2016/09/23

«A Business Model Innovation Typology»



Yariv Taran, Harry Boer and Peter Lindgren. Decision Sciences, vol. 46, n. 2, April 2015. See the references in the original publication of this text.



«CONTRIBUTION AND FURTHER RESEARCH


»Theoretical Contribution

»Business model innovation matters, but business model innovation theory is scarce and lacks an intellectual home (Teece, 2010). We used notions from innovation, organization, strategy, and business model theory to inform a multiple case study aimed at developing a typology of business model innovations, a first yet necessary step in the building of theory, and a powerful tool for strategic decision makers.

»This article contributes to innovation theory, which has largely neglected the phenomenon of business model innovation, and to the business model community, which has put little effort into theory development.

»The study suggests that the success of the innovation depends on, among others, the company’s appreciation of the new business model’s innovativeness and the extent to which the company achieves fit between the innovativeness (radicality, reach, complexity), strategic context (proactiveness), and organizational setting (openness) of the innovation.

»These factors define four types of business model innovation. The case studies showed that three of these types present ideal types, that is, effective forms of business model innovation, but did not provide enough evidence to conclude the same about a fourth type. The four types are essentially different in the way they were triggered (strategic context), the locus of the process (organization setting), the innovativeness of the business models pursued and the risk involved, as well as the consequences of failure. A company’s risk appetite and mitigation seem to be major factors explaining the existence of the four types. The association between fit among the innovativeness, strategic context, and organization setting of a business model innovation on the one hand, and success, on the other, together with our arguments for the central role of risk (appetite and mitigation), led us to develop three propositions for further research.


»Limitations and Further Research

»Given the highly explorative nature of this study, as well as its small sample, the typology, its explanation and the propositions should be considered as tentative theory. Several approaches are possible to extend and test the typology proposed, including more case studies to shed additional qualitative light on the findings presented here. Two issues deserve specific attention.

»First, both companies are analyzers, large (in EU terms), active in the electronics industry, and located in Northwest Europe. Further, preferably surveybased, research is needed to test whether the typology and the propositions hold beyond these limitations.

»Important inputs to the development of that survey are related to the second limitation. It is not unlikely that we overlooked important descriptors of each of the four types. For example, we identified the role of risk and the potential effects of failure, but there may well be other aspects in which business model innovations differ. Research into technological, product and, to some extent, organizational and administrative innovation has identified a range of issues including, but not limited to, success factors (Project SAPPHO – Rothwell and his colleagues, starting with Rothwell et al. (1974) and Rothwell, 1977; Project NewProd – Cooper and his colleagues (e.g., Cooper, 1980; Cooper & Kleinschmidt, 1995), the roles of key individuals in innovation processes (e.g., Sch¨on, 1963; Frohman, 1978; Maidique, 1980; Roberts & Fusfeld, 1981; Boer & During, 2001) and also insight into the organizational context (Burns & Stalker, 1961; Hage & Aiken, 1970; Zaltman, Duncan,&Holbek, 1973; Pierce&Delbecq, 1977; Daft, 1978) and, more recently, the process of innovation (Cooper, 1983;Van deVen&Poole, 1990; Roussel, Saad, & Erickson, 1991; Van de Ven, 1992; Boer & During, 2001).

»With reference to Cooper and Kleinschmidt (1995), whose five categories of success factors encompasses all of these issues, we have limited insight into the influence of process (except for the impact of market understanding or, rather, lack thereof) and lack data about culture and (senior management and organizational) commitment. Furthermore, our insight into the role of strategy and organization is limited to two aspects, proactiveness and openness, respectively. For example, we lack data on the role of key individuals. There is a wealth of theory on (mostly product) innovation, organization, and strategy, in addition to the authors referred to above, which may help in developing propositions on the influence of each of these five categories on the success of business model innovation, which can be operationalized and tested through the survey suggested above.


»(Potential) Managerial Contribution

»Should it appear that further research enriches, but does not essentially alter, the business model innovation typology and, particularly, the influence of consistency on success, the typology presents a powerful decision-making tool. First, it helps managers to identify, estimate, and seek consistency between the key drivers of business model innovation success, including innovativeness, strategic context, and organizational setting, and possibly also the factors categorized by Cooper and Kleinschmidt (1995). Second, the typology as is includes key pointers to be considered, particularly the importance of risk appetite and mitigation. Hopefully, further research as indicated above will produce more pointers.


