A developmental perspective on business model innovation: exploring sequences of change in high-performing IT firms

Abstract

Altering and enhancing existing business models through business model innovation has emerged as a powerful competitive strategy that can provide advantage over extended periods of time. Business model innovation also presents a fundamental counterpart for technological, product and organisational innovations. Success stories of unconventional firms disrupting markets and sustaining financial rewards over competitors through business model innovation can be found in virtually any industry. A key success factor for long-term competitiveness lies in the implementation of multiple, rather than punctual, business model innovations over time, although achieving change through successive iterations is a challenge driven by market and technological dynamics and disruption. However, the lack of empirical investigation on the dynamics of business model change over extended periods of time limits our understanding of how established firms can mimic successful innovators and reconfigure their business models over time. This thesis responds to this gap by exploring the dynamic mechanisms enabling business model development in successful, high-performing firms. It defines and examines the distinctive properties of business model development to understand what determines success in extended business model change processes. The theoretical model and research design were developed to empirically investigate the sequences of change events in business models to find patterns characterising business model development in high-performing firms. The theoretical framework deconstructs the structure of a business model using three well-accepted dimensions of value: value creation, value delivery and value capture. It treats the business model as a dynamic open system in which a firm’s dynamic equilibrium behaviour and complementarity mechanisms are the drivers of change. Then, it employs principles from organisational theory, strategic management, innovation and entrepreneurship to explore the developmental trajectories of business models by examining: (a) the agents and nature of the actions driving business model changes; (b) the frequency of business model change events; (c) the magnitude of business model change events; and (d) the order of business model change events. The exploratory, longitudinal and quantitative research design supporting this study is process- based, where business model development is formulated as a sequence of change events unfolding over time. A set of 12 financial ratios are used to examine fluctuations in a firm’s operational, economic and product-market domains that are attributable to business model transformations for a sample of 1,651 listed firms in the IT sector worldwide. This sector was selected as the research setting because of its dynamism, global size and the pervasiveness of the technologies underpinning it. Business model change events are identified through outlier detection and analysis of coordinated changes across the value creation, delivery and capture dimensions of the business models. Data were collected from a large financial database and transformed into individual sequences of change events. A validation procedure assessed the accuracy of the identification process for business model change events through qualitative data and in-depth analysis for four firms in the larger sample. Then, the individual sequences of change events were used as inputs for data mining methods of analyses, complemented by frequency domain analysis and statistical tests, which revealed the patterns of business model development in high-performing firms. The results suggest a significant association between the timing and intensity at which firms change their business models and their average performance over time. The evidence also suggests that business model change is likely to culminate in events where the value delivery dimension is altered. In terms of the frequency and magnitude of changes, high-performing firms are more likely to develop their business models through frequent and incremental alterations over time, except for mature-large firms who, compared to young-small, young-large and mature-small firms, are more likely to implement radical, less frequent changes over time. Both environmental and internal forces influence the intensity at which high-performing firms typically alter their business models, although environmental factors are more significant than internal forces. Both unconscious and deliberated actions influence business model development in high-performing firms. Unconscious actions dictated by the firm’s particular characteristics of age, size and sub-industry membership are a more significant influence than deliberated, emergent actions. This research develops the new concept of business model development, and provides a contribution to theory by empirically examining a previously unexplored process. By adopting the process-based approach, this research contributes to new thinking and research in business model innovation centred on analysing the flow of events and patterns of business model development across multiple cases. Methodologically, this research developed a research design appropriate for large samples of firms, able to analyse multiple developmental trajectories of business models in a systematic and consistent manner. The research can assist practitioners and firms’ leaders adjust established business models by providing guidance on the intensity, order and frequency of the changes required.