The degree of dynamic reinforcement between businesses is associated with how well the combination of businesses allows the organization to attain its goal as time passes, and as such, it is a dynamic version of the concept of static reinforcement. There is a positive dynamic reinforcement between businesses A and B when performing one of them facilitates and speeds up value cre- ation and capture of the other, while there would be a negative dynamic reinforcement when the performing of one of them hurts and slows down value creation and capture of the other.
An important driver of dynamic reinforcement is the set of rigid con- sequences, such as brand name or reputation. Most of the rigid conse- quences are built over time. Once rigid consequences are well developed they become a very powerful resource or capability that might enable the corporate model to function better. The choice of the organizational struc- ture of the CL affects the development of rigid consequences. A joint CL business model might promote the achievement of rigid consequences that facilitate the emergence of resources and/or capabilities that, without that organizational structure, would not be available. These additional resources and/or capabilities are helpful to increase revenues or decrease costs over time and thus represent an important driver of dynamic reinforcement. The additional resources sometimes even go beyond the increase in revenues or decrease in costs, as we see in the next section, and are instrumental to the design of a difficult-to-imitate business model innovation.
In LAN’s case, an important rigid consequence arising from the joint cargo–passenger business operation is the denser route network. The
expan ded route network is a valuable resource that emerges from the cor- porate model because the ability to fly more routes profitably creates a “vir- tuous circle”: more routes and frequencies imply more value to customers, enabling LAN to charge premium prices, which generates extra revenues to support more routes and to eventually become the one-stop shop for cargo distribution in Latin America (Casadesus-Masanell, Tarziján, and Mitchell, 2010).
In Amazon’s case, the combination of the retail and marketplace platform businesses enables the company to have a larger network of sellers (a rigid con- sequence) increasing traffic and product variety, and attracting more buyers.
All of this reinforces the positive network effects between buyers and sellers, and facilitates the speeding up and working of some of the main company’s virtuous circles, which positively impacts volume, revenues, and economies of scale, enabling a more efficient cost structure.
In Arauco’s case, the addition of the plywood and sawn timber businesses promotes the investment in the log-merchandizing process, which increases the value obtained from the tree and promotes additional investments in for- ests (a rigid consequence). Moreover, the idiosyncratic R&D in forest genet- ics facilitates the growing of a certain type of tree that is coherent with its diversified corporate model.
In the three cases, rigid consequences fueled a value-enhancing cycle that creates increasing value and promotes growth, making each of these com- panies a tremendous success story. All of these examples also show that the rigid consequences generated by a corporate model facilitate an endogenous change in the firm’s corporate model, for example promoting the emergence of new business units. This generation of new resources can represent an important consequence of innovative choices (e.g., choices related to busi- ness units and organizational structure) in corporate models and a way to foster business model innovations. An implication of this discussion is that dynamic reinforcement cannot be analyzed considering only what happens under the restrictions imposed by the current corporate model.
Lack of static and dynamic reinforcement presents the opportunity for a firm to improve by discontinuing some businesses or adding new ones. Among the main drivers of the lack of reinforcement are the risks of cannibalizing an existing brand or product affecting the existing distribution channel, image, reputation, and quality of the company’s offerings. Larger monitoring costs, bureaucracy, and a suboptimal sharing of resources because of an excessive demand for them may also provoke negative interdependencies.
Reinforcement between businesses requires the existence of points of con- tact. One of the points of contact in LAN’s case is the aircraft. Figure 4.1 shows that LAN’s participation in the passenger business promotes a better functioning of its cargo business, whereas a higher profitability of the cargo business helps to have more resources to invest in certain assets and activi- ties necessary for the development of the passenger business. Interestingly, a company can choose the degree of intensity of the interdependency between
its businesses through an organizational-structure decision. LAN may make the decision of participating in the cargo and passenger businesses simulta- neously with the decision of operating them jointly. However, the company also has the possibility of operating both businesses separately, or even to not operate either one of those businesses at all. The choice of the degree of interdependency will affect the generation of rigid consequences and the achievement of static and dynamic reinforcement.
Reinforcement comes together with some level of commitment. Managing interdependent businesses in a corporate model is always complex and, at some point, good decisions at the corporate level may involve suboptimal decisions for at least one of the businesses. For example, LAN’s operating decisions should consider the opportunity of adding a new passenger or an additional ton of cargo as a function of the already-compromised overall weight in a given flight and the expected demands in each business. This also means that the incentive to innovate BL business models that take advantage of the corporate model will essentially be at the corporate level and not at the business level, an important organizational consideration associated with BMI. Therefore the role of the corporate-level view in business strategy can be very relevant when opportunities for business model innovation are available.
Although most of the literature has analyzed situations associated with static reinforcement, there has also been some (more implicit) discussion of dynamic effects. Porter (1987) focuses on three types of inter-relationships among business units: tangible, intangible, and competitive. He sees the role of corporate officers as exploiting such inter-relationships among business units. Exploiting tangible relationships is essentially related to static reinforcement, while both intangible and competitive interrelation- ships, although presented as static reinforcement, have some inner implicit dynamic. For instance, knowledge (intangible) is not only shared but has
Volume
Lower break-even aircraftMore
utilization More routes
Higher willingness
to pay Economies of
scale and scope
Profits
Invest in passenger Invest in cargo
Figure 4.1 LAN cargo and passenger value loops Source: Casadesus-Masanell and Tarziján (2012).
to be created and maintained at the same time. Prahalad and Hamel (1990) focus directly on these dynamics by introducing the concept of core compe- tence. They acknowledge that some core businesses may have the function of generating core competences exploited in other business units. Collis and Montgomery (1995, 1998) generalize this idea by focusing both on businesses and resources, understanding the existence of a virtuous cycle from busi- nesses to resources and back to businesses, generating a coherent corporate model that improves the performance of the underlying businesses.
Martin and Eisenhardt (2001) also consider a time dimension by defining a cross-business synergy as the value that is created, over time, by the sum of the businesses together relative to what their value would be separately. They suggest that the specific sources of cross-business synergy are constantly changing as markets evolve, and that we should look at the strategic pro- cesses (a dynamic concept) to understand the creation of new synergies. Two strategic processes that are especially relevant in the multibusiness firm are knowledge transfer (i.e., deployment of experience, skills, information, rou- tines) and co-evolving (i.e., the business unit processes of routinely changing the collaborative links and relationships among the business units to exploit changing market opportunities).
In sum, although static and dynamic reinforcements are important, we focus more on the dynamic version, both because it has not been analyzed in detail elsewhere and because it is important to determine the success of the CL business model reconfigurations. One of our contributions over existing literature is to make a more explicit treatment of dynamic reinforcement by stressing the relationship between choices and consequences, and the pos- sible emergence of new resources and capabilities through time, which are specially relevant when analyzing corporate models because the choices in one BL business model can have consequences that affect other BL busi- ness models and the whole corporate model. This endogenous emergence of resources and capabilities can be the result of an innovative corporate model that seeks to generate these resources through its business scope and organi- zational-structure choices. Moreover, the emergence of these resources and capabilities can support the sustainable growth of innovations at the CL busi- ness model level. Going back to LAN’s case, the growing revenues provided by cargo operations enables a better service to passengers and vice versa, increasing the customers’ willingness to pay for both offerings, and fostering a competitive advantage that is difficult for competitors to overcome.