as customer service or sales units (Helfat & Raubitschek, 2018). Seizing refers to how a firm utilizes its own resources to capture value from these external opportunities (Teece et al., 2016). This ambidexterity allows firms to balance between exploring and exploiting new and existing resources and networks (Siaw & Sarpong, 2021). Finally, it is vital that firms continuously renew company processes and align existing resources in order to achieve sustainable growth and stay relevant for their consumers which has been termed transforming capabilities by Teece et al. (2016) (Wong, 2016).
2.2.2 Managerial Cognitive Capabilities & Organizational Culture
A firm’s dynamic capabilities can be strengthened by managerial cognition as well as the values and culture of an organization (D. Teece et al., 2016). As knowledge and capabilities are difficult to imitate, they can be essential to build a competitive advantage according to Barney’s (1991) resource-based view. The decisions of top management shape how firms create and employ capabilities and therefore have a great impact on if or how a firm innovates it business model. Several studies have proven that projects designed to respond to disruption benefit from top management support, if managers stress their importance and actively participate in them (Karimi & Walter, 2015). According to Molla et al. (2015), organizational culture decides what firms do and what they cannot do, and therefore either supports or impedes the adoption of technological innovation. Companies should create a common language for disruptive innovations by fostering an innovative culture that reflects the company’s values
and is reinforced by daily practices (Karimi & Walter, 2015; Khazanchi et al., 2007). Path dependencies are significantly impacting the business model innovation process of incumbent firms as they are reinforced by a siloed way of working, legacy systems and organizational politics (Y. L. Doz & Kosonen, 2010; Warner & Wäger, 2019; Weill & Woerner, 2015).
2.2.3 Integrative Capabilities & Organizational Alignment
These daily practices also contribute to effective communication and knowledge exchange within as well as between organizations. In their paper, Helfat & Raubitschek (2018) introduce the term “integrative capabilities”. Integrative capabilities go beyond a firm’s ability to form alliances in that they also include an organization’s “capacity for effective communication and coordination of activities, resources (including knowledge) and capabilities, investments, and objectives within firms” as well as of multiple partners at the same time (Helfat & Raubitschek, 2018, p.1396). The same concept has been defined as “knowledge management” by Rangaswamy (2021). Effective knowledge management is oftentimes established and reinforced through specific organizational routines that strengthen coordination and communication (Helfat & Raubitschek, 2018). As today’s turbulent business environments constantly present firms with market changes, operational activities such as specific routines related to integrative capabilities can help organizations to effectively readjust their core product or business model accordingly. Furthermore, these routines can help firms to orchestrate new product innovations. Organizations should constantly assess their existing processes and procedures to see whether they still serve current market needs (Rangaswamy, 2021). For example, many organizations have moved from traditional waterfall project management to agile-based project management, putting a focus on customer needs and allowing for the development of faster solutions. A firm’s ability to achieve internal fit between organizational elements has also been identified as a key capability for organizational change
in response to disruption in a study by Khanagha et al. (2018). This organizational alignment provides employees with clear behavioral guidelines and helps to promote a coherent view of the company both internally and externally, which in turn ensures that plans, decisions and actions are aligned (Miller, 1992; Soda & Zaheer, 2012).
2.2.4 Information Technology (IT) Capabilities
In order to maximize the value captured from innovative opportunities, incumbent firms need to possess or develop technology-related capabilities. Several studies confirm that Information Technology (IT) capabilities have a positive effect on competitive advantage (Bhatt et al., 2017; Lim & Trimi, 2014; Makhloufi et al., 2018). IT capabilities consist of four different components: IT strategy, IT processes and metrics, IT organizations and assets/infrastructure (Chege et al., 2019). IT capabilities allow organizations to design more customer-centric products, as they provide the tools to better understand customer needs and get the products to market faster (Warner & Wäger, 2019). Especially within today’s competitive business environments, organizations that know their customer and market needs better than its competitors can benefit from first-mover advantages. Furthermore, a firm’s digital readiness, which is defined as the digital organization and connectedness of partners via technologies such as API’s, has been found to be positively correlated with higher market share according to a study by Sebastian et al. (2020). Advanced IT capabilities allow a firm to share knowledge more efficiently within the organization as well as with external partners.
