Broekhuizen, T.L.J., T. Bakker & T.J.B.M.

Postma (2018), Implementing New Business

Models:
What Challenges Lie Ahead?

1. Business model innovation: An introduction

The emergence of disruptive technologies, shifting regulatory environments, and the wider availability
of big data make business model innovation (BMI) vitally important.
BMI is very difficult to achieve in practice–—the barriers to changing business models are substantia

Most discussions around BMI focus on how firms should translate new technologies or business ideas
into new business models. Various authors believe firms should construct a business model that
enables them to deliver and capture value from their innovations

What strategic choices do business leaders make when implementing new business models? This study
tries to answer this question by analyzing the development of several business model innovations that
were new to the industry.

We find that business model innovators face four strategic trade-offs and accompanying tensions
during the implementation of their business model innovation process:

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(1) the level of independence granted to the developer (independence vs. dependence),

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(2) the degree to which the roadmap is planned in advance (discovery vs. planned execution),

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(3) the degree to which the value proposition challenges the status quo (challenging vs. maintaining

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status quo), and
(4) the rigor to which business model innovators preserve the logic of the initial value proposition (solid

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Our in-depth analysis reveals that business model innovators make pragmatic decisions that may
deviate from the guidelines offered by existing literature, and we offer insights into the drivers behind
these decisions.
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2. Business model innovation in theory

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Business model innovators find new ways to create and capture value for their firm’s stakeholders by
introducing a new business concept in areas where competitors do not participate. BMI constitutes the
discovery and implementation of a fundamentally different business model into an existing industry.
Although BMI is more difficult for competitors to imitate than a single novel product or process
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innovation, it is also risky. It frequently causes a major disruption that results in a clash with existent
partners and vendors, requiring the establishment of new partnerships and customer effort to
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understand and try out the new product concept.

Below, we summarize the business model literature’s guidelines on how to develop effective
implementation strategies
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2.1. Organizational form: Independence is key

Many failed BMIs result from the incorrect assumption that the new business would fit with the
organization’s current business. Business model innovators need a lot of freedom to experiment and
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preferably need to develop and run a new business model using a separate organization or business
unit. Such freedom is necessary to self-disrupt by allowing the new unit to develop its own strategy,
culture, and processes without parental interference.

2.2. Roadmap planning: Test market assumptions instead of planning ahead

“no business plan survives its first contact with customers” emphasizes that business executives should
recognize that new business model planning is extremely challenging and that frequent adjustments
along the innovation journey are needed to fine-tune them. Business units need to be agile,
experimental, and quickly test the business model’s assumptions via little hockey stick investments
rather than huge, ex ante black-hole investments.

2.3. Value proposition identity rebellion: Challenge the status quo

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 The firm’s value proposition rebellion plays a key role in getting this message across. Business model
literature often describes the advantages of being a rebel or pirate (e.g., Facebook, Uber, Airbnb) as a
virtue in winning the battle against competitors since a rebellious stance creates consumer awareness
via in- creased public press coverage and because it helps the creator to clearly differentiate from
existent offerings.

2.4. Value proposition core logic persistence: Stick to core logic

By sticking to the original logic, innovators create consistent storylines both internally and externally
that inspire credibility and trust. Innovators should rigorously follow these simple rules so that their new
efficiency-based business models (e.g., Walmart or Ryanair) can focus on realizing process innovations
and unlocking capacity.

3. Research method and case description

We analyzed the degree to which business model innovators follow the literature’s implementation
guidelines through an in-depth analysis of a multiple case study.

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We wanted to explore the challenges business leaders faced during implementation and how they dealt
with them. To ensure a wide variety of responses, we purposively selected exemplary cases across

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multiple industries. Our five cases have successfully introduced BMIs that were new to the industry in

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fashion, retail banking, commercial banking, health insurance, and the hotel booking industry. Our

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selected cases cover both perceived value models that offer high quality, highly
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differentiated offerings and efficiency-based models that focus on low-cost offerings. We
selected five Dutch companies that met the criteria of introducing a value proposition that
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fundamentally changed markets and initiated imitative responses from competitors.

