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International Journal of Innovation Science

ISSN : 1757-2223

Article publication date: 25 November 2020

Issue publication date: 4 December 2020

The purpose of this paper is to systematically analyze the literature on business model innovation by identifying its triggers, enablers, barriers, dimensions, outcomes and highlight avenues for future research.

Design/methodology/approach

A systematic literature review of papers on business model innovation was conducted based on the recommendations of Tranfield et al. (2003) from 2000–2019. A total of 70 conceptual and empirical studies on business model innovation research spanning from 2000 to 2019 were analyzed based on different classification schemes.

The systematic review approach of this paper offers a new perspective in understanding business model innovation, bridges the gap in the extant literature by providing consolidation regarding the triggers, enablers, barriers, dimensions and outcomes of business model innovation and indicating avenues for future research.

Research limitations/implications

A review of literature on business model innovation carried out in this paper is expected to open up new horizons for future researchers to develop and empirically test frameworks related to business model innovation. The five themes identified to shed light on important aspects of business model innovation. These themes are expected to not only strengthen the theoretical foundations of business model innovation but also help practitioners develop and implement business model innovations in their organizations. In particular, the themes related to the enablers, barriers, triggers and outcomes of business model innovation can provide useful insights for practitioners.

Originality/value

This study is the first of its kind that has provided consolidation regarding the triggers, enablers, barriers, dimensions and outcomes of business model innovation.

• Business model innovation

Bashir, M. , Naqshbandi, M.M. and Farooq, R. (2020), "Business model innovation: a systematic review and future research directions", International Journal of Innovation Science , Vol. 12 No. 4, pp. 457-476. https://doi.org/10.1108/IJIS-06-2020-0081

Emerald Publishing Limited

Copyright © 2020, Emerald Publishing Limited

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Creating Value Through Business Model Innovation

Could your company benefit from a new business model? Consider these six questions.

• Business Models

The growing popularity of e-reading devices such as the Kindle is stimulating business model changes in book publishing.

Image courtesy of Amazon.

Companies often make substantial efforts to innovate their processes and products to achieve revenue growth and to maintain or improve profit margins. Innovations to improve processes and products, however, are often expensive and time-consuming, requiring a considerable upfront investment in everything from research and development to specialized resources, new plants and equipment, and even entire new business units. Yet future returns on these investments are always uncertain. Hesitant to make such big bets, more companies now are turning toward business model innovation as an alternative or complement to product or process innovation.

A recent global survey of more than 4,000 senior managers by the Economist Intelligence Unit found that the majority (54%) favored new business models over new products and services as a source of future competitive advantage. EIU analysts concluded that “the overall message is clear: how companies do business will often be as, or more, important than what they do.” 1 And in a similar global study conducted by IBM, in which over 750 corporate and public sector leaders were interviewed on the subject of innovation, researchers found that “competitive pressures have pushed business model innovation much higher than expected on CEOs’ priority lists.” 2 However, this level of interest may not have been too surprising given that the IBM study also found that companies whose operating margins had grown faster than their competitors’ over the previous five years were twice as likely to emphasize business model innovation, as opposed to product or process innovation. 3 One CEO explained why his company’s focus on business model innovation had grown:

In the operations area, much of the innovations and cost savings that could be achieved have already been achieved. Our greatest focus is on business model innovation, which is where the greatest benefits lie. It’s not enough to make a difference on product quality or delivery readiness or production scale. It’s important to innovate in areas where our competition does not act. 4

The Leading Question

What do executives need to know about business model innovation?

• Business model innovation can consist of adding new activities, linking activities in novel ways or changing which party performs an activity.
• Novelty, lock-in, complementarities and efficiency are four major business model value drivers.
• Within organizations, business model choices often go unchallenged for a long time.

Business model innovation can also help companies stay ahead in the product innovation game, where as one CEO from another study explained, “you’re always one innovation away from getting wiped out by a new competing innovation that eliminates the need for your product.” 5 A good product that is embedded in an innovative business model, however, is less easily shunted aside. Someone might come up with a better MP3 player than Apple’s tomorrow, but few of the hundreds of millions of consumers with iPods and iTunes accounts will be open to switching brands.

Business model innovation matters to managers, entrepreneurs and academic researchers for several reasons. First, it represents an often underutilized source of future value. Second, competitors might find it more difficult to imitate or replicate an entire novel activity system than a single novel product or process. Since it is often relatively easier to undermine and erode the returns of product or process innovation, innovation at the level of the business model can sometimes translate into a sustainable performance advantage. Third, because business model innovation can be such a potentially powerful competitive tool, managers must be attuned to the possibility of competitors’ efforts in this area. 6 Competitive threats often come from outside their traditional industry boundaries.

We define a company’s business model as a system of interconnected and interdependent activities that determines the way the company “does business” with its customers, partners and vendors. In other words, a business model is a bundle of specific activities — an activity system — conducted to satisfy the perceived needs of the market, along with the specification of which parties (a company or its partners) conduct which activities, and how these activities are linked to each other. We started our research into business models a decade ago by making in-depth inquiries into the business models of 59 e-business companies in Europe and the U.S. that had undertaken initial public offerings. 7 (See “About the Research.”) Later, we developed a unique data set containing detailed information about the business models of 190 entrepreneurial companies listed on U.S. or European public exchanges between 1996 and 2000. We supplemented these data on companies’ business models with another manually collected data set on business strategy, establishing empirically that a company’s product market strategy and its business model are distinct constructs that affect corporate performance. 8 More recently, we have developed cases on business model choice and evolution. 9

About the Research

The ideas presented in this article are anchored in the authors’ decade-long research program on business models. We started this research with in-depth inquiries into the business models of 59 e-business companies in Europe and the U.S. that had undertaken initial public offerings. Under our guidance, several research analysts investigated each company, using approximately 50 open-ended questions. The analysts wrote up the answers to the questions using information gathered from multiple data sources (such as IPO prospectuses), which we then took to develop an inductive theory on the sources of value creation in e-business.

In our subsequent work, we shifted attention from value creation to value appropriation by linking some of the value drivers of business models (notably, novelty and efficiency) to company performance. To test our hypotheses, we developed a unique data set containing detailed information about the business models of 190 entrepreneurial companies listed on U.S. or European public exchanges between 1996 and 2000. We measured each business model design theme as a variable at a particular point in time, and we regressed these variables on a range of performance measures. We also supplemented these data on companies’ business models with a manually collected data set on business strategy, establishing empirically that a company’s product market strategy and its business model are distinct constructs that affect performance. More recently, we developed cases on business model choice and evolution. These cases have given us additional insights that have led to further conceptual advances. Building on these advances in this article, we focus for the first time squarely on business model innovation in the context of established companies rather than start-ups.

Building on this work, we focus in this article on business model innovation in the context of established companies. However, these ideas are equally applicable to innovators of entirely new business models and to managers of companies who need to adapt their business model incrementally with the objective of achieving business model innovation new to their organization. Even under conditions of resource scarcity, organizations do not need to renounce innovation as a way of enhancing their performance prospects. Rather, managers should consider the opportunities offered by business model innovation to complement, if not substitute for, innovation in products or processes. Business model innovation can allow managers to resolve the apparent trade-off between innovation costs and benefits by addressing how they do business, for example, by involving partners in new value-creating activity systems.

Business Model Innovation in Practice

To illustrate the power of business model innovation, consider two cases: Apple and HTC, the Taiwan-based mobile device manufacturer. For most of its history, Apple was focused on the production of innovative hardware and software, mostly personal computers. By creating the iPod and the associated iTunes, a legal online music download service, Apple introduced a radical innovation of its business model. Apple was the first computer company to include music distribution as an activity, linking it to the development of the iPod hardware and software. By adding this new activity to its business model, which links the music label owners with end users, Apple transformed music distribution. Rather than growing by simply bringing innovative new hardware to the market, Apple transformed its business model to encompass an ongoing relationship with its customers, similar to the “razor and blade” model of companies such as Gillette. This enabled Apple, and its business model partners, to extract ongoing value from the use of the Apple hardware and software. In this way, Apple expanded the locus of its innovation from the product space to the business model — and its revenues, profit and stock price change have reflected that successful business model innovation. (See “Apple’s Performance, Before and After Business Model Changes.”)

