Toward a Theory of Business Model Innovation within Incumbent Firms

Abstract

This paper presents a theory of business model innovation (BMI) within incumbent firms. The process of business model change is examined, with particular attention to business units in a multibusiness enterprise. The paper expands upon past definitions of business models. It identifies four separate but interrelated components in a business model: * A set of elemental activities. * A set of organizational units that perform the activities (some of these units are internal to the firm, others external). * A set of linkages between the activities, made explicit by an isomorphic set of physical transactions (between the organizational units that perform the activities) and human relationships among the individuals who supervise and/or manage the linked organizational units. * A set of governance mechanisms for controlling the organizational units and the linkages between units. A business model thus juxtaposes two systems: a system of activities and a system of relationships. It is only by considering the social contexts in which the internal and external transactions occur that executives can fully appreciate the critical dynamics of organizational change that must accompany BMI. In focusing on business units within large multibusiness corporations, the paper suggests that those business units can be more likely to produce BMI than freestanding business units if the corporation is able to create a favorable context. The dimensions of that context - what is called the BMI-Conducive Corporation - are explored, as are the transformational organizational changes required to produce such conduciveness. Finally, the paper presents implications for both managers and researchers of the proposed theory of BMI within incumbent firms.