It may be the reluctance to engage in replacive BMC that leaves businesses in the awkward position of holding onto an old model long past the replacement
time for that model. Sears, a business unit within Sears Holding, used the additive rather than replacive strategy for BMC. Sears started to sell some of its private brands (Kenmore appliances and Craftsmen tools) through com- peting retail stores, while continuing to sell those same brands in its own unprofitable retail outlets (having the impact of lowering the revenues of those stores even further). The “logic” of replacive BMC can butt up against organ- izational dynamics that support the status quo. Unlike start-ups, existing companies have incumbent business models, and the power of incumbency is considerable, particularly in terms of resilience in the face of challenge. Our proposition regarding the power of incumbency is:
Proposition 2: The power of incumbency may work to slow the response of management in existing companies to the need for replacive BMC.
The concept of dominant logic (Bettis and Prahalad, 1995; Prahalad and Bettis, 1986) helps to explain that response.
Managers are often unable to perceive the significance of either the chal- lenge or the opportunity presented by a new business model. Shih, Kaufman, and Spinola (2009), for instance, demonstrated how unresponsive executives at Blockbuster were to the potent threat being offered by a new business model in the home entertainment business: Netflix’s direct delivery of DVDs by mail.
Blockbuster’s 2002 annual 10-K did not list the threat posed by online rental ser- vices under its mandatory “Risk” section, and the company did not respond with its own online service until 2004, seven years after Netflix’s founding. In 2011, a bankrupted Blockbuster was acquired at auction by Dish Network. Currently, there are no bricks-and-mortar DVD rental chains left in the United States.
Relying heavily on cognitive psychology literature, Prahalad and Bettis proposed dominant logic as a concept to help understand how organiza- tional leaders may ignore or undervalue relevant data concerning threats and opportunities. The dominant logic of an existing business—a mindset created through experience and reinforced by shared schemas and cognitive maps—acts to narrow the stem through which data are funneled into the pro- cess of organizational learning. Thus, Blockbuster executives “saw”—that is, they were aware of—the rise of an alternative business model but discounted the competitive threat and held on to their incumbent model. All existing companies have a dominant logic that resides, of course, in people, not in activities. Dominant logic creates a cognitive bias, although some businesses have a wider stem than others, allowing for greater adaptation.
Replacive BMC has the property of unseating not just incumbent models but also the social capital, competencies, and behaviors of organization unit members, demanding a replacement of the status quo. For that reason, our next proposition addresses the requirement for a more fundamental change:
Proposition 3: Replacive BMC will require systemic organizational transformation.
Optimally, transformational change occurs in a systemic and strategic way: aligning multiple design elements with the new business model. Often,
however, organizational leaders prefer to avoid such fundamental change, opting instead for incremental, piecemeal approaches when systemic change is needed. Miller (1990) has documented the tendency of once-successful organizations to hold on to, with only occasional tinkering, the designs and arrangements that provided success in the past. Replacive BMC will require more than tinkering.
We can return to the Nissan example to witness an executive facing just this challenge. “For a company that had been losing money for seven years out of eight,” Carlos Ghosn observed, “there is not enough of a sense of urgency.
People should be banging their heads on the walls everywhere” (quoted in Thorton, 1999: 54). Ghosn proved to be masterful at building support for BMC. Before determining what the new business model would be, Ghosn toured Nissan plants, subsidiaries, and dealerships in Japan, the United States, Europe, and Taiwan. Rather than imposing a solution, he allowed key employees in the business to propose solutions. Changes imposed from
“above”—top executives telling employees what the new business model will be and what they must change in order to enact it—is likely to engender resis- tance from the organizational units—activities, after all, do not resist—that must enact the new business model. When people participate in designing the new model, as was the case at Nissan, they are more likely to feel that they are making an informed choice and to develop a commitment to the choice as well as a sense of responsibility for implementing the new design.
To harvest the embedded knowledge and gain the commitment of employ- ees, Ghosn pulled together nine cross-functional teams to examine all aspects of the business operation: from business development to manufacturing and logistics to supplier relationships to organizational structure. Each had ten members, all from middle management. Teams could also create subteams to help them collect data. In total, the effort involved about 500 people. Ghosn gave the teams three months to review the company’s operations and make recommendations. By managing the organizational transformation process effectively and engaging middle management in its design, Nissan succeeded in replacing the incumbent business model.
The Corporation as Context
For companies that operate as part of a multibusiness corporation, that corporation is an element of the organizational context for BMC. Business models exist at the divisional level, not at the corporate level. In their prox- imity to operations, customers, and competitors, division managers are best positioned to make judgments about the optimum configuration of activi- ties and units that will deliver the product and/or services to the intended market.
The corporate center exists both outside and above the division, and cor- porate executives have the duty of looking after the interests of the entire corporate entity, not just a single division. In order to fulfill that mandate, corporations create corporate models that specify the framework for gov- erning corporate center/division linkages. Academic literature on business models tends to blur that distinction. Amit and Zott (2012), for instance, refer to business models at Apple, HTC, and IBM (all multibusiness corpora- tions) alongside references to Taco Bell, Bancolumbia Retail, and Nespresso (all divisions within multibusiness corporations). Corporate models are not the same as business models; rather, they are context to business models.
Multibusiness corporations such as Inditex (with divisions including ZARA, Massimo Duttim, and Bershka) and ACCOR (with divisions includ- ing Mercure, Novotel, and Ibis) leave business model choices to their divi- sions. The role of the corporation in that regard is key.
In that regard, we propose that the corporate center plays a dual role vis-à-vis BMC:
Proposition 4: The corporate center may act as both a constraint on and a provider of opportunity for division-level BMC.
Let’s examine these two possibilities in turn.