Apple’s Performance, Before and After Business Model Changes

View Exhibit

Such performance can be hard for even some otherwise high-performing companies to match if they rely solely on product innovation. HTC has been a very innovative, profitable and growing original equipment manufacturer since its founding in 1997. Initially, HTC manufactured handsets for Microsoft-powered mobile phones for companies such as Palm, HP and T-Mobile. In 2006, it changed its product-market strategy from being a contract OEM manufacturer to selling its own HTC-branded smart phones to wireless network operators and the general public through various distribution channels. HTC has excelled in many ways, recording many firsts in the smart phone product market space and winning numerous awards for its many technological innovations. Yet HTC’s business model has remained centered on hardware design and product innovation. In effect, HTC sells great razors, but no razor blades: Its business model allows it to benefit only from the sale of its innovative, state-of-the-art smart phones and tablets, but not from their use. Comparing the performance of HTC and Apple stock in the past two years highlights the fact that in the fast-moving technology market space, product innovation without business model innovation may not always provide enough competitive advantage. (See “The Stock Price of HTC vs. Apple.”)

The Stock Price of HTC vs. Apple

In contrast to Apple, HTC has not been involved in the creation or delivery of mobile content or services, and its devices function on third-party operating systems such as Google’s, generating revenues for HTC only from the hardware sales. Apple, on the other hand, benefits from economies of scope due to the interoperability of its software base (iOS, iTunes, App Store, iCloud) for its various products including its computers (iMacs), tablets (iPads), phones (iPhones) and MP3 players (iPods). In addition, Apple benefits from direct ownership of its distribution channels (online App Store, brick-and-mortar Apple retail stores). Further, Apple’s business model enables it to derive revenue from App Store sales of third-party applications, from iTune songs, and from AT&T for the use of its iPhone for voice and data.

How to Innovate in Business Model Design

An innovative business model can either create a new market or allow a company to create and exploit new opportunities in existing markets. Dell, for example, implemented a customer-driven, build-to-order business model that replaced the traditional build-to-stock model of selling computers through retail stores. 10

Changes to business model design, however, can be subtle; even when they might not have the potential to disrupt an industry, they can still yield important benefits to the innovator. Consider Taco Bell, the restaurant chain offering Mexican-style fast food, which in the late 1980s decided to turn the restaurant’s kitchens into heating and assembly units. Most chopping, cooking and clean-up activities were transferred to corporate headquarters. The food was sent precooked in plastic bags to restaurants, where it could be heated, assembled and served. 11 This incremental business model innovation was not game-changing for the fast food industry, but it allowed Taco Bell to realize economies of scale and improvements in efficiency and quality control, as well as to increase space for customers within the restaurants. 12 Other companies might wish to change their business models in similar incremental ways or follow a business model innovator in their industry in order to achieve competitive parity.

Business model innovation can occur in a number of ways:

1. By adding novel activities, for example, through forward or backward integration; we refer to this form of business model innovation as new activity system “content.” 13

2. By linking activities in novel ways; we refer to this form of business model innovation as new activity system “structure.”

3. By changing one or more parties that perform any of the activities; we refer to this form of business model innovation as new activity system “governance.”

Content, structure and governance are the three design elements that characterize a company’s business model. 14 (See “Six Questions About Business Model Innovation.”) Change one or more of these elements enough and you’ve changed the model. Consider the following.

Six Questions About Business Model Innovation

The content of an activity system refers to the selection of activities to be performed. For example, Colombia’s largest bank, Bancolombia, adopted activities beyond those of a typical retail bank. The perceived market need for these activities was the demand for microcredit among the more than 60% of Colombians who did not have access to banking services. To perform these new activities — an innovation in the content of its business model — the bank needed to train its top management, hire and train new staff and link the new activities to its existing system (platforms, applications and channels). 15 Another example of business model innovation focused on content is IBM. 16 After a severe financial crisis in the early 1990s, the company shifted its focus from being a supplier of hardware to becoming a service provider. Drawing on know-how built over decades, IBM launched a range of new activities in consulting, IT maintenance and other services. The transformation was substantial: By 2009, more than half of IBM’s $96 billion in revenues came from these activities, which had barely existed 15 years earlier.

The structure of an activity system describes how the activities are linked and in what sequence. Consider Priceline.com. This online travel agency has established links with airline companies, credit card companies and Travelport’s Worldspan central reservation system, among others. By introducing a reverse market in which customers post desired prices for sellers’ acceptance, Priceline developed a fundamentally novel exchange mechanism through which these parties interact and by which items such as airline tickets are sold. Priceline was granted a business method patent on its innovative activity system — a novel structure that continues to distinguish the company from other travel agencies.

When he first began franchising 7-Eleven stores in Japan, Toshifumi Suzuki was introducing a business model innovation in the Japanese market.

Image courtesy of Flickr user marko8904 .

The governance of an activity system refers to who performs the activities. Franchising, for example, represents one possible approach to innovative activity system governance. It can be the key to unlocking value, as when Japanese entrepreneur Toshifumi Suzuki realized in the early 1970s that the franchise system that had developed in the U.S. was an ideal response to the strict regulations imposed by the Japanese government on retailing outlets, which limited their size and restricted opening times. By franchising 7-Eleven stores in Japan, Suzuki adopted a novel type of activity system governance (new to Japan, but not to the rest of the world) and managed to create value through professional management and local adaptation. 17 Another example of an innovative governance structure is the recent formation of a consortium of magazine publishers, including Time, Hearst, Meredith and Condé Nast, to develop an online magazine newsstand using multiple digital formats. The resulting company, Next Issue Media, is jointly owned by industry rivals and is a response by the rival publishers to declining print circulation (and hence print advertising revenue) and the growth of digital media. Fighting for survival, the publishers are looking beyond their otherwise fierce competition to their common interest in inventing a new context for magazines in the digital era. As Ann Moore, the former CEO of Time, stated, “It’s increasingly clear that finding the right digital business model is crucial for the future of our business.” 18

A consortium of magazine publishers is working to invent a new context for magazines in the digital era.

Image courtesy of Next Issue Media.

But how does a company increase the odds of developing the right business model for its situation? In our earlier work, 19 we identified four major interlinked value drivers of business models: novelty, lock-in, complementarities and efficiency.

1. Novelty captures the degree of business model innovation that is embodied by the activity system.

2. Lock-in refers to those business model activities that create switching costs or enhanced incentives for business model participants to stay and transact within the activity system. Consider for example Nespresso, a division of Nestlé Corporation. It introduced a new, low-cost espresso maker that uses Nespresso-produced coffee capsules. Once a customer buys a Nespresso machine, he or she needs to use Nespresso coffee capsules — creating a lock-in that enables Nestle to profit from both the sale of the machine and the use of the machine by selling consumables that machine owners must buy from Nespresso. Launching these products involved a radical redesign of the activity system, for example, by branching out into retailing activities.

3. Complementarities refer to the value-enhancing effect of the interdependencies among business model activities. Consider, for example, eBay, which offers a platform to conduct sales over the Internet among individual buyers and sellers of used and new products. A key requirement for the platform to function properly is a payment mechanism that allows buyers to make credit card payments even when the seller does not have access to credit card services. PayPal, the online payment company that eBay acquired, offers such a function, facilitating trades that could not otherwise be completed. In other words, PayPal has a value-enhancing effect on the eBay activity system.

4. Efficiency refers to cost savings through the interconnections of the activity system. Consider Wal-Mart, which not only championed the concept of discount retailing but also designed an activity system that supports its low-cost strategy. An important activity within this system is logistics. Over time, Wal-Mart developed highly sophisticated processes, such as cross-docking, unrivalled in the industry. These processes help the company to keep its costs lower than its competitors, giving Wal-Mart an important competitive advantage.

Our research suggests that the presence of each of these value drivers enhances the value-creation potential of a business model. Moreover, we find important synergies among the value drivers. Complementarities, for example, can be more valuable when supported by novel business model design.

Interdependencies in Business Models

Interdependencies in business models are created by entrepreneurs or managers in several ways: when they choose the set of organizational activities they consider relevant to satisfying a perceived market need, when they design the links that weave activities together into a system and when they shape the governance mechanisms that hold the system together.

Interdependence among business model design elements. Content, structure and governance can be highly interdependent. Take the San Francisco, California-based peer-to-peer lending company Prosper, for example. The venture aims at enabling direct, small, unsecured loans between individual lenders and borrowers. Early on, the founders made the conscious decision to let lenders choose the borrowers to whom they wanted to lend their money. This was a structural choice that settled the question of how lending and borrowing activities were linked, but it also constituted a decision about governance because it shifted the evaluation and selection activities to the customers and away from the company.