3. Research Methodology 3.1 Research Design
In order to answer this study’s research question, a cross-sectional single case study of the Dutch health technology company Philips has been conducted. Due to its long history the company has proven its ability to successfully master a range of disruptions in its business environment and has constantly innovated its business model, which makes Philips an appropriate subject to answer the study’s research question. As mentioned by Siggelkow (2007), it is useful to choose a certain organization as research subject because it provides certain insights that one would not obtain studying another organization. The research strategy has an exploratory nature, meaning “it explores those situations in which the intervention being evaluated has no clear, single set of outcomes” (Yin, 2003). Especially in international business research new phenomena develop quickly and therefore an exploratory research strategy can support the understanding of these new phenomena (Y. Doz, 2011). Furthermore, conducting an exploratory single case study has been deemed as the appropriate research strategy, due to the lack of research on the topic and the clear literature gap identified. Particularly for the research goal of uncovering novel insights, it has been deemed useful to choose a single case to maximize meaningful findings and spur future research and theory development (Bennett &
George, 2005). Therefore, this study takes an inductive approach, „starting with the observations of specific instances and seeking to establish generalizations about the phenomenon under investigation” (Gupta & Awasthy, 2015, p.20).
Invitations to the interviews were sent out via e-mail informing respondents about the nature of the study. In order to reach the research goal to explore the required organizational capabilities for BMI and the differences in capabilities needed for the implementation in different organizational departments, 17 respondents from Philips’ Digital Marketing & E-
Commerce (DMEC) department have been interviewed (see appendix 1 for participant overview). DMEC was established in 2020 to accelerate the direct relationship between Philips and its customers by adhering to the agile way of working. Respondents from each of the different DMEC clans were interviewed, namely direct-to-business (D2B), direct-to-consumer (D2C), digital platforms (DP), project management office (PMO), global media management (GMM) and digital IT.
3.2 Data Collection Methods
Semi-structured interviews were conducted as the primary data collection method. Conducting interviews is a suitable data collection method as they allow for a better explanation and understanding by providing in-depth information in response to open-ended questions tailored to answer the study’s exploratory research question. Furthermore, other data sources such as annual reports, internal presentations and company reports have been collected to triangulate the interview findings and increase the reliability and validity of the study. Triangulation implies the use of two or more data sources or investigators (Thurmond, 2001). Furthermore, two researchers have conducted the interviews. This can decrease potential bias in “gathering, reporting, coding or analyzing” the data (Denzin, 1970 & Mitchell, 1986) which increases the internal validity of the study and the value of the final results (Thurmond, 2001).
In total, 17 interviews have been conducted. Purposive sampling has been chosen as data collection method to identify both the case as well as the interviewees given its suitability for theory building and in order to maximize information-rich findings in relation to the research question. 16 out of the 17 interviews were conducted via Microsoft Teams whereas one interview was conducted in-person at the Philips HQ in Amsterdam. All interviews lasted between 45-60 minutes. In the beginning of the interviews, the respondent was informed about
confidentiality & privacy agreements, which was followed by a description of the research purpose. Each interview was started with grand tour questions on the interviewee, e.g., “What is your role at Philips?” and “What do your daily tasks and responsibilities constitute of?”. The grand tour questions were followed by main research questions on business model innovation and the required capabilities to implement these BMI in the interviewee’s specific department such as “What are the innovative business models that department X is working on?”, “Could you give an example of a (un)successful business model in department X?”, “What were the steps that you have taken for each of these BMIs?” and “What are the organizational/strategic capabilities needed for implementing each of these BMIs?” (see appendix 2 for interview protocol). The last part of the interview was used to allow the interviewer to pose potential follow-up questions and receive feedback from the interviewee. In order to increase the study’s reliability all interviews were recorded, transcribed with the help of software otter.ai, and analyzed afterwards (Silverman, 2005).
3.3 Data Analysis
The empirical data was analyzed using the methodology of Gioia et al. (2013). The Gioia methodology follows a systematic approach to new concept development with the aim to bring qualitative rigor to inductive research and is therefore suitable for the design of this study.
Descriptive coding is used which summarizes the basic subject of a section in a word or short phrase (Saldaña, 2015). As the aim of this research is to understand the experience of knowledgeable agents, descriptive coding has been deemed an appropriate method. The Gioia methodology consists out of three stages: first order concepts, second order themes and aggregate dimensions. The first order concepts emerged directly from the interviews and remain closely to the response of the interviewees. This first stage of the process is often referred to as “open coding” in academic research due to its exploratory nature which
consequently results in a variety of first order categories. For the analysis of the empirical data the software Nvivo was used. The first stage of coding resulted into 95 first order categories.