»Cross-Case Analysis – Toward a Business Model Innovation Typology

»Table 3 combines the characteristics identified and discussed above and suggests four types of business model innovation, three of which are successful and can be regarded as ideal. For reasons of convenience, we labeled the four types using the descriptors of strategic context (i.e., proactive vs. reactive) and organizational setting (i.e., open vs. closed). We identified examples of each of the four types.

»We will first present these types, and then discuss the effects of fit between the innovativeness, strategic context, and organizational setting of a business model innovation on the success of the innovation.

»Four main types of business model innovations

»Open/proactive: Cases D and F were highly successful open/proactive business model innovations. This type has many potential advantages but also disadvantages, particularly the risks involved (e.g., Lieberman & Montgomery, 1988, 1998) in aiming for a radically new to the industry (case F) or even the world (case D) innovation. Company Alpha reduced those risks by limiting the complexity of the innovations to four building blocks (target customers, core competences, partner network, and profit formula). Rather than developing entirely new core competences, the company acquired and enhanced existing competences. Furthermore, company Alpha conducted and deployed these innovations through a joint venture, which allowed it to share the risks involved, while keeping its existing business and the necessary competences intact.

»Closed/proactive: Cases A, 1, and, depending on perspective (see below), also case 3 were closed/proactive business model innovations. Case A was aimed at developing an entirely new business in addition to company Alpha’s existing activities. Case 1 involved a major overhaul of company Beta’s existing business. Both innovations involved a significant departure from the companies’ current activities (high radicality), offering new-to-the-industry products (high reach), requiring changes in all (case 1), or most (all except new competence development or acquisition, case A) building blocks (high complexity). The risks involved in this type of innovation are high, in particular if it is aimed at replacing the company’s entire business model, as in case 1. Obviously, developing an additional business as in case A is also risky, but in that case the company still has its existing business to fall back to. Cases A and 1 were highly successful and worth the risks involved.

»Open/reactive: Cases E and 2were open/reactive business model innovations, but had radically opposite characteristics in terms of their innovativeness. Aimed at offering new-to-the-industry products (high reach), case E marked a next step in company Alpha’s strategy in that it involved an improvement (low radicality) of relatively few of the building blocks (low complexity) of the company’s already highly unique business model. Due to these characteristics, this was a relatively low-risk innovation, whose (financial) risks were further reduced through the establishment of a joint venture with a venture fund. Case 2was an acquisition, which did not change the industry, let alone the world (low reach), but gave company Beta access to a very different industry (high radicality). After a major redesign (high complexity), the acquired company was expected to continue as an independent business. Cases E and 2 were very successful.

»(Partly) closed/reactive: This last group is problematic. Case B is a closed/reactive innovation. Cases C and G are partly closed/reactive innovations. Both cases involved an attempt to outsource some of company Alpha’s activities to a partner, marketing and sales (case C) and manufacturing (case G), respectively. Through case 3, company Beta attempted to push a radically new product into the marketplace. Although it had all the innovativeness characteristics of a closed/reactive business model innovation (low radicality, low reach, high complexity), content-wise case 3 involved a closed/proactive innovation. Innovations in this group are largely governed and handled internally, although there may be some partner interaction (e.g., the outsourcing attempts in cases C and G). The outcome of this type of innovation is a range of incremental (low radicality) changes in all or most of the company’s business model building blocks (high complexity), which are, however, at best new to the company. In effect, the risks involved were low and the consequences of failure limited.


»The effect of fit on success

»Except for open/reactive innovations, there appears to be fit between the innovativeness, strategic context, and organizational setting of the business model innovation.

»Open/proactive business model innovations are associated with high levels of radicality and reach, and a low level of complexity (cases D, F). Closed/proactive innovations score high on all three innovativeness characteristics (cases A, 1, and, depending on perspective, 3). Business model innovations taking place in a (partly) closed/reactive context are lowin radicality and reach, but high in complexity (cases B, C, G, and, again, depending on perspective, 3). As to the open/reactive innovations, the picture is less straightforward: cases E and 2 have radically opposite characteristics – low-high-low and high-low-high, respectively. Through case E, company Alpha tried to use its existing competences to go beyond its current market and reach out to the rest of the industry, with a partner, in the form of a joint venture. Case 2 involved the acquisition of an existing company, which left company Beta’s internal organization largely intact, but enabled it to access new markets with new products. The implication of this finding is that we should distinguish between two open/reactive subtypes (see Table 3).

»Three of the ten business model innovation attempts failed (shown in brackets in Table 3); one was a partial success. All these cases fall into the (partly) closed/reactive group.