Interdependencies between business and revenue models. Managers also need to consider the interdependency between a company’s business model and its revenue model. The revenue model refers to the specific ways a business model enables revenue generation for the business and its partners. 20 It is the way in which the organization appropriates some of the value that is created by the business model for all its stakeholders. A revenue model complements a business model design, just as a pricing strategy complements a product design. Consider Better Place, whose business model aims to provide electric vehicle charging services. Like a mobile phone operator whose business model centers on enabling the use of the mobile phone device through its network rather than on the handset device itself, Better Place’s business model centers on providing charging networks and services rather than on the electric vehicle itself. It involves an innovative business model structure with partners ranging from governments, vehicle manufacturers, clean energy producers and others. Just as mobile phone operators charge customers variable or flat rates for telecommunication services, Better Place intends to implement a revenue model as a function of customers’ car usage (miles driven), thus taking into account the interdependency between its business and revenue models. 21

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The concepts of business and revenue model, although conceptually distinct, may be quite closely related and even inextricably intertwined. For example, in the product world, Gillette uses its pricing strategy of selling inexpensive razors to make customers buy its more expensive blades. A business model lays the foundations for a company’s value capture by codefining (along with the company’s products and services) the overall “size of the value pie” (that is, the total value that is created), which can be considered an upper limit to the company’s value capture. 22 The greater the total value created through the innovative business model, and the greater a company’s bargaining power, the greater the amount of value that the company can appropriate. 23

Caveats. As the Better Place example suggests, business model innovators need to bear in mind that identifying technologically or strategically distinct activities can be conceptually challenging, because the number of potential activities is often quite large. 24 Many seemingly inseparable activities can now be broken down even further, especially given ongoing advances in information and communications technologies. 25 (This, of course, represents not only a conceptual challenge but also an opportunity for innovative managers to redesign the activity systems of their organizations in novel ways.)

What’s more, making changes to a company’s whole activity system rather than optimizing individual activities (such as production) requires systemic and holistic thinking, which can be demanding. When responding to a crisis, operating in tough economic times or taking advantage of a new opportunity, rethinking an entire business model may not always be the first thing on a manager’s mind. This is particularly true when the level of resistance to change is predicted to be high. As a result, choices on business model design often go unchallenged for a long time.

Six Questions to Ask Before Launching a New Model

Our research shows that in a highly interconnected world, especially one in which financial resources are scarce, entrepreneurs and managers must look beyond the product and process and focus on ways to innovate their business model. A fresh business model can create and exploit opportunities for new revenue and profit streams in ways that counteract an aging model that has tied a company into a cycle of declining revenues and pressures on profit margins. 26 We suggest that managers ask themselves the following six key questions as they consider business model innovation:

1. What perceived needs can be satisfied through the new model design?

2. What novel activities are needed to satisfy these perceived needs? (business model content innovation)

3. How could the required activities be linked to each other in novel ways? (business model structure innovation)

4. Who should perform each of the activities that are part of the business model? Should it be the company? A partner? The customer? What novel governance arrangements could enable this structure? (business model governance innovation)

5. How is value created through the novel business model for each of the participants?

6. What revenue model fits with the company’s business model to appropriate part of the total value it helps create?

To illustrate how managers might productively and proactively use these questions, consider the business model of McGraw-Hill’s book publishing business. 27 In the U.S., general and trade books (including consumer titles and celebrity author books) represent about 55% of industry revenues, while academic and professional books generate the remainder. Until recently, only in business-to-business and academic text segments have websites been a true marketing platform for digital content. While e-readers such as the Kindle and the iPad are now rapidly gaining popularity, the time-consuming and expensive book publishing process had not changed in a material manner in many decades. However, Google, Amazon and other competing information and content providers have stimulated a growing customer interest in electronic formats. Publishers in the U.S. and Europe are searching for solutions to meet the emergent demand for creating and delivering digital content on portable devices while preserving and enhancing value.

Meeting the demand for digital content may require publishers to perform new activities ( new business model content ). Although it is unlikely that the traditional hardback/paperback book will disappear, it is expected that the demand for printed publications will fall sharply. If printing and physical distribution become less relevant in the process, the time it now takes to add a new title to a catalogue and to bookstore shelves will be reduced. Accordingly, designing, uploading and maintaining the most complete online catalogue may become a central new activity in publishers’ business models. In addition, to the extent that publishers decide to bypass traditional retail bookstores in their new business models, they will have to develop a new marketing activity targeting retail buyers. Production will need to change as well. Creating content with a digitally enabled streamlined process is another activity 21st-century publishers will probably need to incorporate into their new business models.

Linking the various activities to each other, sequencing these linkages and deciding how stakeholders will interact with one another in the new business models requires careful consideration ( new business model structure ). For example, the ways in which McGraw-Hill decides to interact with multiple digital distribution partners such as Apple and Amazon, through which McGraw-Hill distributes digital content to retail consumers, will affect the breadth of the company’s access to the retail digital book market. The linkages among content creators, including authors, editors, other publishing professionals and distributors, will constitute the heart of the new business model. These linkages must reflect alternatives available to authors — such as bypassing publishers altogether — as well as approaches adopted by competing publishers.

Determining whether McGraw-Hill or another partner will carry out each of the activities of the new business model requires a careful consideration of trade-offs ( new business model governance ). For example, should the publisher’s content be delivered through a new McGraw-Hill branded device, or by proprietary devices offered by such partners as Amazon (with its Kindle) or Apple (with its iPad), thereby leveraging their existing position in the market? Or should its content be delivered through Internet-based platforms compatible with a broad range of devices, enabling global distribution? These are crucial governance decisions that a new publishing model will answer.

Publishers’ new business models will create value through the complementarities and interdependence among activities and through the enormous efficiencies in the publishing process that the new business models could generate. A number of alternative revenue models associated with these new business models could be considered, such as single subscription pricing independent of the number of downloaded manuscripts, piecemeal pricing and/or value-based pricing for time-sensitive publications.

Taking a Systemic View

Addressing the six questions outlined above can help managers see their companies’ identities more clearly in the context of the networks and ecosystems in which their organizations operate. Without a business model perspective, a company is a mere participant in a dizzying array of networks and passive entanglements. Adopting the business model perspective can help executives purposefully structure the activity systems of their companies; the purposeful design and structuring of business models is a key task for general managers and entrepreneurs and can be an important source of innovation, helping the company look beyond its traditional sets of partners, competitors and customers. Most importantly, perhaps, this approach encourages systemic and holistic thinking when considering innovation, instead of isolated, individual choices. The message to executives is clear: When you innovate, look at the forest, not the trees — and get the overall design of your activity system right before optimizing the details.

About the Authors

Raphael Amit is the Robert B. Goergen Professor of Entrepreneurial Management at the Wharton School of the University of Pennsylvania in Philadelphia, Pennsylvania. Christoph Zott is a professor of entrepreneurship at IESE Business School in Barcelona, Spain.

1. “Business 2010: Embracing the Challenge of Change,” white paper, Economist Intelligence Unit, New York, February 2005, p. 9.

2. G. Pohle and M. Chapman, “IBM’s Global CEO Report 2006: Business Model Innovation Matters,” Strategy & Leadership 34, no. 5 (2006): 34-40.

3. Ibid., 36.

5. “Business 2010,” Economist Intelligence Unit, 10.

6. R. Casadesus-Masanell and J.E. Ricart, “Competing Through Business Models,” working paper 713, IESE Business School, Barcelona, Spain, November 2007.

7. R. Amit and C. Zott, “Value Creation in e-Business,” Strategic Management Journal 22, no. 6-7 (June-July 2001): 493-520.

8. C. Zott and R. Amit, “The Fit Between Product Market Strategy and Business Model: Implications for Firm Performance,” Strategic Management Journal 29, no. 1 (January 2008): 1-26.

9. C. Loch, C. Zott, A. Guttman, P. Jokela and D. Nahmias, “FriCSo (A): How to Translate a New Technology into a Business (Model),” case no. 608-025-1 (Fontainebleau, France: INSEAD, 2008); C. Loch, C. Zott, A. Guttman, P. Jokela and D. Nahmias, “FriCSo (B): Designing the New Business Model,” case no. 608-026-1 (Fontainebleau, France: INSEAD, 2008); C. Loch, C. Zott, A. Guttman, P. Jokela and D. Nahmias, “FriCSo (C): Executing the New Business (Model),” case no. 608-027-1 (Fontainebleau, France: INSEAD, 2008); and C. Zott, B. Biren and I. Bancerek “Webraska: Evolving with the Wireless Market,” case no. 802-008-1 (Fontainebleau, France: INSEAD, 2003).

10. E. Brynjolfsson and L. Hitt, “Intangible Assets and the Economic Impact of Computers,” in “Transforming Enterprise,” ed. W. Dutton, B. Kahin, R. O’Callaghan and A.W. Wyckoff (Cambridge, Massachusetts: MIT Press, 2004), 27-48.

11. See L. Applegate, L. Schlesinger and D. Delong, “Taco Bell, Inc.: 1983-94,” case no. 9-398-129 (Boston: Harvard Business School, 2001).

12. J. Santos, B. Spector and L. Van Der Heyden, “Toward a Theory of Business Model Innovation Within Incumbent Firms,” working paper 2009/16/EFE/ST/TOM, INSEAD, Fontainebleau, France, 2009.