By consolidating similar categories in the second stage, the number of categories was reduced to 7 second order themes which form the building blocks of a grounded model. The second stage of the analysis requires the researcher to find patterns that are related to the research question and novel concepts that do not have adequate representation in the current academic research. Hence, for this step also the academic literature has been consulted. Finally, during the third and final step 3 aggregate dimensions have been created. The data structure in figure 1 is a graphical summary of the relationship between the first order categories, second order themes and aggregate dimensions evolved which strengthens rigor in qualitative research (Gioia et al., 2013). As inductive research approaches have an explanatory nature they are often criticized for an unclear relation to theory and consequently their explanatory power (Doz, 2011; Gioia et al., 2013). The Gioia methodology aims to prove the explanatory power of inductive research by adding relational dynamics where the emergent concepts are directly linked to the theoretical dimensions which in turn are connected to the research question. The following section describes the findings which have been extrapolated in line with the described process.
• Servant leadership
• Autonomy & purpose
• Change management
• Talent management
• Entrepreneurial mindset
• Commitment & transparency
1st order concepts 2nd order themes Aggregate dimensions
• Centralization vs. decentralization
• End-to-end ownership
• Integration of silos
• Matrix organization
• Clear roles & responsibilities
• Path dependency & structural inertia
• Routines & Processes (e.g., NBX)
• Acquisition of start-ups
• Consulting with external experts
• Outsourcing risk
• Striving for open innovation
• Portfolio management review
• Cultivating an overarching view
• Setting clear priorities & focus
• Strategy transparency
• Cross departmental collaboration
• Azure DevOps
• Stakeholder alignment
• Building customer data platforms
• Investments in IT infrastructure
• Integrating digital tools &
retooling
• Data-driven decision making via AI & machine learning
• Business-IT alignment
• Electronic data interchange (EDI)
• Continuous & direct feedback from customers, (e.g., NPS)
• Market intelligence teams that scan trends to sense customer needs
• Rapid prototyping
• Agile transformation
• Encouraging innovation through experimentation & risk taking
• Interchangeable teams
Leadership & Organizational Culture
Organizational Structure, Routines
& Processes
Strategic Collaborative Innovation
Strategic Alignment IS & IT Infrastructure Customer Connectivity
Organizational Agility
Figure 1. Data Structure.
Dynamic Capabilities
Operational Capabilities
Strategic Capabilities
4. Findings
This section elaborates on the three aggregate dimensions that were established during the data analysis. The following dimensions are discussed; (1) dynamic capabilities, (2) operational capabilities, and (3) strategic capabilities. All aggregate dimensions are explained by means of their 2nd order themes in different subsections. These subsections are further supported by illustrative quotes that demonstrate the relation between the identified capabilities and Philips’
BMI efforts.
4.1 Dynamic Capabilities
Leadership & Organizational Culture
A common theme that was highlighted by several interviewees is the importance of leadership
& organizational culture for successful BMI. DMEC has adopted a servant leadership style, which invites leaders to demonstrate trust and empower as well as strengthen employees in order to make them perform to their best ability. As stated by interviewee 14:
„As leaders, and for me, it‘s about, as I call it, servant leadership. I need to show towards my team members how their contribution is valued, where they could contribute more or at least where they can improve, listen to their ideas and if not heard by others, have that discussion.“
By trusting employees, leaders are simultaneously giving employees the autonomy to make decisions. Several interviewees stress the importance of autonomy to allow employees to develop an entrepreneurial mindset that stimulates an innovative organizational culture. As explained by interviewee 10:
„A lot of it has to do with the the leadership. How long term focused are they? How clear are they on the strategy of the organization? How much trust do they put into the different levels of the organization? These are things that are probably symptoms of an organization that
functions well, and an organization that functions well should filter into an organization that can innovate well.“
Clarity and commitment to the chosen organizational strategy were stressed by numerous interviewees. Especially for an incumbent firm like Philips legacy processes are ingrained in people ‘s ways of working. Therefore, it becomes vital for leaders to show commitment to the change BMI entails. As stated by interviewee 13:
„I think the challenge is that we have a lot of people who come from a company culture that is ingrained and it’s risk averse. You cannot leave space for the old when you introduce a new business model. People must feel from leadership that there is no way to go back.“
Simultaneously, business model innovations require transformations which makes it inevitable to introduce change management. Leaders need to reduce the complexity of business model innovation and incrementally explain the steps the change requires to employees. By doing so, leaders can avoid potential resistance to change.
“Business innovation or business transformation is typically very complex. But in your narrative as a leader, standing in front of your team, if you start talking complex things, people will see it as complex. And then you will get resistance from the get-go: “this will never happen”, “fly to the moon”, “you're crazy”. But if you keep it really simple, small, then people are really behind your idea.” – Interviewee 4
„ I think to get people to transform or to change the way in which they worked before is quite difficult and to create something that does not exist is quite difficult. And when there are parts of the organization that are impacted by those decisions there's a lot of internal resistance.