For the data analysis, we segmented the findings by the critical events of the development process and
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distilled four strategic trade-offs: the degree to which the business unit relies on planning vs.
experimentation, the degree of independence, the degree to which the value proposition challenges the
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status quo, and the persistence of sticking to the original value proposition.
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4. Business model innovation in practice

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Our critical event analysis reveals communalities and differences in business model execution, but also
shows that each of the business leaders faced tensions regarding the four trade-offs.
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4.1. Trade-off #1: Organizational form–—Independence vs. dependence

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Although greater independence is associated with greater exploration, increased employee

commitment, and less internal resistance, interviewees indicated some risks to stimulating
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independence.

The level of independence, especially for incumbents, involves a delicate balancing act: How much
freedom is needed to learn and experiment relative to the need for controlling positive
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knowledge spillovers (e.g., learning experiences of the creator to the parent, and vice
versa) and limiting negative spillovers (e.g., increased risk taking, integration problems in
later stages)? The more disruptive the new business model is, the greater the internal resistance will
be as the new activities are in conflict with existing capabilities. The disruption also brings a stronger
need for independence, freedom, and tolerance for mistakes to develop new skills. Still, when firms
want to have control over the development of the business model, dependency is needed.

4.2. Trade-off #2: Roadmap planning–—Discovery vs. planned execution

Given the risky and unpredictable nature of BMI, business model innovators generally follow this
advice: Do not plan and lay out a fully blown strategy, but instead quickly test the underlying business
model assumptions in the market.

Overall, business leaders select a discovery approach to launching their concepts when market and
technological uncertainty are considered high. When flexibility and training are key, but when
markets
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 are more predictable and stable, executives oust the flexible trial-and-error method by planning to
achieve greater efficiency and control over the activities to execute the BMI.

4.3. Trade-off #3: Identity rebellion–—Challenging vs. maintaining status quo

To overcome the liability of introducing a new concept and to differentiate the offering from existent
offerings, business model innovators take a daring position that challenges the status quo. Our cases
demonstrate that firms, and startups in particular, have greater flexibility in taking on a rebellious
position to differentiate the concept from existing offerings.

At the same time, business model innovators, especially those for which customer trust plays an
important role, warn that rebelliousness can be harmful.

ING example: Although the concept of ING Direct was strikingly different from traditional banks, the
executive board purposefully decided not to position the concept as fighting against existent bank
offerings to ensure its legitimacy as a valid and trustworthy bank, thereby balancing be- tween
differentiation and conformity. ING Direct considered that a value proposition that questions the
existent rules of conduct may be counterproductive, reducing the concept’s legitimacy, increasing
complexity, and lowering customer trust.

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 A lack of rules about how to play the game in new and emerging markets contributes to a BMI’s

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ability to leverage rebelliousness. Mature markets with stronger social norms about acceptable

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behaviors may, however, seriously limit the appropriateness of a rebellious stance.

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4.4. Trade-off #4: Value proposition logic persistence–—Solid vs. fluid logic

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Our cases show that managers of new business models often struggle with sticking to the initial value
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proposition logic and end up adjusting it, knowing that such changes undermine message clarity for
their clients and other stakeholders. We find that BMIs often change and do not necessarily take off or
remain in a pure form, but instead focus on either differentiation or cost efficiency.
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A solid value proposition is useful for the creation of new business models in which customers clearly
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understand the value being offered. In practice, firms may rigorously implement the simple rules
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initially before subsequently allowing for conscious adjustments to their business models. This indicates
a more fluid stance, ensuring long-term viability.

5. Summary of findings
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During implementation, executive managers are confronted with four strategic trade-offs
related to two overall conflicting organizational goals: the need for efficiency (to achieve
economies of scale) and the need for exploration (adapting the concept in response to
changing organizational priorities, markets, and technologies).
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Each of the extremes on the axis favor either exploratory (independence, discovery approach,
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challenging status quo, flexible logic) or exploitative (dependence, planned approach, maintaining
status quo, fixed logic) strategies that, in turn, yield specific advantages and disadvantages (see Table
1). We aim to help business model innovators answer a fundamental question: How much
exploration or exploitation is needed to implement the business model at each
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development stage? We break the fundamental question down into four guiding questions that cover
four topics of interest.