13. We note in this context that although the “what” of the business model may change (i.e., what activities are included), the “what” of the customer offering (i.e., what product or service the customer buys) may or may not remain unchanged.

14. Amit and Zott, “Value Creation.”

15. S. Banerjea, R. Kahn, C. Petit and J. White, “Dare to be Different: Why Banking Innovation Matters Now,” executive brief, IBM Institute for Business Value, Somers, New York, 2006.

16. H. Chesbrough, “Open Business Models” (Boston: Harvard Business Review Press, 2006).

17. K. Nagayama and P. Weill, “7-Eleven Japan Co. Ltd.: Reinventing the Retail Business Model,” CISR WP 338 and MIT Sloan WP no. 4485-04 (Cambridge, Massachusetts: MIT Sloan School of Management, January 2004).

18. B. Stelter, “Group of Magazine Publishers Is Said to Be Building an Online Newsstand,” New York Times, Nov. 25, 2009, sec. B, p. 3; also see www.nextissue.com.

19. Amit and Zott, “Value Creation.”

21. www.betterplace.com .

22. A. Brandenburger and H.W. Stuart, Jr., “Value-Based Business Strategy,” Journal of Economics and Management Strategy 5, no. 1 (March 1996): 5-24.

23. C. Zott and R. Amit, “Business Model Design and the Performance of Entrepreneurial Firms,” Organization Science 18, no. 2 (2007): 181-199.

24. M.E. Porter, “Competitive Advantage: Creating and Sustaining Superior Performance” (New York: The Free Press, 1985).

25. F. Santos, “Toward an Entrepreneurial Theory of Boundaries: The Scalability of Firms in Nascent Markets,” unpublished manuscript.

26. Zott and Amit, “Business Model Design”; Zott and Amit, “Fit Between Product Market Strategy and Business Model.”

27. The McGraw-Hill Companies are active in the financial services, education and business information markets through leading brands such as Standard & Poor’s, McGraw-Hill Education and J.D. Power and Associates.

Acknowledgments

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Comments (6)

Patricia parker, david chapman, business model innovation | barry young's blog, why business model innovation rocks bmn, javvadih.rao, globalroundhouse.

Business model innovation in established firms

17 January 2022 11:24

• Organisation and Management
• Innovation and Entrepreneurship

On Friday 28 January 2022 Magne S. Angelshaug will hold a trial lecture on a prescribed topic and defend his thesis for the PhD degree at NHH.

Prescribed topic for the trial lecture:

The Context of Incumbent Business Model Innovation: Strategies, leadership, and collaboration

Trial lecture:

10:15, NHH / Zoom

Title of the thesis:

«Business Model Innovation: The Role of the Top Management’s Composition, Cognition, and Knowledge Sourcing Strategy»

The overall purpose of this dissertation is to investigate business model innovation (BMI) in established firms, and to determine what role a firm’s top management team (TMT) plays in facilitating such efforts.

As business environments become more volatile, TMTs’ ability to identify and implement BMIs becomes a source of competitive advantage. Notably, not all TMTs are equally well equipped to handle this responsibility. While an increasing number of studies point toward the important roles of cognitive and behavioral factors in the initiation and implementation of BMI, more empirically-driven research is required to understand the influence of TMTs’ composition, cognition, and knowledge sourcing.

To address these gaps, this dissertation contributes three empirical papers. The first paper illustrates how features of organizational design can steer the allocation of attention among top managers. By linking organizational design theory with an attention-based view of the firm, the study identifies how organizational design influences the TMT’s attentional perspective and attentional engagement towards BMI.

The second paper investigates what compositional characteristics of the TMT are most conducive to BMI. Drawing on upper echelons theory, this paper shows how TMT composition is associated with the scope of the firm’s BMI efforts. The third paper draws on complexity, open innovation, and organizational learning theories to provide empirical insight into the forms of external knowledge sourcing that increase the TMT’s propensity for BMI. The study shows that the diversity and intensity of such knowledge sourcing are associated with the scope and novelty of a firm’s BMI efforts. In sum, the findings of the three papers contribute new empirically-driven insights on the role of the TMT in BMI. Further, they highlight how firms may use organizational design, team composition, and external knowledge sourcing to influence the TMT’s propensity to initiate and implement different types of BMIs.

12:15, NHH / Zoom

Members of the evaluation committee:

Professor Rune Lines (leader of the committee), Department of Strategy and Management, NHH

Professor Kristian Sund, University of Roskilde

Associate Professor Cristina Bettinelli, University of Bergamo

Supervisors:

Associate Professor Tina Saebi, (main supervisor), Department of Strategy and Management, NHH

Professor Lasse B. Lien, Department of Strategy and Management, NHH

Professor Nicolai Foss, Department of Strategy and Management, NHH and CBS

The trial lecture and thesis defense will be open to the public.                                                                 

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Sustainable business model innovation: Process, challenges and implementation

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The capability to rapidly and successfully move into new business models is an important source of sustainable competitive advantage and a key leverage to improve the sustainability performance of organisations. However, research suggests that many business model innovations fail. Despite the importance of the topic, the reasons for failure are relatively unexplored, and there is no comprehensive description of the sustainable business model innovation process in the literature. This research addresses this gap by sequentially employing four research methods. First, a literature review is conducted to synthesise a conceptual model as a framework for an empirical investigation. This investigation used two focus groups with ten participants, interviews with 61 senior managers of 24 organisations, and active participatory research, in which the researcher joined the teams of two different business model innovation projects for several months. The research provides the most comprehensive literature review on the definition and process of sustainable business model innovation to date. It identifies five different process steps of sustainable business model innovation as well as a comprehensive list of key activities and challenges associated with each step of the process. It also discusses how the resulting process framework could be translated into a management tool and outlines some insights on the organisational setup of the process and success factors. These findings can serve as hypotheses to guide further research on sustainable business model innovation and adjacent phenomena. It also provides direction for practitioners engaged in sustainable business model innovation in similar context as the ones investigated. As a result, the research can help organisations to structure their activities better, anticipate key challenges, and build up sustainable business model innovation capabilities.

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Disruptive Innovation in the Era of Big Tech

How does the landmark theory apply to tech start-ups, three decades after its introduction?

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In 1995, the late and legendary Harvard Business School professor Clayton Christensen introduced his theory of “disruptive innovation” right here in the pages of the Harvard Business Review. The idea inspired a generation of entrepreneurs and businesses, ranging from small start-ups to global corporations.

Three decades later, debates have emerged around how the theory should be applied — especially within technology start-ups that have driven so much economic growth since 2000.

In this episode, Harvard Business Review editor Amy Bernstein and a panel of expert scholars discuss the legacy of disruptive innovation, and how the common perception of disruption has drifted away from its original meaning.

Expert guests include:

• Harvard Business School senior lecturer and director of the Forum for Growth and Innovation Derek van Bever
• Columbia Business School professor Rita McGrath
• Harvard Business School professor Felix Oberholzer-Gee

Key episode topics include: strategy, competitive strategy, business history, disruptive innovation, Clay Christensen, innovator’s dilemma.

HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.

• Listen to the full HBR IdeaCast episode: 4 Business Ideas That Changed the World: Disruptive Innovation (2022)
• Find more episodes of HBR IdeaCast
• Discover 100 years of Harvard Business Review articles, case studies, podcasts, and more at HBR.org .

HANNAH BATES: Welcome to HBR On Strategy , case studies and conversations with the world’s top business and management experts – hand-selected to help you unlock new ways of doing business.

In 1995, the late and legendary Harvard Business School professor Clayton Christensen introduced his theory of disruptive innovation right here in the pages of Harvard Business Review .   The idea inspired a generation of entrepreneurs and businesses, ranging from small start-ups to global corporations.

Almost three decades later, debates have emerged around how the theory should be applied in the real world especially within the tech start-ups that have driven so much economic growth .

In this episode, Harvard Business Review editor Amy Bernstein and a panel of expert scholars discuss the legacy of disruptive innovation, including what Christensen got wrong about it, and how the common perception of “disruption” has drifted away from Christensen’s initial idea in recent decades.

This episode will give you a new perspective on what makes a strategy succeed in the long term. It originally aired on HBR IdeaCast in October 2022 as part of a special series called 4 Business Ideas That Changed the World. Here it is.

AMY BERNSTEIN: Welcome to 4 Business Ideas That Changed the World , a special series of the HBR IdeaCast . In the 1980s, Clayton Christensen was in his 30s, the business guy at a startup. The company was making ceramics out of advanced materials, and it was able to take over the market niche from DuPont and Alcoa. That experience left Christensen puzzled. How could a small company with few resources beat rich incumbents? The question led to his theory of disruptive innovation, introduced in the pages of Harvard Business Review in 1995, and popularized two years later in The Innovator’s Dilemma .

