Reinventing business models how firms cope with disruption
Henk Volberda, H.W., Van Den Bosch, F.A.J., & Heij, K. (2018)
Chapter 1 introduction
In the current turbulent environment, it is no longer relevant to ask whether firms should
innovate their business model. These days it is about how you change your business model,
when, and the extent to which you do that. Every organization has a business model— either
explicit or implicit—but in today’s rapidly changing business environments, business model
innovation has become even more important. A business model reflects the outcome of a
firm’s strategic choices and how the firm executes its strategy. It focuses specifically on
creating and appropriating customer value.
Business model innovation falls into two main streams:
- Focus on replication: leveraging an existing business model.
- Focus on renewal: introducing a new business model that is very different form the
previous one.
This book seeks to give us a better understanding of how firms can innovate their business
model, what kind of levers management should work on, and when management should
change the business model.
The need for business model innovation
The speed with which technologies and strategies change forces firms to innovate their
business model continually. This is true of almost all industries, especially the unstable
industries and sectors with low entry barriers. Furthermore, the introduction of new sharing
business models (e.g. Uber) disrupted the existing taxi industry.
Venkatraman and Henderson stated that ‘it is no longer adequate to innovate in narrow
domains—products, processes and services [ … ] we need to innovate more holistically––
namely: the entire business model.’ In today’s dynamic business environments, there has
been an increasing focus on how to create distinctive business models and how to change
them in order to sustain competitive advantage.
The first sign that a business model is under pressure is often that new generations of
products and services are not significantly better. The new versions do not differ much from
the old ones. Customers notice this, and either complain about it or look for alternative
solutions. The business model is worn out and performance begins to dip.
The traditional strategies, based on top-down control, formal planning, and detailed industrial
analysis, guaranteed that their business models would remain both distinctive and sustainable
for some time. There is only slow and gradual erosion of the business model and firms can
anticipate in advance how to develop a new business model over time.
1
,Competition is now characterized by short periods of competitive advantage, alternating with
frequent disturbances and disruption of the business model. Market globalization, rapid
technological change, shorter product life cycles, and increasing aggressiveness from competitors
have changed the basic rules of competition. Consequently, no business will survive over the long
term without reinventing itself.
Firms will have to cope with frequent disruptions that are either:
1. Demand-driven: new entrants finding unserved customer needs.
- Occur when new entrants serve underserved market segments of incumbent firms using
technologies that are initially inferior to the mainstream technologies used by incumbents.
2. Supply-driven: emerging technologies that make the firm’s business model redundant.
- Stem from new entrants introducing a fundamentally new technological architecture that
cannot be copied by incumbents by simply improving elements of the existing technology
(e.g. iPhone).
3. Combination of the two: have a great impact on a sector as a whole (e.g. manufacturers
as well as providers).
- Free message traffic via Internet telephony using Skype has caused the profits of
traditional providers to evaporate.
The current era is called the ‘revolution era’: instead of there being just more of the same, these
days changes are abrupt, discontinuous, and seditious. Products and services quickly turn
into commodities; they become less distinctive, and consumers make their purchases more
cleverly and cheaply. This is described as the ‘Walmartization’ of everything.
Managers agree that the way to future success lies in moving away from traditional prescriptions
for strategy. Merely defending a competitive advantage is tantamount to stagnation. Inventing
something new does not guarantee success, but nor does imitating one’s rival. This raises the
question of how a firm is to stay on its feet in a swiftly changing competitive landscape.
2
,A competitive race with only losers?
Firms can now only achieve temporary competitive advantages, because those advantages are
being imitated or improved upon at an ever more rapid rate through business model innovation
by other players in the market.
The continuous interaction between changing and learning on the one hand, and greater forms
of competition and selection on the other, has been dubbed the ‘Red Queen race’. The players in
a specific market are involved in a constant race against one another to incorporate new
technologies and market approaches in their business model. Because everyone is running equally
fast, nobody develops any real lead. Firms adapt faster and faster, but relatively speaking the
players seem to be standing still because others are doing the same. “It takes all the running you
can do, to keep in the same place. If you want to get somewhere else, you must run at least twice
as fast as that!”. It is not easy for firms entangled in this kind of Red Queen race to step out of it.