People will maybe be impacted because they are not anymore in charge or with the power of making a decision or because the responsibility that they had has changed. I will take that as a challenge in dealing with internal resistance and change management. “– Interviewee 9
Lastly, providing employees with a strong sense of purpose has been highlighted as another factor to consider when implementing innovative business models. As employees encounter
challenges when undergoing an organizational transformation, it is important that they find a strong motivation to confront these challenges. As explained by interviewee 6:
„It is super important to have a very strong purpose, mission and a sort of ‘why’ behind whatever you do. Because that is what evokes the feeling of people going from A to B. Because they will need to break barriers, they will meet a lot of constraints, hurdles and so forth. And you need to bend through it and the only way you can do it is with a very strong purpose.”
Customer Connectivity
A second dynamic capability which was frequently highlighted by respondents was the importance of customer connectivity when undergoing business model innovation. Numerous respondents highlighted that scanning & sensing trends in the market is done on a regularly basis in order to spot innovative opportunities, understand evolving consumer needs and seek out a differentiation strategy for Philips. As explained by interviewee 1:
„I think you also have to have that market lens because that also drives the business model innovation based upon the maturity of either the consumer or professional, what they expect in that marketplace is also a big driver. And I think that's where having strong processes for evaluating external trends is really critical and then having the deep capability to validate research. So when you're looking at your business model innovation you need to really be looking at where you can win and differentiate versus what's hygiene.“
Dedicated employees are tasked with scanning market trends and competitors as explained by interviewee 17. Some interviewees, such as interviewee 9, understand exploring consumer trends & market research as part of their daily responsibilities.
“In our tribe we have members who are busy with strategy. So they look at the trends, they look at what the competitors are doing, and we have a market intelligence team. They feed us also with information.“- Interviewee 17
„There is another important part that is linked to understanding consumers. To understand the consumer decision journey, consumer experience or user experience (…). Whether it is participating in research or reading documentation, or understanding competitors websites or experiences.“ – Interviewee 9
Furthermore, sensing market trends and evolving consumer needs is enables and supported by the creation of channels for consumers to directly express their feedback to Philips. This was also expressed by interviewee 16:
“What we work on in voice of the customer is really providing outlets or channels for customers to give us the feedback that we didn't have before. “
By creating these channels, Philips is able to continuously and directly gather feedback from consumers and react quickly when necessary. One of these channels is NPS (Net Promoter Score) which allows Philips to measure the happiness of consumers with their products and services. As explained by interviewee 5:
“The second capability is the capability of what we call the voice of the customer. So how can we make sure that we really get that feedback from the customers when we introduce a new business model or even before that? How do we do the research? How do we get the insights?
So I think the future of new business models is in measuring the value that the customer gets out of it and charging for that value (…) and we measure that with NPS.“
Lastly, rapid prototyping has been introduced as part of DMEC’s agile transformation. Here, the goal is to receive quick feedback from customers to understand the viability of the product or service. As explained by interviewee 3:
„I think agile, by essence says, try and deliver in a certain cadence, iteratively, so that you can release something as fast as possible so that you learn as fast as possible whether something that you develop makes any sense or not to the consumer or to the customer.”