The idea has inspired a generation of entrepreneurs. It’s reshaped R&D strategies at countless established firms, seeking to disrupt themselves before somebody else does. It’s changed how investors place billions of dollars and how governments spend billions more, aiming to kickstart new industries and spark economic growth. But the idea has taken on a meaning well beyond what Christensen actually described. Think about how easily we use the word disruption to explain any sort of innovation, business success, or industry shakeup.

It’s also drawn fire. Some critics argue the theory lacks evidence. Others say it glosses over the social costs of bankrupted companies, and debate continues over the best way to put the idea to work. On this special series, we’re exploring 4 business ideas that changed the world. Each week, we talk to scholars and experts on the most influential ideas of HBR’s first 100 years. This week: disruptive innovation. With me to discuss it are Derek van Bever, senior lecturer and director of the Forum for Growth and Innovation at Harvard Business School, Rita McGrath, professor at Columbia Business School, and Felix Oberholzer-Gee, professor at Harvard Business School. I’m Amy Bernstein, editor of Harvard Business Review and your host for this episode. Let’s set some context. Rita, what was our understanding of innovation before Clay gave us disruptive innovation?

RITA MCGRATH: Yeah. I think our common understanding of it was something that came out of R&D groups. It was like big product, big materials, big physical things, innovation. The classic would be like DuPont nylon. They invented this thing, that meant women didn’t have to spend hundreds of thousands of dollars collectively on silk stockings, and they had nylon riots. Literally, people were charging at these trucks with this revolutionary substance.

I think that’s how a lot of people still thought about innovation, is something that was very tech-heavy in the sense of not digital, but just technology that was coming out of R&D labs and so forth. That was one pervasive thought. I think the next pervasive thought was that innovations that were successful added something. They were new and improved, and so you built a better mouse trap. You built a better nylon stocking, you made Kevlar and things became impermeable, and that it was always at the top of the market.

I think that was one of the things that Clay’s work revealed, which was that innovation did not have to be new and improved or better on the existing dimension of merit, but that it could actually be worse on whatever it was we used to judge products by. But it did something else that was different.

AMY BERNSTEIN: You mentioned technology. Was technology always a necessary component of innovation as understood then?

RITA MCGRATH: I think in our theory of innovation it was. I think the idea of really business model innovation to me, did not become a common topic of conversation really until the ’90s. Prior to that, it was really product-centric, I would say, innovation. Peter Drucker and people like that, talked a little bit about things like the advent of the knowledge worker and what the network society was going to mean, and that kind of thing but that was really early days.

AMY BERNSTEIN: Felix, so help us understand Clay and what shaped his thinking. He was a co-founder of a technology company when he started to consider disruptive innovation. What shaped his thinking?

FELIX OBERHOLZER-GEE: We know Clay as a faculty member at Harvard Business School, of course, first and foremost. But actually, by the time he arrived and became a faculty member, he had done many different things already. He was a missionary in Korea, he studied in the US and in the UK. He had earned an MBA from HBS. Then in the 1980s, together with faculty members at MIT, he had started a company called Ceramics Process Systems. The one experience that he had as CEO of the company, was quite dramatic and in part informed his thinking about disruptive innovation.

The basic technology that they had came out of an MIT lab, and it was exactly what Rita had alluded to. It was this idea, is there a way to make what we have today, is there a way to make it better? To improve on the quality? In their case, they made ceramic substrate that could be used in microelectronics. This is a very, very thin layer of ceramic that has excellent properties when it comes to conducting heat and power. They had better ideas how to make that. The challenge was that the technology was not so easy to scale up.

They were about 14 months late or so later than they had anticipated. By that time, a competitor had essentially duplicated or had a product that was very similar, and the price premium that they expected to earn had vanished. In retrospect, I think looking back at this particular type of innovation, Clay later found in his dissertation that if you go directly against established incumbents, your chances of being successful are not all that great. He would say, “Well, maybe 5%, 6% of these attempts are successful, but mostly you shouldn’t really get your hopes high up.”

AMY BERNSTEIN: Derek, let me ask you about this idea that Felix just described. Had anyone ever noticed this before? Was it all that novel?

DEREK VAN BEVER: It was really remarkably creative, what he did. The question that consumed him was why is it that sometimes a tiny, little upstart can unseat a powerful, industry-leading incumbent? It was the sometimes that really intrigued him. He was looking for the causal driver, not merely correlation, but what was it that caused this phenomenon? There were lots of descriptive explanations that had been advanced in the past. One was that industry leaders would become self-satisfied and complacent, and not see the attacker coming.

Another was that if you got attacked on too many fronts at once, Xerox versus Canon, you couldn’t respond adequately. What bothered Clay was that while these explanations were often true enough, there were also a lot of anomalies, instances where they didn’t hold. Clay used these anomalies as learning opportunities, rather than exceptions. What he realized was if you can approach an incumbent in a way that causes them to ignore you or to flee upmarket, you have the thing you need the most, which is time to build a foundation underneath your business.

Then finally, he gave names to phenomena that were familiar, particularly to businesspeople. He called the trajectory of innovation that is far and away the most common, he called that sustaining innovation. Any company that wants to be in business for any length of time, had better be really good at that. He called that trajectory underneath the existing incumbents; he called that disruptive innovation. That’s what’s hard for incumbents to see, because it typically presents as products that aren’t as good, that aren’t interesting to their best customers. And therefore, are not something that they can allocate resource toward

FELIX OBERHOLZER-GEE: Or maybe if I can add a little twist to it. One of the things that I find most fascinating about the theory of disruption, is that it describes the reasons why the incumbent is unlikely to respond. For instance, because you have amazing margins with your best customers, and the incentive to serve a segment that doesn’t look very profitable to begin with, those incentives are just really muted.

Or you might have firm internal processes that make it really difficult to serve a new segment with much different demands in a way that seems both effective and eventually profitable. Even once you know about disruption, in part, it’s such a powerful idea because it speaks to the tendency not to respond. Even though from the outside it looks like you have all the resources, you have all the talent, you have everything that it would take to be responsive.

DEREK VAN BEVER: Felix, you’re reminding me, our colleague, Chet Huber, came into my office one day after I had been teaching in the course for a couple of years. He sat down in front of my desk and he said, “You do realize that this is a psychology course, right?” And boy, was that true.

AMY BERNSTEIN: Rita, Clay brought this idea to a much broader audience through HBR and through his book, The Innovator’s Dilemma. Tell us how that was received.

RITA MCGRATH: Well, I think before we get to Innovator’s Dilemma, let’s talk about “Disruptive Technologies: Catching the Wave,” because that was the HBR article that preceded it. Everybody’s forgotten this now, but he co-wrote that with Joe Bower, Harvard’s own Joe Bower, who had written a whole series of books and articles, and research drafts on how fundamental the resource allocation process is to corporate decision-making of all kinds.

The original idea was to build on what Derek was saying, companies allocate resources according to a logic, and that logic is sometimes not necessarily in their own best interest. When the book came out, The Innovator’s Dilemma, that was in 1997. This is another thing we’ve all forgotten, which is it did not become a runaway best-seller right away. It took a couple of years.

And if memory serves me, it was a picture of Clay with Andy Grove of Intel on the front cover of a business magazine. I think it was Forbes. The two of them are on the front cover, and Grove basically saying, “I am changing the entire direction of my company because of Christensen’s theory.” That’s when it hit the masses.

AMY BERNSTEIN: That’s exactly when I remember becoming familiar with it for the first time. I’d forgotten that. Thank you for that. Felix, why do you think the idea struck a chord? Why did the book finally take off, the idea finally take off? What was happening at that time?

FELIX OBERHOLZER-GEE: When we think about the late 1990s today, of course, what we think of most commonly is that the dot-com bust when the bubble burst. But of course, before the bubble burst, there was a dot-com boom. There was a deep sense that technology would change things in really radical fashion. It’s not a coincidence that Andy Grove and companies like Intel were under the impression that the future could look radically different from the way the past had looked. That past success didn’t really guarantee much when it came to predicting future success.

Part of that, I think, is interlinked with the way the new technologies created network effects. The idea, that as my technology scales, as I get lots of customers, as I get broad adoption, the value of technology increases correspondingly. The personal computer, the early beginnings of the internet, everything spoke to technology and network effects, in particular, would become dominant features of the business landscape. Now, one thing that is true, if you operate in environments with very strong network effects, on the one hand, they’re a real formidable barrier to entry.

But just like they fuel growth and they can make you very successful in a short period of time if successfully challenged, you can then also lose everything in a very short period of time. Andy Grove’s famous management mantra that instructed everyone to be really paranoid, had in part to do with how technology changed and how technology gave rise to business network effects that created stability and instability at one and the same time. That was obviously fertile ground for a thinker who came along and said, “Well, it looks like you’re doing really well today, but actually your success today may hide in some sense, the undoing of your business in the future.”

