Dynamic Capabilities and Business Model Change
The second level of capabilities refers to dynamic capabilities,3 defined as the “capacity of an organization to purposefully create, extend or modify its resource base” (Helfat et al., 2007: 4).4 In contrast to operational capabilities, dynamic capabilities do not involve production of a good or provision of a marketable service (Helfat and Peteraf, 2003). Instead, dynamic capabilities refer to deliberate efforts to change a firm’s resources and operational capa- bilities (Zahra, Sapienza, and Davidsson, 2006; Helfat et al., 2007). That is, while resources (physical, human, organizational) are available to all firms, the “capability” to deploy and alter them productively differs among firms.
By altering the resource base—acquiring new resources or recombining existing ones—companies are able to generate new value-creating strategies (Grant, 1996; Pisano, 1994; Henderson and Cockburn, 1994; Teece, Pisano, and Shuen, 1997).
A third level of capabilities is referred to as “meta capabilities” (Collis, 1994), “higher order capabilities” (Winter, 2003), or “regenerative capabili- ties” (Ambrosini, Bowman, and Collier, 2009) and denotes the capacity to modify or create new dynamic capabilities (Winter, 2003).
Capabilities consist of “routines to execute and coordinate the variety of tasks required to perform the activity” (Helfat and Peteraf, 2003: 999).
Routines are “repetitive, highly patterned activities or behavior that are learned” (Nelson and Winter, 1982: 97). While skills are embodied in indi- viduals, routines are found at the organizational level, where they act as
“rules of conduct” or “best practices” for the members of the organization.
The notion of routines is crucial for the definition of capabilities (operational or dynamic) as routines imply that the organization must have reached some threshold level of practiced activity. On a micro-level, the antecedents of capabilities and routines are suggested to be embodied in individuals, orga- nizational and managerial activities and practices, and structures (cf. Felin et al., 2012).
Matching Dynamic Capabilities for Business Model Change
Analogous to the hierarchy with which capabilities evolve in an organiza- tion (cf. Collis, 1994; Winter, 2003), one can expect the process of business model change to involve different types of organizational capabilities. In this
3 Dynamic capabilities are also referred to as “first-order capability” (Winter, 2003) or
“second-order capability” (Danneels, 2002) throughout extant literature.
4 The “resource base” is defined to include “tangible, intangible, and human assets (or resources) as well as capabilities which the organization owns, controls, or has access to on a preferential basis”
(Helfat et al., 2007: 4).
section, I illustrate how business model evolution and adaptation are akin to dynamic capabilities in that they involve alterations to the firm’s extant set of operating capabilities and resources on a continuous basis. In contrast, the process of business model innovation is more likely to be akin to “meta capabilities” in that it challenges the firm’s existing ways of doing business, thereby effecting changes in the sets of extant dynamic capabilities.
Further, similar to dynamic capabilities, the processes of evolution, adap- tation, and innovation need to be institutionalized through routines, organ- izational structure, and incentives to facilitate the ongoing and repeated processes of evolutionary, adaptive, or innovative change. This further war- rants that a certain threshold level of practiced activity is maintained to ensure effectiveness in change processes. Hence, I argue that firms need to develop
“business model change capability,” defined as the firm’s capacity to adjust, adapt, and innovate its business model in the face of environmental dynam- ics. Developing this capability can help the firm to overcome core rigidities of its existing business model and implement change processes in a structured and systematic way. Contingent on the environmental setting and the type of business model change required, I illustrate the need for different types of capabilities to facilitate evolutionary, adaptive, and innovative change.
Evolutionary change capability
As argued earlier in this study, firms operating in environments characterized by low-intensity and gradual changes are in need of incremental adjustments and fine-tuning activities to support the evolution process of their business model. This evolution process centres on standardization, implementation, and maintenance of the existing business model. For this purpose, change processes are geared toward incremental and continuous adjustments in the firm’s existing system of activities and relations, such as improvements in the activities offered to the firm’s customers, strengthening ties with external stakeholders, or increasing efficiency in the way value is delivered and cap- tured. Although the scope of change is limited to one or few areas at a time, effective business model evolution requires managers to have a deep under- standing of how business models operate and what changes are required to maintain or improve the effectiveness of the existing business model. This is why Doz and Kosonen highlight the need for “dynamic consistency,” defined as the “capability to anticipate change sequences” manifested in managers’
understanding “what their BM is, how it works, and what the relationships are between its core components, that seem to at first sight be only loosely coupled.
