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John Gibe

Thomas Kalling

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Art. No 40205 ISBN 978-91-44-12980-8 First edition 1:1 ÂŠâ&#x20AC;&#x2030;The authors and Studentlitteratur 2019 studentlitteratur.se Studentlitteratur AB, Lund Design: Lukas MĂśllersten/Lyth & Co Cover design: Jens Martin/Signalera Cover illustration: Everett Collection/Shutterstock.com Printed by Dimograf, Poland 2019

CONTENTS

1. Introduction 1.1 Business Models and Strategy

7 8

1.2 Business Models Contributions

1.3 Themes and a Definition

2. Core Dimensions of Business Models 2.1 Customer

35 40

2.2 The Offering Dimension: Customer Value and Product Features

2.3 Three Main Types of Activity Systems: The Chain, the Network and the Shop

2.4 Resources and Capabilities: Pillars of Competitive Advantage

2.5 The Competitive, Complementary and Cooperative Context of Business Models

2.6 Conclusions and Discussion Regarding the Business Model Framework

3. An Introduction to Strategy Work 3.1 Five Images of Strategy Work 3.2 Indicators of Good Strategy

93 93 101

3.3 Porter’s Generic Strategies: Cost Leadership, Differentiation and Focus

120

3.4 Strategy Work in Business Models – Comments on Integration

125

3.5 Timing: ‘Knowing’ When to Change the Business Model

126

4 4. Managing Business Models

129

4.1 Steady-State Business Model Management

129

4.2 Early Phase Business Models

135

4.3 Modifying a Business Model

137

4.4 New Business Models

151

4.5 Indicators of Good Strategy

171

4.6 Conclusions

177

5. Strategy Work in Digital Business Models

179

5.1 Introduction: Growth of E-Business/ Digital and Implications for Strategy

181

5.2 Characteristics of digital technology

186

5.3 ‘Digital Customers’

189

5.4 Digital at the Offering Level of Business Models

191

5.5 Digital Activity Systems

193

5.6 Digital Resources and Capabilities

195

5.7 In the Firm’s Near Context: Effects of Digital on Industries, Networks and Ecosystems

200

5.8 Major Changes in the Broad Socio-Economic Context Brought by Digital

203

5.9 Conclusions

208

5.10 How Well Do General Indicators of Good Strategy Apply to Digital?

210

5 6. Legitimacy and Business Models

215

6.1 Responsibility and Resilience

216

6.2 Value Propositions

219

6.3 CSR and Business Models

224

6.4 The Integration of Business Models

228

6.5 Stakeholder Management

230

6.6 Final Word

233

REFERENCE S 235 I N D E X 2 51

1 Introduction

A business model is an idea concerning the interrelation of the things inside and outside your organization. It connects organization-internal features such as asset base, activities, structure, culture, control mechanisms and any other feature in the organization with organization-external entities, such as factor and product markets and customers, suppliers and competitors, along with societal issues, including politics, trends, technology development, regulations and more. The basic idea is that the intersection, which is the offering, has a cost, a price and a volume reflecting the internal efficiency and the preferences of the customer base in light of competition and societal tendencies. Hence, we have a model for determining profitability and performance. And so, in this book, we use the business model approach as a way of explaining organizational behaviour and performance â&#x20AC;&#x201C; be it profitability or any other objective of organizational principals. We also use it as a subjective perception of the firm or the organization, and the matters that could possibly be managed in order to pursue whatever goals and ambitions the organization might have. Therefore, this is a book about strategy and strategic management, which is typically the academic subject within business studies focusing on, precisely, performance and explanations related to this, as well as the formulation and implementation processes organizations go through as they try to adapt to their environment. Many things can be said

8 about the field of strategy, one being that we have many inconsistent variables on both the dependent (effect) and the independent (cause) side.