AMY BERNSTEIN: Derek, was that paranoia that Andy Grove was pushing? Is that what made the idea so relevant to businesspeople or what was it that made it resonate?

DEREK VAN BEVER: Well, first, unlike many academics, Clay was himself a businessperson earlier in his career. He instinctively understood the relevance of his work to business leaders. He understood the angle at which a businessperson would approach a question. In fact, he was answering the question he had had when he left business to come to academia. He was also careful never to pretend that he knew more than his audience about their business.

In that famous encounter he had with Andy Grove, in which Andy Grove kept asking him to say, “What does disruption mean for Intel?” Clay said, “I’ll explain the theory of disruption to you, but you know your business better than I do. You’re the one who’s got to figure out what the implication is for Intel.” He famously said, “I would’ve been killed if I had tried to out Andy Grove, Andy Grove on what the implication of disruption was for Intel’s strategy.”

AMY BERNSTEIN: Rita, who was the first to embrace it? We know about Andy Grove, of course, but what industries, where did the uptake happen?

RITA MCGRATH: I think the uptake happened in industries that were being challenged so automotive, for example. The advent of really inexpensive but super, high-quality, smaller cars in the ’70s and ’80s, had completely freaked that industry out. They glommed onto this theory as, “Oh, they were low-featured, they weren’t as good on the dimensions of merit that we’d previously competed on.” But the disruption theory gave the incumbent Big Three car makers an out.

I think those kinds of industries, steel, automotive, where they felt that there were these things happening at the low ends of the market. I think the other thing that made it popular at the time was, and we’ve forgotten this now, but there was a time in American business where entrepreneurship meant you couldn’t get a real job. It was not the glam, cool thing. The guy you wanted to be was the guy in the gray flannel suit.

I would say beginning in the Reagan Administration mid-‘80s, and then leading up to the dot-com boom, that was really when entrepreneurship, the whole idea of startups, started to be something people took seriously. Before that, if you weren’t Ford or 3M or something, people didn’t really think about you as a force for change in the economy. I think that moved towards entrepreneurship.

I would put it to the rise of companies like Microsoft, where briefly, Bill Gates was the most valuable man in the world. It legitimated that whole field. Then following closely on the heels of that was this idea of corporate entrepreneurship, which is we need to be able to create new businesses from within, and then we need to be doing this continuously. We can’t just have one great idea and live on it for decades, no more.

AMY BERNSTEIN: Did everyone embrace this theory when it finally took off? Or were there some who said, “No, that’s not making sense”? Were there critics?

RITA MCGRATH: Oh, there always are. Oh, there always are. There’s always people that say, “Are you kidding? I’m, insert name of company. Gillette in razor blades, or Pepsi or Coke or these big franchises.” There’s always people that say, “Don’t be ridiculous. There’s no way some little fly-on-the-wall company is going to be able to attack us in any meaningful way.” There was a whole chunk of people who just didn’t buy it. What I would say, and I want to build on what Derek was saying, and to some extent Felix, it gave managers an explanation. It gave them an out.

It said, “You’re not a bad manager, because you’re attending to your best customers and you’re trying to go upmarket, and you’re trying to increase your margins. You’re trying to do all these things that all the business textbooks at the time said was the right thing to do.” It doesn’t mean you’re a bad manager, but you can still find yourself in trouble. I think it was that combination of providing an explanation for a phenomenon that had not gotten a lot of attention up to that point. But also giving people an out saying, “Oh, I was hit by the innovator’s dilemma. Nobody could have seen that coming.” Right?

DEREK VAN BEVER: Right.

AMY BERNSTEIN: But did it explain anything else, Felix? Were there any puzzling business behaviors or phenomena that this theory helped explain, other than the one that Rita just described?

FELIX OBERHOLZER-GEE: I think what Rita described is really the core of what was appealing, and it often came across as a puzzle ex post. Once you see that Netflix has successfully disrupted Blockbuster, then the big question, of course, is, “Oh my God, if Netflix saw this opportunity, why didn’t Blockbuster, in the beginning, have a DVD shipping service? Why didn’t they see the promise of the internet?” In some sense, the most popular version of the theory that often we couldn’t see it because no one knew that it would be so big.

There’s 15 ideas around the corner that go nowhere. How am I to pick the one that I should really pay attention to? That explanation is much more disquieting, I think, and hard to live with because it doesn’t really tell you what you can and what you cannot do. It replaced that with an explanation that said, “Yes. Of course, it’s bad luck someone else had a really promising idea, but your incentives were actually not to respond in the first place.” That’s exactly why disruption is something really powerful.

Because your systems are set up in a way, your incentives are set up in a way, that in the moment the company that seems to have all the resources, that seems to have all the capabilities to do something, that the disruptor often does—typically, not a great quality—why the incumbent wouldn’t really do that successfully.

AMY BERNSTEIN: Derek, let’s get into the criticism that the theory has drawn. There have been a few critics. Jill Lepore, the Harvard historian, most notably, who said that there really wasn’t enough evidence to justify the theory. Well, first of all, what’s your view of that? You worked very closely with Clay. How did he respond to that criticism?

DEREK VAN BEVER: Anyone who knew Clay, knows that he had a handmade sign in his office that said, “Anomalies Wanted.” And it’s true. One of the things that made him such a powerful thinker, was that he was so humble and so open to criticism. It wasn’t as if you spot something that the theory doesn’t cover and say the theory, therefore, is discredited. For Clay, that was for him a building block. Now, we get to dig in and make it better.

That disruption theory was still under construction, absolutely fit Clay’s worldview. It wasn’t so much that businesspeople criticized the theory. I think the academy had a really hard time with it, in part for the reason that Felix is mentioning. That people would say, “Sure, ex post, you can spot disruption, but can you spot it ex ante? Can you spot the areas where disruption prospectively is going to be operative?”

Work has been done on that, but that was very much out there. Then also, disruption is not built on a quantitative model, which is the coin of the realm today, of course, so it’s really hard to determine the boundary conditions. Anybody who’s done research on growth, you have to define what success and failure are, and there is no objective standard. You’ve got to figure out, “Okay, what’s the structure of the experiment?” And then run it.

I will always remember, I went to Clay once with what I thought was a really smart question. I said, “Clay, how can you tell when a disruptor becomes an incumbent?” He looked at me indulgently, and he said, “Derek, you do realize these are just constructs, right?” It was he had this revolutionary idea, but he also realized he’d given names to forces, and there was still so much to be discovered.

RITA MCGRATH: Yeah, and I’ll jump in on this. Very famously, he was wrong, by the way, about some of the top-of-the-line innovations. He very famously predicted that the iPhone would fail. One of the most profound critics of the theory of disruption is Safi Bahcall, who wrote a book called Loonshots. He’s biotech CEO, he’s a trained physicist, da, da, da, da, da. In his work, what he’s looking at are these unloved, crazy ideas that some passionate person is pushing.

So something like mRNA virus chains and discovery, all kinds of discoveries. He called them loonshots because it wasn’t obvious that they were economically viable. But his argument would be very often what turns into a disruptive technology, is actually a bunch of people pursuing what they think is a sustaining technology. It ends up through the twists and turns that discovery takes, it ends up actually being completely disruptive.

An example of that would be the invention of the microprocessor. The people that came up with that stuff, were actually looking for better vacuum tubes. They thought they were doing sustaining innovation, and it turned out to take them in a completely different direction. I think there is a nuance to this, which is separating out the intent of the people making these discoveries from the actual market consequences.

AMY BERNSTEIN: Felix, any thoughts?

FELIX OBERHOLZER-GEE: I always liked Clay’s distinction in the article that he wrote for Harvard Business Review in 2015, where he explains why Uber is not a disruptor in his view. First, the theory is not really built to explain which of the disruptors is going to be successful. Even if you expose, see the patterns, say, “Oh my God, that’s amazing what they did, because they went in at the low end and they had a really great idea. Ultimately, built an amazing business.”

There’s nothing in the theory that out of the hundreds of people that try to do this, who’s going to be successful and who’s not going to be successful. Then the second point that he makes in that article that I’ve always found very important, and often among the critics, I think poorly understood, is that there is a sense of when is it going to happen fast and when is it going to take a long time? But ultimately, there’s very little in the theory that would describe end states.

That is if you see a company, a big, large incumbent that gets disrupted, can you say anything about the eventual size of that organization? Can you say anything about the return on investor capital of that company? The answer is, by and large, no. It might be that the segment that they hold onto, perhaps it’s a sliver at the very high end of quality, where you have customers with very high willingness to pay.

You can maintain perhaps a smaller but a financially super, super successful business. The idea of being disrupted, is not so much the disruptor has to, I don’t know, go bankrupt. Or it’s like it’s only really disruption if it looks like Kodak.