A progressive process of discovering more about these relations over time will enable managers to fine-tune their BM more effectively and preserve its effi- ciency” (2010: 243). Thus, to guide and implement business model evolution, firms need evolutionary change capabilities. I define these as those organiza- tional processes that facilitate effective standardization, replication, and main- tenance of the existing business model and thus guide its evolution process.
Adaptive change capability
As argued previously, operating under conditions of environmental competi- tiveness requires firms to respond with swift adaptations of their business mod- els with the aim of aligning their business model to the environment, rather than to incrementally adjust or radically disrupt it. For example, in highly com- petitive environments, innovation-based advantages resulting from disruptive business model innovations may well be rapidly eroded. Business model adap- tation, as compared to evolution or innovation, takes place periodically and is likely to affect a number of business model dimensions simultaneously.
Two important barriers are likely to impede business model adaptation. First, operating under conditions of environmental competitiveness can make it dif- ficult for the firm to detect and anticipate new market demands. As environmen- tal competitiveness is spurred by continuously shifting customer needs (D’Aveni, 1994; Jarrat and Fayed, 2001; Nath and Newell, 1998) it becomes imperative to sense and respond quickly to changes in customer preferences (Day, 1994;
Jayachandran, Hewett, and Kaufman, 2004; Hult, Ketchen, and Slater, 2005).
From a dynamic capability perspective, “organizational agility” or “customer agility” has been suggested as an important determinant of firm success in hyper- competitive environments, suggesting that a firm may be less or more agile than its competitors (cf. Haeckel, 1999; Zaheer and Zaheer, 1997). As firms can be agile in more than one domain, such as responding to changes in customer needs, supply-chain activities, or system development (cf. Sambamurthy, Bharadwaj, and Grover, 2003; cited in Roberts and Grover, 2012), I argue that developing organi- zational agility is an important prerequisite for successful business model adapta- tion. Organizational agility is conceptualized to consist of two complementary dimensions: Sensing capabilities and responding capabilities, manifested in the firm’s ability to scan, learn, and interpret market and competitors activities, and as the ability to mobilize the firm’s existing resources and processes to respond quickly (cf. Teece, 2007; Jayanchandran, Hewett, and Kaufman, 2004).
However, the need for organizational agility is likely to impose contradictory demands on the firm, requiring it to balance the tension between “stability and agility” (cf. Doz and Kosonen, 2010; Agarwal and Helfat, 2009). As Agarwal and Helfat (2009: 284) point out (in reference to Nelson and Winter, 1982), continu- ous adaptation “may be hard for organizations to manage effectively, because this may conflict with routines that enable companies to perform current tasks well.”
To solve this tension, I argue that firms need to institutionalize continuous adap- tion through the use of routines, organizational structure, and incentives that facilitate ongoing adaptation activities. For instance, routines for search (Helfat, 1998) or exploitative learning processes (March, 1991) support the firm to align with changing competitive conditions, by broadening and building on existing knowledge and reinforcing skills, processes, and structures (cf. Abernathy and Clark 1985; Levinthal and March 1993; Danneels 2002; Benner and Tushman, 2003). The importance of exploitative learning for organizational adaptation has further been highlighted in extant dynamic capability literature (cf. Dixon, Meyer, and Day, 2014; Jansen, Van Den Bosch, and Volberda, 2006).