Organizational Agility
DMEC’s agile transformation which has been mentioned in the previous section is also connected to the third dynamic capability of organizational agility. Many interviewees stressed the importance of the organization’s agility in order to respond to disruptions in the business environment and drive business model innovation. The goal of the agile transformation is to achieve more focused and faster innovation and simultaneously increase the happiness of consumers, customers, and employees. As explained by interviewee 13 the agile transformation is supposed to stimulate employees to think outside the box and dare to experiment:
„When I say that agile is top down, the meaning is that they need to be willing also to experiment, to touch, to discuss, to really own it. For example, there should be the space to challenge the “why” when the “why” is not clear enough.“
Encouraging employees to take risks and experiment in order for innovation to thrive was also highlighted by interviewee 14. The encouragement to experiment is especially present in Philips’ accelerator tribes as they are responsible for defining new business models. However, for innovation to thrive it is essential to encourage experimentation organization-wide:
„Examples where you do have this, are within the accelerator tribes. This is also where we do a lot of the experimentation, of course, where we actually tried to define business models, new ones. And that I think is the challenge of a big Philips enterprise is that you have compliance, you have standards, you have the enterprise mindset, but you also want to innovate, and sometimes that clashes. But I think we sometimes also just need to accept the risk, because if you don't experiment, then you will never know if it will be successful.“
The agile transformation also introduced portfolio review meetings to DMEC. These meetings can be understood as a type of marketplace where product owners and teams not only align, but also are able to exchange work. This enables an interchangeability of teams that can build a significant robustness for innovation efforts. Interviewee 3 gave an illustration of the portfolio
„It's a place where the product owners meet. And the idea is that what in the Spotify model was a marketplace - you really are there to exchange like in a market. Okay, this work - I'm overloaded and can take it over. So you see already these are squads that are interdependent and even interchangeable.“
The portfolio review meetings are essential for the organization’s agility as they enable the effective management and prioritization of innovation projects. Even though they are seen as not being agile due to their routineness by some employees, they actually constitute a stable point of orientation that allows for structured innovation. As highlighted by interviewee 2:
„Agile portfolio management, that I'm responsible for within DMEC, is mainly around how do you embed that agile way of working in a kind of procedural way. There you have a focus on value delivery, you have a focus on decision making and prioritization, but then leading up to the strategy that you have as an organization. So it's connecting the teams with the strategy.“
Lastly, as explained by interviewee 5 it is only possible to achieve organizational agility when innovation processes are not slowed down by talents leaving the company. It is essential to retain talent in order to build up organizational stability and robustness:
“The labour market is quite intense, which means that people that have the knowledge are easily moving into other positions, or even outside the company because there are lots of opportunities there. And the risk is that you lose the people with the knowledge. And not only that, the whole idea of Agile is that you build a stable team. And by keeping the team stable, they can learn to work together and they become more efficient and more successful. And if you constantly lose people in the team, that's a big risk and not just for the knowledge but also for the team dynamic and the risk is that you never reach that point where the team actually becomes more successful in every sprint because you're constantly catching up.“
4.2 Operational Capabilities
Organizational Structure, Processes & Routines
As stressed by numerous interviewees innovation efforts at Philips are challenged by path dependency, structural inertia, and legacy processes. Currently, Philips is operating under an organizational matrix structure with the goal to integrate teams and facilitate rapid information flow. However, the complexity of the structure is slowing down decision-making due to the creation of unclear roles and responsibilities. As explained by interviewee 9:
„Sometimes you are lost into the matrix trying to understand who is ultimately able to get things done. Or to make a decision or to facilitate certain resources.“
According to many interviewees driving innovation efforts requires quick decision-making which is only possible with end-to-end ownership of projects. Due to its complex organizational structure this is often perceived as a challenge within Philips. Hence, the importance of integrating silos was a commonly mentioned theme by interviewees. As stated by interviewee 12 and 9:
“What we are now working on in the next stage is going to be the way Philips is organized:
you have the innovation process, you have the marketing and sales process, you have the fulfillment process, and you have after sales service. And all of that happens in two beautiful silos. And what we're working on is to actually provide a unified experience across all of that in function of that third party if you want, whether that's a consumer or a customer or a distributor, a channel partner as well. So, we're working on making that holistic view possible.” – Interviewee 12
„I will tell you our biggest challenge today is that we don't have end to end ownership of the resources that are required to deliver to consumers the features that they expect and as a result, we don't have end to end ownership of the full user experience or consumer experience. We can influence and we need to work with our partners in the markets in the businesses in the
other functions to put all the things together. We are like a spider in a web yet we are accountable for the overall business.“ – Interviewee 9
As a global conglomerate, managing relations and communicating with stakeholders is a necessity not just for the management of daily operations but especially for driving BMI efforts at Philips. Due to its centralized role in the organization, DMEC is oftentimes slowed by managing these dependencies that hinder the full control of the innovation process. As explained by interviewee 15:
„The biggest challenge is to overcome dependencies, especially from the product side: to do proper category management and have that in place for the ecommerce. And to the market sides: that you can optimize your sales channel to the fit of the customers in that specific country. From a DMEC perspective, that's a challenge because you're in the middle of those stakeholders and have those dependencies. So you're not in full control on that. But yeah, I think the alignment with both entities on the product side, the businesses and the markets is key to be successful.“
DMEC’s agile transformation in 2020 has centralized several activities in order to streamline responsibilities and ultimately speed up innovation processes. As remarked by interviewee 14 the centralization of innovation activities in DMEC is especially important to achieve consistency and standardization:
„It’s centralization versus decentralization and then with centralization also comes usually standardization. But its also about making choices on who is best equipped to perform the activities. The marketing transformation has centralized a lot of the activities that previously were in the different markets and different businesses, in terms of accountability, but then also responsibility to execute. I think it’s about finding ways to get as efficient as possible to streamline how content and data goes into the different platforms, and being able then to drive more consistency.”