Not everyone would agree that the dependent variable, the effect side, has to do with organizational performance, but most strategy researchers would probably admit that regardless of whether or not it is explicitly researched, there is an idea of survival and perhaps prosperity at the eastern end of our causal models. Performance, however, may be perceived and measured in many different ways. We might talk about profit and profitability, margins and returns. To many, the concept of shareholder value is probably the ultimate measure of performance and corporate wellbeing. We can also talk about competitive advantage, growth, innovation rate and a range of other measures trying to capture performance. As indicated, many may claim that performance is not necessarily a part of strategy theory at all – but are perhaps only interested in decision-making, leadership or things typically referred to as ‘strategic’ or ‘important’. We argue, however, that within the social sciences, it is important to understand organizations and corporations and why they exist and survive, and one prominent reason is probably the belief among principals (e.g., shareholders) in the wealth-generating abilities of the organization in question. So, if the theory of the firm is that firms exist at least partly because of their ability to generate wealth, then one ought to be interested in organizational performance, short and long term. Hence, the position of strategy in the field of social science: strategy theory or theories are aimed at explaining variation in organizational performance. As stated, however, this does not mean that the field has generally accepted any uniform ways of measuring performance – it is quite the contrary. But this challenge is probably even greater when it comes to the independent variables, the cause side, where the strategy field is littered with different frameworks aiming to explain performance:

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1.1 Business Models and Strategy

ÂŠ â&#x20AC;&#x2030;T H E A U T H O R S A N D S T U D E N T L I T T E R A T U R

9 the Five Forces Framework (Porter, 1980), the resource-based view (Barney, 1991), the structure-conduct-performance approach (Scherer, 1980), the knowledge-based view (Grant, 1996), the value chain framework (Porter, 1985), the competence-based view of strategy (Sanchez, 2000), the capability perspective (Amit & Schoemaker, 1993), the dynamic capability perspective (e.g., Teece et al., 1997), etc. On the process-oriented side, there are also several models for understanding how strategies emerge and unfold in an environment of cognitive limitations, bounded rationality, psychological barriers, opportunism, cynicism, institutions, artefacts, discourse, power, norms, values and other features (Bower, 1970; Mintzberg, 1978; Burgelman, 1983; Chakravarthy & Doz, 1993; Oliver, 1997; Johnson et al., 2003). These process- and practice-focused pieces also, at least indirectly and perhaps unintentionally, contribute to our understanding of why organizations change and improve performance. So, the perspective we take here is that strategy theory is a group of models and theories aiming to explain performance variation. Here, variation can take place both in a spatial dimension (between competitors at any given point in time) and a temporal dimension (explaining why the performance of a given organization changes over time). The small challenge we think a business model perspective might help overcome is related to the fact that business models and business model management are based on multiple assumptions and theories, and we thus take a more holistic perspective than the standalone theories we often have a tendency to use (see above). This is particularly true on the side of the independent variables, where theories, models and frameworks come in abundance. On the dependent side, there is slightly less variation, and we just simply assume, like many others, that financial performance in the form of profitability is a reasonable proxy for value creation, competitive advantage and survival â&#x20AC;&#x201C; accepting, of course, that the principal might have objectives not perfectly linked to financial performance. In our world, a generic business model approach should aim at including all relevant stand-alone perspectives, naturally taking into account any conceptual redundancy among concepts. This is something not all that uncommon in the strategy and strategic management fields. So,

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in our perspective, the business model approach gives a more holistic view of strategy than individual, bivariate causal strategy theories, precisely because it recognizes the complexity and systematics of industries, markets, organizations, groups, people, decisions and action. In that sense, we argue, the business model approach gives a truer and more practical view on strategy and those who work with it. To us, a business model not only identifies key components of the organization and relevant external properties, but also identifies the relationship between the external and internal. In that sense, a business model is a harmonious idea of match or the pursuit of match. Theoretically, the overarching assumption is that the better the match, the better the performance. Practically, a business model outlines a range of issues that any given decision-maker or organization principal ought to know very well. In our world, it also contains proxies for perhaps the two most fundamental building blocks for any student of business: the balance statement (resources and liabilities) and the profit and loss statement (revenue and cost, including the firm-internal and external processes generating them), thereby linking us as far back as to Pacioli (1494) and double-entry bookkeeping. A more recent reference on the same theme is of course Penrose (1959), who, inspired as it were by Knight, 1921, suggested that firms consist of resources and the services they render (p. 25): Strictly speaking, it is never resources themselves that are the ‘inputs’ in the production process, but only the services that the resources can render.