AMY BERNSTEIN: Rita, what was it about the way that Clay communicated that helped spread his ideas?

RITA MCGRATH: That is such a good question because I have had so many conversations with my fellow innovation professors over the years, who would say things like, “I came up with the concept of, fill it in, ambidextrous innovation, the attacker’s advantage.” There’s a whole list of things, and they’re very miffed that, “Well, I came up with that and nobody paid any attention. Clay talks about it, and everybody thinks it’s the best thing since the miracle of bandwidth.” I think I’d point to three things, master storyteller, absolutely masterful storyteller.

When Clay illustrated a phenomenon, he used relatable examples. He used an interesting story, he used a twist, and people could see themselves in that story. Second thing he did, was he took ordinary things and made them really interesting. I’ll go back to one of his most famous parables ever, the parable of the milkshake. What’s the job a milkshake has to do for you? People would be listening to it going, “You know, you’re right. At lunchtime, I have a different job I need to be doing, than when I’m picking my kids up from school. Yes, I see that now.”

He had that way of making the ordinary seem really extraordinary. Then I think the third thing was he was genuinely interested in your response to what he had to say. Many professors, I won’t name names, but many professors are much more interested in you hearing what they have to say, than being interested in what you have to say. I think with Clay, it was always the other way around.

AMY BERNSTEIN: Coming up after the break, we’re going to explore how the common perception of disruption is drifted from its original meaning. What lessons are there for us today? Stay with us.

Welcome back to 4 Business Ideas That Changed the World: Disruptive Innovation . I’m Amy Bernstein. Felix, let’s pull the camera back a little bit. How has Clay Christensen’s theory of disruption changed the way we think about strategy and competition?

FELIX OBERHOLZER-GEE: Well, in a way, the idea is almost a victim of its own success, so disruption is anywhere. In fact, the way most people use the word disruption these days has very little to do with Clayton’s idea. We come up with a new flavor for yogurt and people say, “Oh my God, the market for yogurt has been disrupted.” Despite that, I think it has done two things. The first is what Rita mentioned earlier, it’s given entrepreneurship a prominence.

It’s gone to a point now, when I tell my MBA students that most of the time, most innovation comes from large, established organizations, they look at me in complete disbelief. They actually don’t really think that large, incumbent organizations do anything that is all that innovative. It’s almost like the flip of what Rita described earlier, where we thought that, “Oh, if you’re an entrepreneur, you must be a loser.”

Now we’re giving, I think generally speaking, not enough credit to large companies and all the pretty amazing things that they do. One of the consequences of using disruption completely indiscriminately is that it’s now become synonymous with success. We look at Uber and they seem successful. Then we say, “Oh, the market for taxi services has been disrupted.” Success described in these very, very general terms I think is actually not very useful for setting strategy.

AMY BERNSTEIN: That’s interesting. If we now equate disruption with success, what about the other side of that, Rita? Can the theory of disruption be blamed for business failure? Can we say it’s brought down some companies, some firms?

RITA MCGRATH: I don’t know that the theory’s done that. It is possible to have badly managed firms in just about any circumstance. I think this builds on what Felix was saying. When the stories get told after the fact, we miss so much of what actually happened. What actually happened at Blockbuster was not the common mythology. The common mythology is Netflix emerged out of scorched earth and took the world by storm with CDs that you could mail in a red envelope. That is not true. Netflix in desperation, went to Blockbuster to try to be acquired.

They wanted to be Blockbuster’s online arm, and Blockbuster laughed at them. Literally laughed at them and said, “Get out of my office. What are you people? You’re a four-person dingbat operation, and we’re supposed to take you seriously?” That’s one of those stories that gets misunderstood. Kodak’s another one. The guy that sank Kodak had been running the printing business at HP. Lost out on the CEO race to run things at HP. And steered that company right over the cliff that was printing at home just at the moment that screens became possible, to be good enough to show pictures.

A lot of this stuff doesn’t really get remembered when we recall the stories. I don’t think the theory brings companies down. What I think brings companies down is the following: A failure to adequately balance today’s investments versus tomorrow’s. An unwillingness to make the financial and personnel commitments to little, new things. I see this all the time. You got your core business and it’s trundling along like an eight-lane highway. You got something with four people and a passionate advocate in charge of it, and it looks completely insignificant in the early stages.

When you think about why established companies get undone, it’s not because they didn’t make big, courageous moves, it’s because they didn’t allow the flourishing of lots of small, low-cost moves.

DEREK VAN BEVER: I completely agree with Rita. You can’t blame a theory for being explanatory. In fact, there has been research to try to validate the proposition that what disruption actually does through targeting non-consumption is to expand markets.

It may be that the providers of products and services change, revolve over time, but consumers benefit because there are more and more people who are available to consume products that are less expensive, more convenient, et cetera.

AMY BERNSTEIN: How has the theory evolved since it debuted, Felix?

FELIX OBERHOLZER-GEE: One of the really big additions was to distinguish between different types of disruption. We just talked earlier about the low-end entry, the low-end foothold that I think was very much on Clay’s mind when he first wrote about disruption. Toyota’s entry into the car market being one of the prominent examples. There wasn’t all that much in his ideas regarding competing against non-consumption. The idea you want to be that lower quality, lower priced version of something that we’re familiar with, or are you really competing for a segment that is not in the market at all?

Those differences turn out to be super, super important. In that sense, the theory has become richer. I think there’s also a little more of a sense that it’s not really a recipe. It’s not as though, “Oh, I follow this particular recipe and then I know I’m going to be successful.” We just know that the chances of entrepreneurs being successful are pretty low to begin with. Just like the probability of being disrupted if you’re a large and successful business are probably not all that large.

DEREK VAN BEVER: Could I add one thing to that? I completely agree that with Felix, that if you go back to [The Innovator’s] Dilemma, Clay was really describing one flavor of disruption at that time. Not new market disruption. But also, I think over time, you could see a shift in his language from talking about a disruptive technology to a disruptive positioning.

That it was really the creation of a new business model in all of its attributes. What’s the value proposition? What’s the profit formula, the capabilities, and priorities in that model? In fact, a technology can be shaped to be sustaining or disruptive. What is the model that’s being brought to market to compete with incumbents?

AMY BERNSTEIN: For the businesses that are trying to avoid being disrupted, Rita, what’s the best advice out there for them?

RITA MCGRATH: Well, you lift the lid off of any corporate portfolio, and it’s horrifying. What you see in there is somebody’s pet bunny from three CEOs ago and nobody said, “Why are we still doing that?” Or you’ve got these mission-critical, absolutely important projects that like half an intern is working on so you have this real disconnect.

DEREK VAN BEVER: These are the scars of a veteran, for sure!

RITA MCGRATH: I have been around the block on this. Anyway, then the last thing is your reward system. What do people believe they’re going to get rewarded for around here? One of the things that companies needed to do, if they’re going to avoid getting disrupted, you have to be in the game and you have to be willing to support small initiatives. There’s got to be some slack resource, there’s got to be the willingness to fund it. The number of times I have seen companies say, “Oh, we don’t want, we’re not going to be disrupted. We have this thing going on over here.”

No assumptions tested, no low-cost commitment tests. Big project teams with all the money in the world, on the assumption that they know what they’re doing and they don’t. There’s a real need for organizations that want to behave this way, to be willing to put some money behind what I call options. The idea of making a small investment today that could, not that will, but that could give you the right to create future choices. Companies that are going to be successful are going to get a lot smarter about that.

AMY BERNSTEIN: Well, let’s look at it from the other side, Derek. What’s the best advice for entrepreneurs or upstarts, who want to take advantage of disruptive innovation?

DEREK VAN BEVER: Yeah, pretty simple advice. Keep your cost structure low so that you’re able to exploit opportunities that are uninteresting to incumbents, too small, too remote, and target non-consumption. Don’t go after customers that they value, but rather go after segments that they’ve dismissed. The brass ring is if you can go after a segment that they’ve dismissed and they look at you and they go, “They just don’t understand this business.”

They let you grow a little bit and you get some success, and they look back at you a little bit later. And they go, “Oh, those poor dears. They just are not going to learn, are they?” Then they completely ignore you. That gives you the opportunity then to build from the bottom unmolested.

AMY BERNSTEIN: Felix, where does applying this theory most often go off the rails? Where are the difficulties in applying it?

FELIX OBERHOLZER-GEE: One difficulty for entrepreneurs is that it’s pretty difficult to distinguish non-consumption that actually has the promise from situations where there’s just no interest. You’re probably familiar with SimpliSafe, the home security company, I think is a beautiful example. Eleanor Laurans, one of the co-founders, she sits in Clay’s class. She literally goes out and tries to apply the theory thinking, “Why is there no home security for renters?”