Finally, fixed processes such as the PEPF or NBX frameworks contribute to the robustness of the organization. The framework is describing all the steps an innovation needs to run through before being scaled over the entire organization. Furthermore, the PEPF framework allows employees to lock their processes which facilitates information sharing even when certain employees are absent. In this way, alignment on processes can be achieved and innovation efforts are strengthened. As explained by interviewee 11:
„Philips is a process-driven organization, and we have multiple levels of processes. That's PEPF, the Philips Excellence Process Framework. There has been described from the highest level to the most detailed level, how a process should look like. Not always meaning that that's exactly being done like that because you know, the world is changing continuously. But that's a way to lock your processes. So let's say I'm leaving and everything relies on me then, they can still move back and look at what was the process for this issue as a default.”
Next to PEPF, Philips is also relying on the NBX framework to test BM innovations at different stages. The innovations need to pass certain gates at each step to ultimately reach deployment to markets. As explained by interviewee 6:
“We do everything according to what we call a new business model framework, the NBX process. So, you go from pre-seed to seed to alpha, beta and then to business as usual. (…) Maybe you've seen it that companies they go for rounds of investment, right? (…) And this exactly is related to those phases. (…) at certain moments, we have gates that you need to pass and if you don't pass the gates, if you don't see a substantial improvement for example, in consumer metrics or other metrics, then we are not able to pass on to the next gate. So, you need to look at innovation in quite a harsh way (…) So yeah, I think that framework really helps us to do innovation in a more phased, stage-gated way.”
IS & IT Infrastructure
Several interviewees highlighted the importance of leveraging the power of data, investments in digital tools and IT capabilities. In order to harvest the value of the collected data and being
able to make strategic decisions based on data, it is essential to first understand the data and how it is connected:
„We have a lot of numbers, but I don't think within Philips and within DMEC, we build a story with it. And if you really want to be data-driven, you need to understand how that data is generated, how it is stored and how it connects to other data points, because then you can make a decision on it.“ – Interviewee 7
„I would say the most important capability is data and the ability to understand data and action on data. But I do think there's inherently something core in kind of data and AI that, you know, people talk about it, but I still don't think it's embedded enough in companies in order to drive the business model innovation or the scaling.“ - Interviewee 1
Of equal importance is understanding data that is generated within the entire ecosystem of the healthcare industry. Therefore, the integration of silos not only within Philips itself, but integrating and leveraging data opportunities between companies can shape innovation and future business models. As explained by interviewee 4:
„I think the future play will be all around data. Because there is an explosion of data. So I think the fuel for future innovation is really grasping the data needed. And that's data in your enterprise but also beyond your enterprise in the ecosystem. The whole healthcare play is an ecosystem for me. But if all this company starts meetings sitting in a silo, there is no value for the end customer. So via data and the right play in an ecosystem, I think that is where the consumerization of health really starts.“
In order to leverage the value of data, several interviewees stressed the importance of integrating tools and unifying customer data. At the moment, Philips and DMEC employ a variety of digital tools of which many have the same features. Hence, streamlining and identifying the capabilities of each tool is important to obtain an overview and reduce overlap and complexity.
„Another one I think that they're working on is around like you know more unification around the customer data that we have with our digital experiences. “– Interviewee 16
„Within Philips we have so many systems in which you can generate content. (…) And I foresee there the biggest challenge because there are so many stakeholders, we’re using Sprinklr for one purpose for social and we're using other tools. We have so many tools. (…) You may have also heard of Project protein, which is a really good initiative. That's a project in which they are identifying all the platforms that we’re using and their capabilities. And I think the step one was to identify all those platforms and I think the second step is, hey, don't we have overlapping capabilities of these platforms.“ - Interviewee 11
At DMEC, data is also used to do market research and understand the size of the market opportunity of a certain product or service. Data can be seen as a way to test value propositions and consumer needs as explained by interviewee 10:
„We use data in the sense of understanding the size of market opportunity. We use data usually as a part of market research. So we will collect market research using panel providers and basically gathering a survey input, which is nothing particularly new in practice. But that's kind of a way for us to test value propositions and needs.“
Next to testing value propositions, digital tools are also employed to understand consumer preferences. As highlighted by interviewee 17, A/B tests are frequently conducted in DMEC’s D2C tribe to explore consumer preferences and the impact of a new value proposition:
“We try to work with a market or markets, some real audience and we just run, let’s say an A/B test to understand the impact of in this case, the emerging technology.”