Furthermore, a business model is much more than an idea of how an organization generates revenue; it is more than the configuration of a value chain. It is causal and should outline the links between assets and performance – in fact, we argue, even the causal mechanics between factor and product markets. A business model contains components and variables that are sometimes, but far from always, tangible, definable and measurable. As a consequence, the notion and perceptions of a business model may be subjective and individual, and thus share similarities with culture. This may foster a common

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11 language and a common view of the world – and the organization. Thus, a business model representation is also an expression of culture. One reason we think a business model perspective is relevant in strategy research is that it offers a more holistic approach. But another important reason is that increasingly, strategic change and renewal typically requires changes to the entire business model, not just to the market position, the offering, the value chain, the organization, the asset base or any factor market interaction strategy alone. Johnson et al. (2008) claim that radical changes and radically new products rarely emerge out of steady-state structures, but typically require entirely new ‘business models’; in other words, fundamental changes also in relation to resources, processes, profit formulas and value propositions. And, as indicated, we find it unfortunate that much strategy research only studies variables one by one. Perhaps an even stronger argument is the practical relevance of the business model approach. First, managers and decision-makers increasingly refer to business models in their strategy discussions (IBM Global CEO Study, 2008). We would argue that any responsible strategist takes a very holistic approach for understanding the options he or she has at hand. Then you cannot focus on individual features alone. We have worked with several companies over the years that would not think of anything other than entire business models in their strategy work, along with contextual models for understanding society (e.g., PEST models or versions thereof). A second practical argument is also that the business model consists of features decision-makers are typically involved with and make decisions about, such as investments in resources, recruitment, education, structure, control, value chain configuration, innovations, services and products, and not least market positioning. Yet another reason for our preference for a business model approach is the emerging field itself. Zott et al. (2011) report a massive increase in the number of articles (both scientific and non-scientific) since the late 1990s. Furthermore, the definitions of business models are extremely heterogeneous, sometimes at a level where it does not make sense even trying to search for a uniform definition (see, for instance, DaSilva & Trkman, 2014). Business model research is becoming increasingly

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1.2 Business Models Contributions As stated, the field of business models is maturing and with that follows field reviews and summaries of existing research. Zott et al. (2011) have conducted one of the more comprehensive reviews of ‘recent developments’ and it is clear that the overwhelming majority of articles and books written on the topic of business models have been written over the course of the last 20 years. They have dealt with business models and e-business, business systems, entrepreneurship, innovation, the new media landscape, networks, IPO, technology and, more recently, corporate social responsibility and sustainability. Wirtz et al. (2016) performed an even more thorough review of 681 journal articles, which underlined the substantial historical heterogeneity of the field, but also concluded that the scientific understanding of the business model concepts is converging. So, the concept has been around for a long time. In the following, we review some of the more influential pieces related to or directly describing business models.

The Business Idea – the SIAR Perspective The concept of the ‘business idea’ was popularized by, among others, researchers connected to the SIAR group (Scandinavian Institutes for Administrative Research), which was a research insti-

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popular and the field continues to mature and take shape. But despite the proliferation of ‘business model models’, we believe that our integrative and scientifically grounded, as well as practical, take on business models offers some unique qualities in terms of the development of the field. Throughout the rest of this chapter, we revisit some of the academic contributions to the field of business models, starting already in the 1960s. In the next chapter, we outline our framework for business models and business model management, followed by an exploration of strategy work in Chapter 3. The rest of the book focuses on business model management in different contexts, such as change, legitimacy and the management of multiple business models.

