Business model innovation has received increasing interest within science and managerial practice over the last years. Accordingly, scientists have developed various approaches on business model innovation. However, it has been recognized that established companies face particular challenges successfully innovating their business model. Current academic research considers the company’s established dominant logic to be the main barrier hindering the innovation process. In contrast to that none of current theories on business model innovation covers the overcoming of the dominant logic in their approaches. The research gap leads to the question, how does a new approach for business model innovation looks like which support today’s companies in their current and future challenges.
To answer this question, Chapter 1 highlights the need for action. Based on that, Chapter 2 deals with the theory of business model innovation and dominant logic. Chapter 4 highlights the research gap reflecting on the role of dominant logic within business model innovation. Chapter 5 aims at developing the according strategy, which acknowledges and effectively addresses the innovation barrier of the dominant logic. Finally, the last Chapter summarizes the findings how the new academic approaches on business model innovation is characterized and discuss the validation of the new theory.
business strategy, business model, business innovation, dominant logic
"You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete."
- R. Buckminster Fuller, 1895-1983
In today’s digital world, a lot of companies struggle to achieve their growth and innovation targets (Sniukas et al., 2016, p. 5). One reason is that incumbent companies are confronted with new market players which handle the challenges of a volatile, uncertain, complex, and ambiguous world (VUCA World) more successfully (Bennett&Lemoine, 2017).
For instance, since AirBnB was founded in 2008, the recently 31 billion Dollar valued company, has challenged the hotel sector to an unknown extend (Bensinger, 2017). A decline of 18.6% of revenue/room year-over-year in major American cities, like New York, is ascribed to AirBnB (Zervais et al., 2016). There are other examples like Uber, a 50 billion Dollar valued company with operations in over 50 countries (Sherman, 2017). Uber is challenging the taxi industry through its simple technology- enabled business model. Spotify puts the music industry under pressure with its streaming offerings and Netflix replaced Blockbuster (Matzler et al., 2016, pp. 76-77).
In contrast to that, incumbent corporates are still facing the new VUCA world with traditional strategic management approaches of choosing an industry and product market combination (Sniukas et al., 2016, p. 5). This leads to a competitive advantage focusing either on cost leadership, differentiate offerings or on a niche (Porter, 1985). In practice, popular examples of former market leaders like Polaroid or Kodak show how companies struggle or collapse when applying these traditional frameworks (Sniukas et al., 2016, p. 5). Polaroid, the former global leader in the field of instant photography recognized, as one of the first, the trend towards digital photography, but failed to translate this into an innovative business model (Tripsas&Gavetti, 2000). Kodak, whose bankruptcy became known in 2012, did not manage to break away with its beliefs of the film business even it held all relevant patents for the digital camera (Gavetti, 2012, p. 81).
For this reason, the major goal is to analyze and develop a strategy for designing business models, which support today’s companies in their current and future challenges.
This section covers the theoretical basis in form of definitions, business model innovation theory itself as well as the current research state of dominant logic.
Business Model Innovation
Business model innovation describes a process that completely renews a business model or recombines at least two elements of it. In order to create and deliver a value proposition in a way that the customer considers new and innovative to a certain degree Mitchel&Coles (2003, p. 17).
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Figure 1 shows the four generally accepted steps of business model innovation (Schallmo, 2013, p. 109).
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Figure 1: The Four Steps of Business Model Innovation (Schallmo, 2013, p. 109) Dominant Logic
Dominant logic is the prevailing thinking and behavioral patterns of decision makers in an organization based on experience. It contains key assumptions about its identity and is the basis of important decision making (Prahalad&Bettis, 1986).
Dominant logic includes the following dimensions and elements:
- Level of application: Dominant logic prevails in the entire organization (Prahalad& Bettis, 1986).
- Underlying theory: Dominant logic has its roots in cognitive psychology (Bettis, 2000).
- Elements: Dominant logic combines behavioral and cognitive elements (Von Krogh, 1991).