Moreover, the firm can develop dynamic capabilities and install dedicated organizational units in charge of specific types of renewal activities such as alli- ances or acquisitions to help institutionalize adaptation within the organ ization (cf. Agarwal and Helfat, 2009). Further, while authors emphasize the need for
“strategic flexibility” (Wang and Ahmed, 2007) or “resource fluidity” (Doz and Kosonen, 2010) on the organizational level, flexibility has its antecedents on the individual level, manifested in terms of cognitive decision styles, reflecting the individual’s belief system or cognitive content (Nutt, 1993). These are shaped by antecedents such as culture (Lorsch, 1986), past experience (Brief and Downey, 1983; Prahalad and Bettis, 1986), and learning (Lord and Maher, 1990).
In sum adaptive change capability can be defined as the firm’s capacity to align its business model in response to conditions of environmental com- petitiveness by means of institutionalizing routines, processes, and incen- tives that facilitate adaptation activities on a continuous basis. I propose that firms can develop this capability by employing organizational and manage- rial routines and processes associated with organizational agility (sensing and responding), exploitative learning processes, strategic flexibility (on organizational and individual levels), and boundary-spanning processes for resource renewal (e.g., alliances and acquisitions).
Innovative change capability
Environmental shifts are often brought about by disruptive technologies, new competitors, or major regulatory or political regime changes. The amplitude of these shifts can be severe in the way that it renders the firm’s knowledge and competence base useless (cf. “competence destroying change”: Tushman and Anderson, 1986). To respond to these shifts, continuous adaptations of the firm’s business model are often not sufficient. Rather, business model innovation can provide an effective way for firms to get ahead of the competi- tion and to “rewrite” the rules of the game by introducing a novel way of cre- ating, delivering, and capturing value. Thus, exploratory learning processes become a key process of business model innovation.
Further, two types of barriers, cognitive and organizational, are likely to obstruct the process of business model innovation. On a cognitive level, management might be unable or unwilling to perceive the need for change.
This inability has been primarily associated with the constricting effect of the dominant logic (Prahalad and Bettis, 1986) or path-dependency of the firm (Coombs and Hull, 1998), and has been referred to as the “bias of the current business model” (Chesbrough, 2007). As environmental shifts occur infre- quently and rarely repeat themselves, managers might be unable to detect the need for change in time or fail to recognize opportunities outside their current logic of doing business.
Further, the inherent complexity and uncertainty of the change process is likely to impede the process of business model innovation. As demonstrated earlier, business model innovation requires change along multiple dimensions
of the firm’s business model. Thus, assessing the many interrelated, heteroge- neous elements and evaluating new ideas can pose a difficult task for business leaders (Osterwalder and Pigneur, 2002; Pateli and Giaglis, 2005).
To address these cognitive challenges, management is needed for a com- prehensive understanding of the firm’s business model and its underlying assumptions. Hence, augmenting and internalizing relevant business model know-how on a formal and informal basis (e.g., by means of internal or exter- nal training programs, information sessions, or handbooks) contributes to the firm’s capability to innovate its business model. These learning processes need to be supplemented by the development and usage of analytical tools to determine and assess current business models.
On an organizational level, the firm is likely to experience challenges idio- syncratic to organizational change, such as a lack of clear roles and respon- sibility in conducing the change process, also termed “business model innovation leadership gap” (Chesbrough, 2007). Particularly in cases of busi- ness model innovation, often no single person has been given the authority and the capability to innovate the business model. Chesbrough (2007) finds that while top leadership should assume this responsibility, CEOs are likely to delegate the responsibility for the business model to the general manager of the business unit, who in turn is often unwilling or unable to change the status quo as their familiarity with the existing model inhibits them from challenging the existing model.
To address the organizational challenges of coordination and authority, I propose the development of dedicated organizational units and functions (e.g., chief officer of business model innovation) that oversee and manage decisions and activities pertaining to business model innovation. Similar uses of “inno- vation offices” have been proposed in open innovation literature (Chesbrough, 2006) or alliance management literature (Dyer, Kale, and Sing, 2001).
In sum, innovative change capability can be defined as the firm’s capacity to innovate its business model in response to conditions of environmental shifts.
This innovative change capability rests upon learning processes pertaining to explorative innovation and the accumulation and internalization of relevant business model know-how. Further, this capability resides within manage- ment operating in the organizational unit, functions, and roles dedicated to the coordination and management of the business model innovation process.