13 tute-turned-consulting firm. SIAR was founded by and centred around Eric Rhenman, who was a professor at the Department of Business Administration at Lund University and was also connected with Harvard Business School and the Stockholm School of Economics. For various reasons, not unlike the rest of the academic institutions of business administration at that time, researchers at SIAR did not publish many peer-reviewed international journal articles in English (one notable exception being Normann, 1971). At least in the Swedish business administration environment, publishing peer-reviewed journal articles was not at the top of the agenda in those days, as these researchers were more keen on implementation, problem-solving and consulting. The downside, of course, is that their ideas are not as well-spread as they could have been. It is difficult even to find proper references to concepts, as most of the SIAR management concepts are described in internal memoranda and the like. But perhaps the most prominent concept in the SIAR framework was the business idea, which reflects the possible harmony between the organization and its environment, as well as the transaction, which is the offering. The business idea concept, too, is difficult to track in any academic publications, but it was discussed as a ‘system of dominance’ by Rhenman (1969) and also in great detail in a textbook in 1974 (Bruzelius & Skärvad, 1974), and in Normann’s dissertation (1975). In the latter piece, a business idea is described as depicted in Figure 1.1. The important concept here is ‘consonance’ and conformance between the market and the product system, as well as between the product system and the internal features. Another important aspect is the criticism against one-sided approaches for defining a business based solely on the market positioning – here the idea is also to cover ‘how’ to take the desired market positions. According to Normann, it is not sufficient just to say ‘we’re in the transport business’. A business idea should also determine how and according to which formula you actually make money out of that position in the transport industry. Furthermore, the business idea is very much

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The first task of leadership is to find some kind of role or mission in the external environment – a task which demands creativity and at the same time a high degree of realist comprehension related to the “distinct competence” and the character of the liaisons and commitments made to external and internal stakeholders. The values connected to the mission or the role then must permeate the organization and therefore need to be “embodied” within it through – in Selznick’s words – the “institutionalization process”. This manifestation has to take place not solely in a technical but in a social sense – the overarching values connected to the mission of the firm must be allowed to penetrate and characterize the social structure of the firm.

Normann suggests that there are several fundamental properties of business ideas. First, they have a system character with many different, potentially interlinked, features. Second, they require descriptions on multiple levels. Third, they are an expression of real, concrete conditions, not just thought up or ad hoc marketing stunts. Fourth, a business idea should constitute a superior ability deeply rooted in the social fabric of the organization. Furthermore, a business idea is the product of history and historical conditions and is therefore difficult to imitate – the flipside to that being that it might be difficult to assimilate or change internally – in a way so that it becomes path-dependent. Finally, a business idea is characterized by harmony, consonance and congruence. It is also noteworthy that the SIAR group did a lot of work not just on individual organizations and businesses, but also on society and in particular on the role of organizations in society. Being founded in the midst of the so-called ‘68 Movement’, it was perhaps the first time in modern history that the post-World War II modern ‘Big Corp’ (like other societal institutions) was questioned, criticized and challenged, not only by students but also by the labour movement, for so-called ‘externalities’, for lack of responsibility, for excessive profits

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a product of a Selznickian perspective on the organization (Selznick, 1957). Normann (1975: 49) writes:

The niche/segment

“Our market is …” “We resolve the following needs …”

The product system

Products Peripheral systems

Organizational structure, resources, educated workforce, organized knowledge

Reward system Formal organizational structure

Planning

Suppliers Equipment Management style

FIGURE 1.1 The main components of a business idea (based on Normann, 1975).

and excessive tax-planning. Furthermore, at least in Sweden, this was a time of legislative changes whereby labour organizations got a lot more formal power; for instance, through corporate democracy and codetermination initiatives like the Employment Act (Medbestämmandelagen, MBL, in Swedish). One of the main clients of SIAR was the Swedish Employers’ Association (SAF), which allegedly found it difficult to defend itself against the growing criticism and to find its role in the transforming society. For SIAR, this meant that they ran several long-term client projects for SAF with part of the objective being to help develop an understanding of the role of companies in society – but also the role of society in fostering an environment where business could develop. One of the central models that came out as a result of this exercise was the Stakeholder Model (Rhenman, 1964; Rhenman & Stymne, 1973; influenced by Barnard, 1938), which outlined the relations between shareholders, employers, trade