The objective of the dominant logic is to describe the dominant way how decision makers in organizations think and act (Bettis&Wong, 2003, p. 351).
III. DOMINANT LOGIC WITHIN BUSINESS MODEL INNOVATION
According to Franke&zu Knyphausen-Aufsess (2014, p. 36), an organization’s dominant logic is determined by the specification and configuration of internal and external antecedents. Internal antecedents refer to the organization itself, its members and elements. Franke&zu Knyphausen-Aufsess (2014, p. 36) assign them to an individual, top-management team and organizational level. External antecedents are predetermined by an organization’s environment and are thus mostly immutable by the organization. Dominant logic evolves when the internal antecedents fit the organization’s environment in a way that enables a company to obtain a successful performance. Figure 2 elaborates the antecedents, as well as the function and reinforcement of dominant logic.
The Role of Dominant Logic within an Organization
Figure 2 also illustrates the filter function of dominant logic. Based on the fit between internal and external antecedents, dominant logic filters relevant data and directs an organization’s attention to it. The filtered data are then incorporated into a strategy, values, expectations, performance measures and reinforced behavior of an organization (Bettis & Prahalad, 1995, p. 7). These determine an organization’s performance. This illustrates that dominant logic presents an aspect of organizational intelligence, from which organizational learning can emerge. Organizational learning then again shapes the organizational intelligence through feedback loops. The dominant logic itself, as well as its internal antecedents are reinforced through a successful performance (Bettis & Prahalad, 1995, p. 7). In managerial practice, this reinforces the consistency of decisions made in the organization (Csik, 2014, p. 38). Antecedents, such as established structures, procedures, systems, routines and processes, embody the dominant logic and direct the attention of managers to issues that are deemed important by it. Furthermore, dominant logic provides information, values and decision rules which standardize and simplify the decision-making process for managers and employees throughout the organization (Bettis, Wong& Blettner, 2011, pp. 372-373). Consequently, as long as there is no significant change in the environment (and thus no need to adapt the internal antecedents), dominant logic "can provide a highly effective and efficient means of managing the organization", reduce complexity, enhance consistency and thereby foster the overall stability of an organization (Bettis, Wong&Blettner, 2011, pp. 372-373). ’
In the long term though dominant logic consistently increases the homogeneity of the organization and, at the same time, its inflexibility, inefficiency, inadaptability and inability to innovate (Wordenweber, Eggert&Schmitt, 2012, pp. 50-51, 60). Hence, when a significant change in the environment occurs, inflexible internal antecedents present a major obstacle. (Bettis, Wong&Blettner, 2011, p. 373; Csik, 2014, p. 38; Bouchikhi&Kimberly, 2003). For example, the tools that managers use to make strategic decisions in congruence with the dominant logic are built on learnings and an environment of the past.
As the environment changes, they will no longer be applicable (Bettis, Wong&Blettner, 2011, p. 373; Prahalad&Bettis, 2000, pp. 126-127, 130). This forces managers and employees to rethink and unlearn which means adapting or eliminating elements of internal antecedents to make room for new mental maps (Prahalad&Bettis, 2000, pp. 130, 136). Especially in high-velocity environments an organization’s ability to identify and react to external changes depends on the top-management’s ability to continuously evaluate the fit between the organization’s dominant logic and its environment, as well as their willingness to modify or completely unlearn it if necessary (Franke&zu Knyphausen-Aufsess, 2014, pp. 46, 52). This implies that if a change of the external antecedents destroys this fit, a reconfiguration of the internal antecedents is needed to achieve a new fit between an organization’s set of choices and its environment (Franke&zu Knyphausen-Aufsess, 2014, p. 52).
The Influence of Dominant Logic on Business Model Innovation
As elaborated in the previous chapter, the dominant logic can particularly impede an organization’s ability to innovate by filtering and restricting the management’s perception, awareness and understanding of the inter- and intra-organizational context. Aspects not deemed important by the dominant logic are mostly ignored. Consequently, information that possibly indicate a change of the environment and therefore a need for the company to adapt and innovate itself may not reach the relevant decisionmaking processes (Csik, 2014, pp. 38-39; Tikkanen et al., 2005, p. 792; Hacklin&Wallnofer, 2012, p. 170).