Companies develop core competences and highly specialized assets, and these form the basis of
their success. But the very acquisition of those assets then makes those firms less able to renew
their business model because of, for example, cannibalization fear (competence trap).
Business model trap
A strong tendency to keep exploiting existing opportunities results in routines. These routines
are institutionalized in rules, regulations, planning and control systems, and shared norms and
values. Learning then only occurs within the existing standards and values (single-loop learning)
and only results in small-scale improvements. Managers in these kinds of organization avoid risk,
preferring stability.
Business model innovation
From ‘how to do what you are currently doing better’ to ‘how to be different’.
4 dynamic sources of competitive advantage for firms:
1. A challenging vision (Tesla)
2. A forward-looking perspective on how an industry branch could develop
- There are several game-changers that have disrupted the established logic of value
creation and capture in their industry sectors (Amazon and Ikea)
3. A capacity to reflect on the learning system
- Self-questioning and learning within the company where hierarchy is discouraged and
young employees are given more responsibility (Honda)
4. An innovative culture (Google)
Competing successfully in turbulent markets requires business model renewal, an approach which
is essentially different to business model replication, which is needed in more stable markets.
Firms must continually build and exploit new business models. This means that management does
not adapt fully to the existing environment, but creates room for flexibility in the organization and
seeks to achieve objectives that may be unattainable. This requires managers with a more
entrepreneurial mindset. Using the flexibility created, the organization has to experiment and
unlearn old routines (double-loop learning). Only this will make more radical business model
3
, innovation possible. The big question is how established organizations can work on this while their
existing models are still making a substantial contribution to sales and profit. What firms do is still
dictated to some extent by the restrictions of past business models. In some cases, firms will have
to cannibalize their existing business models in order to introduce new, competitive models.
However, it is not always possible for the new model to come into being alongside the old one,
which makes it harder for companies.
4
Henk Volberda, H.W., Van Den Bosch, F.A.J., & Heij, K. (2018)
Chapter 1 introduction
In the current turbulent environment, it is no longer relevant to ask whether firms should
innovate their business model. These days it is about how you change your business model,
when, and the extent to which you do that. Every organization has a business model— either
explicit or implicit—but in today’s rapidly changing business environments, business model
innovation has become even more important. A business model reflects the outcome of a
firm’s strategic choices and how the firm executes its strategy. It focuses specifically on
creating and appropriating customer value.
Business model innovation falls into two main streams:
- Focus on replication: leveraging an existing business model.
- Focus on renewal: introducing a new business model that is very different form the
previous one.
This book seeks to give us a better understanding of how firms can innovate their business
model, what kind of levers management should work on, and when management should
change the business model.
The need for business model innovation
The speed with which technologies and strategies change forces firms to innovate their
business model continually. This is true of almost all industries, especially the unstable
industries and sectors with low entry barriers. Furthermore, the introduction of new sharing
business models (e.g. Uber) disrupted the existing taxi industry.
Venkatraman and Henderson stated that ‘it is no longer adequate to innovate in narrow
domains—products, processes and services [ … ] we need to innovate more holistically––
namely: the entire business model.’ In today’s dynamic business environments, there has
been an increasing focus on how to create distinctive business models and how to change
them in order to sustain competitive advantage.
The first sign that a business model is under pressure is often that new generations of
products and services are not significantly better. The new versions do not differ much from
the old ones. Customers notice this, and either complain about it or look for alternative
solutions. The business model is worn out and performance begins to dip.
The traditional strategies, based on top-down control, formal planning, and detailed industrial
analysis, guaranteed that their business models would remain both distinctive and sustainable
for some time. There is only slow and gradual erosion of the business model and firms can
anticipate in advance how to develop a new business model over time.