Digital tools are also used in DMEC for project management and logging process. As part of the agile transformation, tools such as Azure DevOps have been introduced which help employees to structure projects, plan smarter and collaborate with other teams:
„It's (Azure DevOps) a tool and indeed it's an agile tool. And it helps you to structure your backlog so that you really order the chunks of work and on level of thickness and then like smaller parts. It helps you to plan them in time. “- Interviewee 13
One of the biggest challenges DMEC is facing is the alignment of business with IT. In order to drive innovation, it is important to integrate the two departments which previously operated in a siloed way of working:
„In the past, there were two silos, business and IT and I'm trying hard to get rid of that. So for me, it is an integrated part of the team.“ - Interviewee 5
It is especially important to drive the integration efforts as currently IT is still seen as a cost driver and both departments receive separate yearly budgets. As explained by interviewee 14, IT needs to be seen as an integrated part of the business and a value driver instead of a cost driver. Otherwise, there is a risk of the silos slowing down innovation:
„ Philips as a big company with a CFO that looks at cost. And that I think as digital marketing in general, IT is usually seen as a cost. I think, unfortunately digital IT is also still seen as a cost driver, while for digital, it's actually a value driver. And that means that sometimes we have tough discussions about reducing budgets, which almost immediately kind of hampers innovation.“
One of the goals of DMEC’s IT investments is to generate increased automation. By automating processes, routines, and activities more space is opened up for other activities and the more time can be spend on innovation activities:
„And the more automation we can bring, the more smart things we can bring, the more bandwidth or the more room they have to think of innovation or to think outside of the box and to understand what are we doing in activation? “- Interviewee 11
With the investments in IT and an increasing number of digital tools, the roles of a digital marketeer change. Here it becomes more essential to understand the opportunity the tools can provide, but collaborate with digital experts that can fully understand and leverage the value these tools provide and later evaluate results together:
„A marketeer is a marketeer, but a digital marketer has in principle more tools and needs more tools in their toolbox, and I know the platforms that we have, we have at least 100 tools. You can’t know all of the 100 tools, so then sometimes it’s best to leave it to the experts in that sense, brief them, know how to brief them and then evaluate together the results.“ – Interviewee 14
The maintenance of digital tools should be considered from the start. It is not sufficient to make short-term investments and pull these out once the tool is up and running. Instead, resources need to be continuously deployed to avoid drying out innovation processes:
„It was a big investment to build our ecosystem and transfer all the data and train everybody and create the new processes, etc. So we had a huge team working on it for two years. And then after that, it was scaled down because it was up and running. So it was scaled down to a very small team. Now we have six people, but it's still the platform where all the calls and everything comes in. So now we have to maintain the platform and continuously improve and innovate with six people globally. It cannot be done.“ - Interviewee 8
4.3 Strategic Capabilities
A third aggregate dimension that emerged from the data centers around the use of strategic capabilities when undergoing business model innovation.
Strategic Collaborative Innovation
Many interviewees highlighted the importance of strategic partnerships and collaborations to drive innovation. By partnering with external companies, DMEC is gaining access to external expertise and resources that they do not possess in-house. Especially when exploring new
business models, DMEC needs quick access to tools and systems that can only be fond external to the company. As explained by interviewees 9 and 11:
„We started working with an agency, they had resources, and they had tooling. So we were able to implement that in a kind of online environment.“ – Interviewee 11
„ (…) You have a certain level of subject matter expertise. And that means sometimes that you need to have external input and maybe not resources or people with capabilities always access within the organization. Again, as I said, you need typically to create new processes and new processes mean new ways of doing things, or new information connections in a way. New tools to be used, so you need the assets, the capabilities and the systems. Typically, in developing new business models that are not there.” - Interviewee 9
Next to engaging in strategic partnerships for access to external knowledge and resources, it becomes increasingly essential to engage in partnerships for the success of the innovative business models. As explained by interviewee 5, it requires partnerships to make new solutions valuable to the customer as the products and solutions are becoming increasingly complex and require components from different businesses:
„The third capability I think, is partnerships. Because many of the new business models are done in partnership. For our hospital, in many cases, it doesn’t make sense to do business with Philips. They need a solution that involves many different components. How can you make that happen? It can be as simple as construction work to install an MRI scanner. But more and more, it’s the digital partner. There’s all kinds of partners that use and many of our solutions actually require partnerships to make it a really successful solution for the customer.“
Especially in the digital realm, strategic collaborations carry great potential for DMEC. By collaborating with digital partners, Philips can get access to a wider audience and tailor their online targeting of consumers. As stated by interviewee 11:
„So, let's say, for example, www.nu.nl maybe you know it, the news outlet in the Netherlands.