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unions, customers, suppliers, legislators, opinion-makers and others. The logic was that society needs business, but business needs society too, and the survival of a particular business depends on how well the individual relations are managed – if a stakeholder is unsatisfied with the activities of the business, that stakeholder will act in a way forcing the business to modify its activities, which might have a negative impact on the performance of the business. Again, as is the case with the business idea, harmony, consonance is the ultimate system feature, and achieving this will impact the survival of the organization. Thus, it is important to note the systemic and open character of SIAR’s approach, which originally, with the Stakeholder Model, was larger than the individual organization and its immediate market. It is not surprising at all that the business idea concept has developed as a more micro-level concept within a stakeholder perspective. Thus, the business idea reaches beyond industry and market. In our view, a generic business idea outlines the key features of the market and the organization, as well as the key interrelations between external and internal aspects of the business idea. But the expressions of specific business ideas differ. Some companies spend millions on formulating more or less idealized versions of business ideas, often with a high degree of aspiration, which might be more or less connected with reality. At the other extreme, firms might not even bother writing these things down, either because they do not care that much, or because writing them down is not particularly helpful. There are successful firms that do not spend time documenting aspects such as key components of business ideas, perhaps because these are embraced and embodied anyway by the organizational members and relevant stakeholders in the external environment. As indicated, many features of a business idea might be hard to capture in words and numbers, and expressions of business ideas often have a subjective component with a fair degree of aspiration. And so, a business idea may be a subjective expression of an organization, which we carry and develop as individuals – these subjective expressions help us develop our own understanding of the organization we work in and its environment. It helps us make sense of our role in that organization and thus also our role, for lack of a better distinction, in society.

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17 Far from all of us contemplate or analyze the organizations we work for or our role in those organizations. But many of us do, and consider our role in fulfilling whatever needs society and our customers might have. It is, we argue, perhaps important to have a hunch also on an individual level of our personal missions in life – and society. But it is not primarily on the individual level that business ideas are the most relevant. They can and should also be used as analytical tools. Compared to many other strategy perspectives, it is a broad and holistic concept, encapsulating many features sourced from a multitude of other frameworks and theories. In fact, one could almost claim that the business idea is more like an interpretation scheme that may be used in inductive strategy and organization studies; a meso-level framework not necessarily with the detail required for understanding individual features in depth, but rather an economic, cognitive and cultural map helping to identify major interrelations and hotspots, which in turn may be studied in detail using other more expedient and focused frameworks. This overarching tendency or ‘big picture’ character of the business idea concept might render it a bit superfluous when it comes to specificities, but, on the other hand, it holds a strong position as a contrast and complement to sharper strategy models. In fact, one can argue that the strategy field sometimes lacks this intermediary meso-level model, which often leads to criticism of fragmentation and insularity, but also to debates (between schools of thought) that possibly miss the target. The increasing interest in ‘micro-foundations’ (e.g., Felin & Foss, 2005) is also an expression of the opposite: a molecular approach to strategy – perhaps the business idea could be seen as a model for the ‘macro-foundations’ of strategy. In this book, we have tried to achieve both kinds of advantages by integrating and combining both the overarching business idea and business model approach with the details of specific strategy models, such as the resource-based view, the five forces approach and many more. The authors of this book represent a different generation of Lundian business researchers but have been thoroughly trained in and indoctrinated by the business idea approach introduced by SIAR. Between 1974 and 2004, the business idea concept was taught to

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business administration students from day one at the undergraduate level. And for us, a business idea is the perspective through which we perceive and study organizations. It is all quite natural. Also, we have taught the business idea concept both at undergraduate level and for executive students. One of us (Thomas) also used to work as a consultant for Bruzelius Skärvad International (BSI), one of the many spinoffs from SIAR, that was run by two of the more prominent SIAR staff who had left SIAR in the early 1980s to start their own operations. But BSI, like the other spinoffs built around exits from SIAR, had methodologies and approaches that were thoroughly grounded in the business idea logic. So, for us as Lundian business students and researchers, the perspective and the concept of the business idea is not new. The impact of the SIAR approach to strategy and the business idea has been recognized by, among others, Mintzberg (1998) and Argyris and Schön (1978), but other than that, only by relatively few outside of the Scandinavian context. This is of course in great part due to the absence of English publications on the subject.