1
,Competition is now characterized by short periods of competitive advantage, alternating with
frequent disturbances and disruption of the business model. Market globalization, rapid
technological change, shorter product life cycles, and increasing aggressiveness from competitors
have changed the basic rules of competition. Consequently, no business will survive over the long
term without reinventing itself.
Firms will have to cope with frequent disruptions that are either:
1. Demand-driven: new entrants finding unserved customer needs.
- Occur when new entrants serve underserved market segments of incumbent firms using
technologies that are initially inferior to the mainstream technologies used by incumbents.
2. Supply-driven: emerging technologies that make the firm’s business model redundant.
- Stem from new entrants introducing a fundamentally new technological architecture that
cannot be copied by incumbents by simply improving elements of the existing technology
(e.g. iPhone).
3. Combination of the two: have a great impact on a sector as a whole (e.g. manufacturers
as well as providers).
- Free message traffic via Internet telephony using Skype has caused the profits of
traditional providers to evaporate.
The current era is called the ‘revolution era’: instead of there being just more of the same, these
days changes are abrupt, discontinuous, and seditious. Products and services quickly turn
into commodities; they become less distinctive, and consumers make their purchases more
cleverly and cheaply. This is described as the ‘Walmartization’ of everything.
Managers agree that the way to future success lies in moving away from traditional prescriptions
for strategy. Merely defending a competitive advantage is tantamount to stagnation. Inventing
something new does not guarantee success, but nor does imitating one’s rival. This raises the
question of how a firm is to stay on its feet in a swiftly changing competitive landscape.
2
,A competitive race with only losers?
Firms can now only achieve temporary competitive advantages, because those advantages are
being imitated or improved upon at an ever more rapid rate through business model innovation
by other players in the market.
The continuous interaction between changing and learning on the one hand, and greater forms
of competition and selection on the other, has been dubbed the ‘Red Queen race’. The players in
a specific market are involved in a constant race against one another to incorporate new
technologies and market approaches in their business model. Because everyone is running equally
fast, nobody develops any real lead. Firms adapt faster and faster, but relatively speaking the
players seem to be standing still because others are doing the same. “It takes all the running you
can do, to keep in the same place. If you want to get somewhere else, you must run at least twice
as fast as that!”. It is not easy for firms entangled in this kind of Red Queen race to step out of it.
Companies develop core competences and highly specialized assets, and these form the basis of
their success. But the very acquisition of those assets then makes those firms less able to renew
their business model because of, for example, cannibalization fear (competence trap).
Business model trap
A strong tendency to keep exploiting existing opportunities results in routines. These routines
are institutionalized in rules, regulations, planning and control systems, and shared norms and
values. Learning then only occurs within the existing standards and values (single-loop learning)
and only results in small-scale improvements. Managers in these kinds of organization avoid risk,
preferring stability.
Business model innovation
From ‘how to do what you are currently doing better’ to ‘how to be different’.
4 dynamic sources of competitive advantage for firms:
1. A challenging vision (Tesla)
2. A forward-looking perspective on how an industry branch could develop
- There are several game-changers that have disrupted the established logic of value
creation and capture in their industry sectors (Amazon and Ikea)
3. A capacity to reflect on the learning system
- Self-questioning and learning within the company where hierarchy is discouraged and
young employees are given more responsibility (Honda)
4. An innovative culture (Google)
Competing successfully in turbulent markets requires business model renewal, an approach which
is essentially different to business model replication, which is needed in more stable markets.
Firms must continually build and exploit new business models. This means that management does
not adapt fully to the existing environment, but creates room for flexibility in the organization and
seeks to achieve objectives that may be unattainable. This requires managers with a more
entrepreneurial mindset. Using the flexibility created, the organization has to experiment and
unlearn old routines (double-loop learning). Only this will make more radical business model
3
, innovation possible. The big question is how established organizations can work on this while their
existing models are still making a substantial contribution to sales and profit. What firms do is still
dictated to some extent by the restrictions of past business models. In some cases, firms will have
to cannibalize their existing business models in order to introduce new, competitive models.
However, it is not always possible for the new model to come into being alongside the old one,
which makes it harder for companies.
4
