Based on Jansen, Van Den Bosch, and Volberda (2006), Suarez and Oliva (2005), and others, three main types of environmental dynamics can be dis- cerned. Table 8.3 contrasts these types of environmental dynamics along the dimensions of frequency (i.e., the amount of environmental disturbances per unit of time), amplitude (i.e., the magnitude of the deviation from initial con- ditions caused by a disturbance), predictability (i.e., the degree of irregularity in the overall pattern of change), and velocity (i.e., the rate/pace of change of disturbances) (cf. Bourgeois and Eisenhardt, 1988; Wholey and Brittain, 1989; Davis, Eisenhardt, and Bingham, 2009; McCarthy et al., 2010).
Matching Environmental Dynamics With Business Model Change
Regular environmental change
Regular change describes fairly stable environments that experience low-inten- sity gradual changes (Suarez and Oliva, 2005). The degree of irregularity in the overall pattern of change is highly predictable and deviations from initial conditions caused by changes in the environment are minimal. Although the pace of change is slow and the amplitude of change is limited, firms are likely to experience the need for incremental adjustments and improvements in their business model. One can thus expect that in such settings, firms are likely to allow for the natural evolution of their business model to take place and merely engage in adjustment and fine-tuning activities that are simple and iterative.
Environmental shifts
Environmental shifts or “punctuated equilibria” (Tushman and Romanelli, 1985) can be described as dramatic or discontinuous changes to a firm’s environment, often brought about by disruptive technologies (Tushman and Anderson, 1986; Christensen, 1992), new competitors (Sirmon, Hitt, and Ireland, 2007), or major regulatory or political regime changes (Suarez and Oliva, 2005;
Dixon, Meyer, and Day, 2014). These shifts occur infrequently and rarely repeat themselves. The amplitude of these shifts can be severe, often termed as “com- petence destroying change” (Tushman and Anderson, 1986). Environmental shifts are highly unpredictable and cause a high degree of instability in the environment (Dess and Beard 1984). The velocity of an environmental shift has two paces: periods of incremental change are punctuated by disruptions (e.g., technological breakthroughs), which significantly increase both environmental uncertainty and munificence (Tushman and Anderson, 1986).
Because environmental shifts can be competence destroying (Tushman and Anderson, 1986), they make current products and services obsolete (Jansen, Van Den Bosch, and Volberda, 2006, Sorensen and Stuart 2000). This might render
“the core of the firm largely useless in its current product market” (Agarwal and Helfat, 2009: 283). For example, Danneels (2011) describes the case of Smith Corona, a manufacturer of mechanical typewriters, whose long-term viability was threatened during the transition from mechanical to electronic products.
Table 8.3 Patterns of environmental dynamics
Regular Change Environmental Competitiveness Environmental Shift
Frequency Low High Low
Amplitude Low Low–moderate High
Predictability High Moderate Low
Velocity Low High/continuous Punctuated (two stages)
Thus, environmental shifts are often found to prompt organizations to respond with “revolutionary change” (Greenwood and Hinings, 1996), “discontinuous transformations” (Agarwal and Helfat, 2009), or “reorientations” (Tushman and Romanelli, 1985). These radical types of organizational change affect all parts of the organization, including a shift in the firm’s core values and beliefs as well as the firm’s strategy, structures, and control systems (Agarwal and Helfat, 2009).
Hence, one can anticipate that environmental shifts not only prompt a large amount of organizational change, but also require change along mul- tiple dimensions of the firm’s business model. Because gradual and incremen- tal adaptations of the firm’s business model may not be sufficient, I argue for the important role of business model innovation in the face of environmental shifts. I suggest that business model innovation provides an effective way for firms to get ahead of the competition and to “rewrite” the rules of the game by introducing a novel way of creating, delivering, and capturing value. This idea is in line with organizational learning and innovation studies, which highlight the important role of exploratory innovations in the face of envi- ronmental shifts (cf. Jansen, Van Den Bosch, and Volberda, 2006), as a way to capitalize on changing circumstances (Zahra, 1996) by innovating their offering and targeting premium market segments (Levinthal and March 1993;
Zahra and Bogner, 2000) or creating new niches (Lumpkin and Dess, 2001).
Environmental competitiveness
“Environmental competitiveness” (Jansen, Van Den Bosch, and Volberda, 2006),
“hypercompetition” (D’Aveni, 1994; Brown and Eisenhardt, 1997; Eisenhardt and Tabrizi, 1995; Hanssen-Bauer and Snow, 1996), or “environmental turbu- lence” (Easterby-Smith, Lyles, and Peteraf, 2009) describe high-velocity envi- ronments that are in perpetual flux or churn (Eisenhardt and Tabrizi, 1995).
Characterized by intense competition (Matusik and Hill 1998; Miller 1987), companies are required to continuously evolve their basis of competitive advan- tage (Burgelman, 1994). Hypercompetitive environments are associated with intensive pressures for higher efficiency and lower prices (Matusik and Hill 1998;
Pablo et al., 2007) and to keep pace with rapid innovations in product markets (Lee et al., 2010; Galunic and Eisenhardt, 2001; Rindova and Kotha, 2001).
Given the need for continuously evolving their basis of competitive advantage, one can expect business model innovation to be ineffective and even harmful in the face of environmental competitiveness. Research has shown that operating in hypercompetitive markets, firms have fewer resources available for innova- tions, and that outcomes of innovations would rapidly diffuse over the popula- tion of competitors (cf. Miller and Friesen, 1983; Zahra, 1996; Zahra and Bogner, 2000; Levinthal and March 1993). Thus, with periodically changing competitive demands on the firm, the firm cannot afford to continuously uproot, decon- struct, and innovate its extant business model. Hence, I argue for the need for business model adaptation to reach temporary alignment with the environment.
These adaptations can affect the core and non-core dimensions of the firm’s business model and allow the firm to respond quickly to new market demands.