Determinants of Success – Porter, 1991 One other important contribution to the field of business models, or at least our take on business models, is Porter’s 1991 article on strategy theory. The article is not well-cited compared to Porter’s other production and is not frequently cited in business model research. Porter’s (1991) model is a highly overarching approach to understanding the causal mechanics by which firms become successful. Hence, at least implicitly, it thus also constitutes a response to some of the criticism that emerged towards Porter’s framework from, for instance, Mintzberg (1990; for the lack of process orientation) and from proponents of the resource-based view (e.g., Barney, 1991; for the external bias). In this framework (see Figure 1.2), firm success is first determined by the very nature of the industry in which the firm operates, and the firm’s relative position in that industry. To understand the industry, one can successfully use the Five Forces Framework (Porter, 1980), and relative position is a matter related to the extent to which the firm

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Cross-Sectional

Firm Success

Attractive Industry Structure (5 Forces)

Attractive Relative Position

Sustainable Competitive Advantage

Activities / Value System

Drivers

Structural determinants of differences in the cost or buyer value of activities or groups of activities

Longitudinal

Managerial Choices

Initial Conditions

FIGURE 1.2 The determinants of success in distinct businesses (based on Porter, 1991).

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has a competitive advantage based on cost or differentiation – hence, one can apply the generic strategies approach (ibid.). Porter’s model is causal in nature and assumes that relative position is not the ultimate reason for why the firm performs the way it does. One has to ask why the firm takes that position, and for that purpose one needs to consider the configuration of the firm’s activity system. Here, the value chain framework may be used (Porter, 1985). But, again, the causal mechanics do not end here; we need to ask ourselves which components of the value chain actually drive the cost and the differentiation advantages – the concept of ‘drivers’ is also outlined in Porter (1985) and is a concept not entirely different from, for instance, ‘resources’ in the resource-based perspective. Drivers include scale, learning, sharing activities, capacity utilization, location, policy choices and more. One driver may be ‘brand reputation’, for instance. All the above variables are cross-sectional in character. At any given point in time, they identify key factors in explaining firm performance and variations thereof. But, in Porter’s words, they still do not tell us how these success and failure factors came about. To understand that, we must apply a longitudinal process perspective and ask where drivers and resources come from. How come a particular value chain configuration becomes successful? In searching for the origins of success, Porter suggests that we apply a longitudinal perspective, which includes two sets of explanations: initial conditions and managerial choices. Initial conditions refer to history and factors inside (e.g., legacy) or outside of the firm that have helped develop the features that have ended up being critical to firm success. Managerial choices refer to deliberate decisions and choices at certain points in time that have helped develop price and quality levels, value chains and drivers that have contributed to superior or inferior performance. We need to understand, Porter claims, the incremental or radical development of events, deliberate or not, that have generated the characteristics of the business – this understanding also helps us understand the opportunities and ramifications related to modifying and making strategic changes. With this approach, Porter not only manages to make his own contributions to the strategy field more prominent and logical, he

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21 also launches an entire frame of reference for strategy research – which happens to share many similarities with the way we perceive business models today. Industry forces, the firm’s position in that environment and the roots to that position share obvious similarities with the harmonious character of the business idea as pronounced by, for instance, Normann (1975). Furthermore, Porter’s framework also represents a similar perspective on the epistemology of strategy. Separating between ‘models’ (i.e., theory based on traditional statistical and mathematical quantitative research on a few select variables) and ‘frameworks’ (i.e., broader sets of variables seeking to capture a larger proportion of ‘the complexity of actual competition’), Porter suggests that we need to be able to develop both kinds of theory. Our argument is that, still, much of strategy research is based on a ‘model’ approach, which is relevant for specific questions and specific subsets of the entire strategy field, but perhaps not that effective in capturing the multitude and variation of real strategic management. Porter (1991: 98) states: The frameworks, however, seek to help the analyst to better think through the problem by understanding the firm and its environment and defining and selecting among the strategic alternatives available, no matter what the industry and starting position.

Porter’s approach also acknowledges the inductive character of a framework approach, by which the framework serves as an overarching yet not detailed enough tool through which decision-makers and organizational members interpret and can act upon changes in the entire spectrum of possible cues triggering strategic change. Frameworks […] should challenge models by highlighting omitted variables, the diversity of competitive situations, the range of actual strategy choices, and the extent to which important parameters are not fixed but continually in flux. (Porter, 1991: 98)

As was the case with the SIAR approach to business ideas as taking place in a wider context of stakeholders, Porter also expanded the

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