Additionally to the elaborated definition in Chapter 2, Tikkanen et al. (2005, p. 790) conceptualize a business model not only as a "sum of material, objectively existing in structures and processes" but also as "cognitive meaning structures at the level of a business organization". This highlights that the dominant logic of a company is not only strongly interlinked with the business model but even drives the tendency to avoid business model revision and thus ’protects’ the existing business model (Bouchikhi&Kimberly, 2003; Csik, 2014, p. 39; Cavalcante, Kesting&Ulhoi, 2011, p. 1328). Tikkanen et al. (2005, p. 791) specify that "in practice, the cognitive aspects of the business model are firstly constituted by the meanings and meaning structures that actors maintain about the components of the business model. Second, the cognitive aspects also relate to the way in which actors perceive the functioning of the business model". This implicates that a strongly anchored dominant logic can constrain a company’s strategic options to an extent that it is not able to cope with a changing environment (Bouchikhi&Kimberly, 2003). Cavalcante, Kesting&Ulhoi (2011, p. 1328) point out that "managers might fail to recognize, explore, seize and exploit valuable new technological and/or market opportunities, since they are not consistent with the present business model".
Regarding these statements, it can be implicated that a firm’s dominant logic can significantly influence the business model innovation process. In particular, these findings imply that dominant logic impedes a comprehensive analysis of the company and its eco-system for potential levers of disruption, as well as an organization’s ability to exploit them by creating new business model ideas. Tovstiga&Birchall (2014, pp. 1-2) confirm this assumption by stating that "managers of incumbent companies typically fail to recognize disruptions as opportunities because the potential new markets lie outside their existing resource base" and further that dominant logic prevents them from "recognizing the developing market for the threat that it really poses to them".
Hacklin&Wallnofer (2012, p. 166) agree on these statements after conducting a single-case study in which business models were used as a tool for strategic decision-making. In particular, they explore the cognitive stages that a workshop group goes through during the steps of analysis and creation within the business model innovation process (Hacklin&Wallnofer, 2012, p. 178). Figure 3 visualizes these (cognitive) stages.
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Figure 3: Interactive Stages of Analyzing and Creating Business Models (Hacklin&Wallnofer, 2012, p. 178)
Their findings emphasize the obstacles that occur due to dominant logic within the steps of analysis and creation. The observation that personal identification with the current business model rises the intrinsic resistance of altering single elements of it, is strongly linked to the existence of dominant logic. Furthermore, it bears "the risk for strategy practitioners to ignore changes in their environment" Hacklin&Wallnofer (2012, p. 166). To reset the "mental models on which perceptual filters are based", Hacklin&Wallnofer (2012, p. 166) suggest several measures to induce an unlearning of the established logics. They further outline the importance of using systematic creativity tools to overcome the intrinsic resistance and create substantial ideas for new business models.
IV. REARCH GAP
Reviewing accepted scientific approaches on business model innovation emphasizes that current research is strongly focused on identifying, describing and recommending a process that serves as a guideline for companies to innovate their business model. Furthermore, it is possible to derive process steps that business model innovation generally consists of. The findings identify that analysis, creation, implementation and steering are scientifically accepted steps. Further consideration regarding the existence of these distinct steps within each approach, highlight that research is primarily concentrated on the steps of analysis and creation. Figure 4 illustrates this enhanced research focus.
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Figure 4: Considered Steps within Academic Approaches of Business Model Innovation (Own Figure)
The role of the dominant logic within an organization depicts the strong interrelation of a company’s business model and its dominant logic. Consequently, the impact of dominant logic within business model innovation is elaborated. While dominant logic can have a positive influence on an organization by reducing the complexity and enhancing the consistency of decision-making, it also poses a problem regarding its adaptability (Bettis, Wong&Blettner, 2011, pp. 372-373).