»IDEAL TYPES: IDENTIFICATION AND TENTATIVE EXPLANATION


»Ideal Types

»The differences between the success and (partial) failure cases suggest that fit among innovativeness, strategic context, and organizational setting affects the likelihood of success. The finding that fit plays an important role is concurrent with various bodies of theory, including manufacturing strategy (e.g., Hayes & Wheelwright, 1984; Skinner, 1985), organization theory (e.g., Mintzberg, 1979), and innovation theory (e.g., Boer & During, 2001).

»On the aggregate innovativeness scale combining radicality, reach, and complexity, all successful cases, A, D, E, F, 1, and 2, were more innovative than the partially successful case B and the failures C, G, and 3. All successful cases were high in reach, except case 2, and highly radical, except case E. In contrast, cases B, C, G, and 3 were low in radicality, low in reach, and high in complexity.

»A deeper look into the failure cases suggests a pattern. First, complexity hardly seems to explain the difference between success and failure, but radicality and reach do. Case C involved the establishment of a new business unit offering incremental improvements to existing products, combined with outsourcing of marketing and sales to a partner. Case G concerned outsourcing of manufacturing to a partner, which, however, failed to result in a competitive product. Company Alpha is, indeed, a highly competent design company, accustomed to pushing new products into the marketplace and with a successful history of technology development collaborations. However, the company may have underestimated the complexities involved in establishing a successful operational collaboration through outsourcing. Case 3 failed because company Beta tried to push a new product into the market – they improved (low radicality) many of the building blocks (high complexity) to develop a new product for (mostly) existing market segments (low reach), without, however, having any idea of how customers would respond. In other words, the innovativeness characteristics are associated with a (partly) closed/reactive innovation, rather than the closed/proactive innovation it actually is.

»Accepting the organization theory notion (e.g., Doty et al., 1993) that effective configuration implies ideal type, the open/proactive configuration, the two forms of closed/proactive configuration, and the open/reactive configurations represent ideal types. The closed/reactive configuration may also be an ideal type, but we do not have sufficient evidence for that, as the three failures are examples of business model innovations that fall between the (other) ideal types; they are either not entirely closed, or represent some mix of proactive and reactive behavior.


»Tentative Explanation and Propositions

»Risk appetite (e.g., HM Treasury, 2006; KPMG, 2008) and mitigation, that is, dealing with the potential effects of failure, seem to explain most of the associations between the innovativeness, proactiveness, and openness of business model innovations.

»Successful high radicality, high reach, and low complexity business model innovations are associated with an open, proactive approach. High radicality and reach are clearly associated with proactiveness. Companies mitigate the risk involved by keeping the innovation outside their existing core business. They reduce the risk and effects of failure further by focusing on a limited number of building blocks. Based on this, we propose:


»Proposition 1

»Companies pursuing a proactive, that is, high radicality and high reach, business model innovation, best adopt an open approach aimed at establishing a new business outside their existing core business or some form of external collaboration, with a limited number of new building blocks.

»A proactive company pursuing a highly complex business model innovation takes serious risks and the consequences of failure may be disastrous, especially if it adopts a closed approach. The company should be prepared to take and actively manage the risks involved in innovating its entire core business. We propose:


»Proposition 2

»Successful companies pursuing a proactive, that is, high radicality and high reach, as well as high complexity business model innovation, and adopting a closed approach, take and actively manage the risks involved in innovating their entire core business.

»Acompany pursuing an open, reactive business model innovation is cautious. In variant A (Table 3), the company reaches out to the world but stays close to home at the same time, by only pursuing incremental innovation of a limited number of building blocks. Alternatively, in variant B (Table 3), the company may, for example, acquire an existing company in a different industry, which provides it with several radically different buildings blocks that the company may further develop based on its own experiences. The result, however, is a mostly “new to the company” business model. The risk level is low (variant A) to medium (variant B) and the effects of failure are limited as the company’s existing business is not affected.


»Proposition 3

»Companies pursuing an open, reactive business model innovation are cautious, keep the risk involved relatively low, and go for low radicality, high reach, and low complexity or, alternatively, high radicality, low reach, and high complexity, which, in both cases leads to limited effects, should the innovation fail.

»Closed, reactive business model innovations are associated with low radicality, low reach, and high complexity, low to medium risk and limited failure effects. As our research did not provide evidence of successful cases of this type, further research is needed to investigate if closed, reactive business model innovations can be successful.»





Innovation Typologies
Thematic Readings

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