They have a lot of visitors, they have a lot of data. They cannot share the data with us, but they
could say hey if you plugin with your system with us, then we strike a deal with each other, we can make sure that you're targeting only people that are interested in health, or maybe another kind of a lifestyle, then we could target those folks.”
With the recent acquisition of a biotelemetry company, Philips has also been able to create an entirely new business model centered around prescriptions as a service. This acquisition presents an innovative value proposition to the consumer who is only paying for the service, which is actually needed, which in turn creates entirely new revenue streams for Philips. As explained by interviewee 10:
„I would say the relatively recent acquisition that we did of the biotelemetry company has some aspects that are kind of pretty innovative from a Philips perspective, in the sense that they're not always about selling a medical device to a fixed customer, but selling the potential, the service of monitoring, basically people's heart health or heart rhythms, as a prescription, basically, and selling that to the sort of insurance company pay us basically, rather than the hospitals themselves.“
Collaborating with external companies can also allow Philips to outsource the risk that is oftentimes accompanied when exploring new business models. If an innovative business model should fail externally, Philips is able to take the learnings, but has minimized bigger losses and the threat to destabilize the organization’s robustness. Once a business model has proven to be successful externally, it can be chosen to build and scale the innovation internally. As highlighted by interviewee 4:
„Sometimes we chose deliberately to do it (BMI) externally. Because if you didn't externally create a minimal viable product, you can also have the risks external. You can just buy it from another vendor and they take the risk and you can take the damage to learning and then when you fall are more stable. So you see that the proposition is working. The revenue is coming.
You can consider to build it internally.“
Lastly, interviewee 3 stresses the importance of partnering with competitors to create products and solutions which can serve consumer needs in the best possible way. Collaborating with competitors to create new business models should not be seen as a threat to Philip’s own brand positioning, but instead as an opportunity to create even more value for consumers which can result in benefits to everyone involved:
„I think we should take a broader perspective because, yes, we could still sell brush heads and we could still sell blades, but I think it should be more thought of as how can we serve consumers best and maybe that's a partnership with Unilever, Procter Gamble, whoever.”
Strategic Alignment
A second theme which was highlighted frequently by the interviewees, was the importance of strategic alignment between teams and between stakeholders.
„There also needs to be alignment with quite some stakeholders. For instance, supply chain, the supply chain is enabled,… finance when for instance, you also include online payments that need to be included. Content and product data management that you can get the right catalog in your platform.“ – Interviewee 15
One way to achieve this alignment is via DMEC’s portfolio management framework and the portfolio review meetings.
“So that is the idea of the portfolio review meeting: to align between squads in order to keep the alignment on working people level and in the same time stakeholders can join.” – Interviewee 13
Interviewee 2 elaborates further on the benefits of the portfolio review meetings. The meetings serve to connect the teams with the organizational strategy and clarify innovation processes by emphasizing decision making and prioritization:
„Agile portfolio management that I'm responsible for within DMEC is mainly around, how do
delivery, you have a focus on decision making and prioritization, but then leading up to the strategy that you have as an organization. So it's connecting the teams with the strategy.”
Next to agile portfolio management, lean daily management (LDM) and digital tools such as Azure DevOps, which has already been explained in a previous section, are employed at DMEC to achieve alignment between teams. Whereas LDM allows teams to understand whether they are on track to meet project goals or receive the support to meet these goals, Azure DevOps structures projects digitally and makes the current status of projects accessible for every employee:
“Consumer Engagement in care in D2C was using lean daily management, which is basically ensuring that your trains are on time is always the metaphor they use in the training. So, looking at your numbers, seeing where you are, hitting or missing your numbers.” – Interviewee 3
Alignment should also be done by sharing learnings between departments and businesses.
Sharing learnings enables an organization-wide improvement of products and services and ultimately create a better value proposition for consumers:
„But that also means that how D2C implements it might be different than how D2B implements it. And that's where it's good to have them on this digital platform angle, and someone who could look at this a bit more holistic. And also, therefore share learnings between the different departments, businesses, whatever you call them. And that I think is also necessary, because then you get the most value out of the solution.“ – Interviewee 14
The importance of cultivating an overarching and holistic view of the organization was also stressed by interviewee 4:
„For me in the end, they (consumers) should buy from Philips channel agnostic (…). Although I'm in DMEC, I should not be thinking only DMEC. So there's a part of our culture or our mindset… we need to be enterprise thinking. Otherwise, we will be fighting for our domain.”