Table 8.4 presents my contingency framework on business model dynam- ics, environmental change, and dynamic capabilities.
A number of similarities and dissimilarities between evolutionary, adap- tive, and innovative business model change become apparent. First, all three types of business model change occur in response to environmental dynam- ics and require deliberate managerial action for the change to be anticipated and implemented. Second, this further requires a certain threshold of under- standing within the organization about the firm’s business model and its underlying assumptions. Third, developing the capability for business model change is required in all of the three cases of business model dynamics.
However, the constituent elements of these business model change capa- bilities differ among the three types of business model dynamics. The pro- posed organizational and managerial routines are tailored to address and overcome the specific challenges idiosyncratic to the different types of busi- ness model change. Thus, business model evolution merely requires pro- cesses to maintain dynamic consistency, that is, the fine-tuning between the linked core components of the business model. Conversely, requiring adap- tive activities on a continuous basis, business model adaptation necessitates an effective level of strategic flexibility within the organization, supported by standardized routines pertaining to exploitative learning, as well as sens- ing and responding to the environment. In contrast, affecting change along multiple dimensions of the firm’s business model simultaneously, the process of business model innovation requires the highest level of relevant business model know-how, analytical tools, exploratory learning mechanisms, and institutionalized organizational units, functions, and roles to ensure effective coordination and implementation of the new business model.
Concluding Discussion
In this brief study, I examined the contingencies between environmental dynamics, business model change, and dynamic capabilities and illustrated that these contingencies are indeed important antecedents to firm perfor- mance. In doing so, this study has contributed to a clearer conceptualization of business models and a typology of business model dynamics. While busi- ness model literature commonly studies types of business model dynamics
Table 8.4 A contingency framework
Environmental Dynamics
Regular change Environmental competitiveness Environmental shift Type of business
model change
Business model evolution
Business model adaptation Business model innovation Type of dynamic
capability
Evolutionary change capability
Adaptive change capability Innovative change capability Underlying
capability dimensions
• Dynamic consistency (Doz and Kosonen, 2010)
• Customer agility (Roberts and Grover, 2012),
• Strategic flexibility (Wang and Ahmed, 2007),
• Exploitation (March, 1991;
Jansen et al., 2006; Dixon et al., 2014)
• Exploration (March, 1991; Jansen et al., 2006; Dixon et al., 2014)
• Business model know-how
• Dedicated org. units and functions for business model innovation
separately (e.g., adaptation or innovation), examining three types of dynam- ics in one framework takes into account the heterogeneity with which firms can alter their existing business model. Further, examining the environmen- tal contingencies of business model change contributed to a more systematic treatment of the drivers of business model change, which to date had been presented on an abstract and generic level. Moreover, differentiating dynamic capabilities for different business model dynamics sheds light on the organi- zational dimension of business model change and highlights that firms can cultivate a preparedness for business model change.
It is clear that the framework outlined in this chapter requires additional work, both conceptual/theory and empirical. Conceptually speaking, my study rests upon two main assumptions. The first assumption is that man- agement assesses environmental dynamics “objectively” and subsequently recognizes the need for business model change. However, it is conceivable that realized organizational behavior reflects managerial perceptions of how stable or turbulent the environment is rather than its objective characteris- tics (Child, 1972; Duncan, 1972). The second assumption is that when faced with the need to change, management will choose from among three alter- native courses of action (business model evolution, adaptation, and innova- tion). However, environmental conditions are often not clear cut and neither are types of business model dynamics. For example, in cases of environmen- tal scenarios entailing elements of both intense competition and continu- ous market disruptions, firms may need to develop capabilities that support both the exploration and exploitation of knowledge, and to facilitate strategic flexibility while experimenting with new business model designs.
Further empirical research is required to generate taxonomies on business model dynamics and to test the moderating roles of environmental dynamics and dynamic capabilities on the performance implications of business model change. The main purpose of this study, however, has been to develop a priori behavioural theory of business model dynamics.
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