5.1. Is flexibility in thinking and action favored over control and structure?

To determine the degree of flexibility needed, smart business innovators should assess the degree of
market dynamics and the unpredictability of customer and technology developments

Early in the BMI journey, when uncertainty about market reactions and technology development
abound, exploration and autonomy are essential to meeting customer needs and updating the business
model. Independent structures provide business units with the required organizational discretion and
freedom to explore and experiment, enhance employee commitment, and reduce internal conflicts with
the established activities of the parent firm. Also, when the BMI is disruptive to the parent firm,
business model innovators need to be independent and distant from the parent firm in order to be agile
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 and develop their own dynamic ability. Business leaders may, however, decide to limit independence
when they want to facilitate future organizational integration or search for (mutual) knowledge
spillovers between the parent and innovating business unit.

5.2. Do the benefits of planning outweigh the loss in flexibility and market learning?

Smart business leaders study the market and concept characteristics in detail to determine whether
and when to rely on planning or trial-and-error discovery. In highly dynamic markets characterized by
quickly changing customer needs and technological developments, executives should prioritize
experiential over structured learning as this helps to efficiently and quickly obtain and
update new knowledge on how to exploit disruptive technologies and market opportunities.
A discovery approach is preferred when executives can quickly test market assumptions
and learn via experimentation with limited resource endowments. Discovery techniques help to
quickly determine fast-changing consumer needs (e.g., what kind of aesthetics the market wants),
which is some- thing that is more difficult and time-consuming to assess with survey research or test
labs.

When innovators value control and make smart use of projections, a planned, top-down execution may
lead to knowledge and speed-to-market advantages and help customers familiarize them- selves with
new value propositions and break- through products.

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5.3. Do differentiation benefits outweigh additional costs of attaining legitimacy?

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Smart business executives should determine the optimal level of rebelliousness needed for their
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business model and balance the need for differentiation and legitimacy in time. For new entrants who
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may not have deep pockets, the development of rebellious business models can be highly effective,
while for reputable and risk-averse firms the use of rebellion is more restricted. A rebellious stance
leads to a great- er ability to differentiate but may come at the cost of identity conflict and create
conflicts with existing industry norms that hamper the establishment of partnerships. A rebellious
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stance is particularly effective when breakthrough or disruptive business models are developed to
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change or contest the rules of the game, such as Uber (taxi industry), TiVo (in television broadcasting),
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or Airbnb (hotel industry), since business leaders then have a license to challenge industry norms,
experiment freely, draw public attention, and capitalize on the generated buzz. Our cases indicate that
the appropriateness of rebellion is contingent on the maturity of the industry and business model. In
new and emerging industries or market niches, customers may be drawn to challengers as the rules are
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not yet set. But as industries or disruptors become more mature and mainstream or when industry
norms are followed, business model innovators often need to temper their rebellion to serve the more
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conservative mainstream customers.

5.4. Is efficiency or flexibility in execution favored?

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Business executives should continuously monitor the development of the business model concept in
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relation to market developments in order to determine when and how to update their business model.
When markets are dynamic or when disruptors enter the market, it will be more difficult to stick to the
original value proposition, as changes are need- ed to respond to pervasive market and technological
developments.
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Cost leaders should realize that changing the business model will become more difficult as the concept
matures because interdependencies between the individual elements of the business model grow and
harden over time. Therefore, business leaders should not only look at the short-term benefits, but also
realize that decisions are path-dependent and can have long-term con- sequences to the extent that
even small changes can have huge consequences

Our study analyzed how business executives react to exploration-exploitation trade-offs, and for what
reasons. Although business model theory prescribes a clear, one-size-fits-all solution to all business
model innovators, the diversity of responses to these trade-offs as well as the changes made during the
journey show that executives may deviate from the propagated guidelines for good reasons. Executives
make deliberate decisions on key topics in search of specific exploratory or exploitative advantages.
Their implementation decisions are not always in line with the business model literature’s prescriptions
but are not just simple anomalies. Often, these deviations can be explained by their organizational
priorities, business model characteristics, or market developments.
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