How is it that leading company back then, that now ADT is serving homeowners, but renters are afraid maybe, or have a willingness to invest in home security as well. They built the company, literally built on the principles that she learned in the classroom. That yes, it’s a little less convenient, you don’t have someone who comes by your house and installs the equipment. You have to do that yourself, and so on, and so on. Then it turns out renters were just not really all that interested.

The fact that SimpliSafe is a very successful company today is just because a large fraction of homeowners actually found the value proposition of the company quite attractive. Distinguishing instances when you look at non-customers and what I tend to call near-customers, customers whose willingness to pay is in a useful vicinity, that turns out to be really difficult. Then for incumbent firms, I think one of the main difficulties is even if you’re successful at recognizing potential for disruption. Even if, as Rita suggested, you follow Clay’s advice and you set up a small group.

Typically, you take it out of the regular bureaucratic procedures, and you set it up as a separate entity, and they don’t have to worry about funding for a little while. We have lots and lots of examples where companies have done this successfully, where they build a shadow operation. Think Walmart, its online operations that get established, a million miles away, at least mentally, from Bentonville, in Silicon Valley, of course. Then there’s just no real way to bring that small, agile organization back and attach it to the supertanker.

You build something sort of interesting, sort of successful, but given the scale of the incumbent, it’s pretty meaningless. I think incubating new ideas, that’s what many incumbents are quite good at. But marrying these ideas back to the supertanker that has been on a set course for a long period of time, I think that remains extraordinarily challenging, with not that many examples of companies that have done this successfully.

DEREK VAN BEVER: Felix, you’re reminding me, Clay, when he was in the classroom, he would take that big index finger of his and he would go, “Where do you stick it?”

FELIX OBERHOLZER-GEE: Yeah.

DEREK VAN BEVER: His frustration was that companies would always try to stick it underneath the division that it is effectively disrupting. You know how that story ends, right?

FELIX OBERHOLZER-GEE: Yes.

DEREK VAN BEVER: Where it’s, “Oh, we’ll take care of this. Don’t worry, we’ll make sure that this grows just as fast as it should.” That’s often the last that you hear from it.

FELIX OBERHOLZER-GEE: Yeah. But then his view that simple organizational separation will lead to long-term success, that I think has not really been true for many companies either. I think that’s a really important question. Then the second, if you see disruption, if you think it’s going to happen, how good are you going to be? What are the chances that that’s a game that you can play successfully? Think of the large energy companies right now.

Most of them are making some investments in renewables, and we already see quite interesting dividing lines. Some of them being good at it, and some of them basically wasting money that doesn’t seem to have much of a payoff. Disruption itself implies that it’s almost costless to respond. But in the end, there’s capital, there’s talent, there’s attention that is required, if in fact, you want to be building something successful.

In an environment where entrepreneurship and the opportunity cost of trying new things are typically downplayed or are seen as very low, I tend to remind my students that the opportunity costs of trying to play yet another game, they can be quite sizable.

AMY BERNSTEIN: Let me throw out a question to the whole group here. Where do you all think our understanding of disruptive innovation is headed? What future are we looking at? I’ll go around the horn here. I’ll start with you, Rita.

RITA MCGRATH: Sure. What I’m encouraged by is when Clay and I were working together in the ’90s, we’d never actually wrote a paper together, we co-presented a lot of stuff, but not co-authored. But anyway, we were talking about this in the ’90s, and we would be like the only people in the room talking about these phenomena, and people would look at us as though we had two heads—or four heads I guess, between the two of us. Because I was talking about, “Well, you need to plan differently when you don’t have data.”

Clay was talking about, “Well, this little upstart could cause you problems, if the right circumstances prevailed.” I think what’s happened in the intervening decades, is people are now aware. People are now willing to say older models of strategy don’t apply, that newer models really make a difference. That is a far cry from being able to put that awareness into systemic action. I think what we’ve made a lot of progress on is the conversations are different.

There’s a lot more knowledge that there’s more to life than just sustaining innovations. That there are these phenomena we need to pay attention to. I think awareness is where we are. I think the next big chasm to be crossed is how do we now put that in practice in the management structures that we use to run large, complex corporations? There is so much knowledge about how you build innovation capability, how you build disruptive potential, how you actually make these things happen.

And yet, most managers aren’t taught it. If you think about the lifecycle of a competitive advantage, it has to come from somewhere. It has to come from an innovation or an invention, or an idea or something. Then you have to scale it, which is getting it into the business. Then you have this delightful period of exploitation, where you get to enjoy the fruits of your labor. That’s what we teach people. We don’t also teach them about what happens when the shoe has turned, the thing’s gone obsolete. Your 386 microprocessor is no longer the state-of-the-art. How do you now reconfigure your company to take advantage of the next new thing? Those are skills were not yet mainstream.

DEREK VAN BEVER: Yeah.

AMY BERNSTEIN: Derek?

DEREK VAN BEVER: Yeah. Going back to an aside I made a while ago, that when Chet said, “You know this is a psychology course, right?” It is interesting that 27 years after the publication of that book, we’re still bound to get caught up in this phenomenon. To pick up on what Rita said, I think we are going to understand more about how to respond to the phenomenon of disruption as incumbent companies. We’ll understand the different rate at which it works its way through industries.

Fifty years in steel, seemingly overnight in education, and we’ll understand more the importance of the performance metrics that we honor. What would’ve happened if US Steel had measured not gross margin, but net profit dollars per ton? Would they have abandoned such a huge swath of the steel market and imagined that they were doing the right thing? I think we’ll get better at continuing to tease out this puzzle of how do we confront our own cognitive weaknesses and blind spots and respond with more alacrity, more quickly and more effectively?

AMY BERNSTEIN: Last word to you, Felix.

FELIX OBERHOLZER-GEE: I think to me, one of the really big changes in technology in the economy today, is the ease with which companies can produce high-quality services and products at incredibly low cost. Remember, part of the dilemma for the incumbent, comes from the fact that you’re serving customers who have very high demands. And the implication was you, as a result, have very high cost. That makes it basically impossible for you to respond. Now today, we see so many companies that have amazing quality and a cost advantage at one and the same time.

This old notion in strategy of being stuck in the middle when you try to be both high quality and low cost, and then you end up being not really high quality because you’re thinking about cost. You end up not being really low-cost because you’re thinking about quality as well. This notion of “stuck in the middle,” to the extent that it doesn’t really apply, frees up incumbents to respond in a much more flexible manner to serious threats of disruptors.

Then it struck me as interesting, even in today’s conversation—I know I’m guilty of it myself—how many of our examples are product related? Well, what about services? In services, it’s almost true by definition that you get fabulous service from engaged employees. And the moment you have highly productive, highly engaged employees, you have this interesting combination of having a potential cost advantage that comes from high productivity. The very same ingredient that produces your cost advantage now produces your ability to satisfy even the most demanding customers.

That, to me, is a change that doesn’t say, “Oh, if I’m an entrepreneur, I shouldn’t use disruptive innovation as my guideposts, where to enter, how to develop my business.” But it says that the balance of who’s going to be successful and how easy it will be to disrupt large organizations, that balance is going to change over time in favor of large incumbents. The very formidable difficulties of disrupting their businesses.

HANNAH BATES: You just heard Derek van Bever, Rita McGrath, and Felix Oberholzer-Geein conversation with Harvard Business Review editor Amy Bernstein on HBR IdeaCast.

Derek van Bever is senior lecturer and director of the Forum for Growth and Innovation at Harvard Business School, Rita McGrath is a professor at Columbia Business School, and Felix Oberholzer-Gee is a professor at Harvard Business School.

We’ll be back next Wednesday with another hand-picked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review.

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This episode was produced by Curt Nickisch, Anne Saini, and me, Hannah Bates. Ian Fox is our editor. And special thanks to Maureen Hoch, Nicole Smith, Erica Truxler, Ramsey Khabbaz, Anne Bartholomew, and you – our listener.

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Incorporating resource optimization for sustainable airline service innovation business decision model: toward circular economy policy achievement

• S.I. : OR for Sustainability in Supply Chain Management
• Published: 24 April 2024

Cite this article

• Chih-Hao Yang   ORCID: orcid.org/0000-0003-2983-3869 1 ,
• Lopin Kuo 2 ,
• Yen-Yu Liu 3 &
• Kai-Ling Pan 4  

The United Nations Sustainable Development Goals (SDGs) provide a practical framework for addressing a sets of interconnected global economic, environmental and social concerns. Despite the circular economy providing an optimal vision for the development balance between the environment and the economy, the main challenge regarding industrial practices is its innovation business model. The airline industry has experienced rapid growth and has become an increasingly significant actor in the global transport chain. However, resource optimization is a key enabler for a circular economy policy promotion in the sustainable airline service industry. This study developed an innovation business decision model for sustainable airline service, which aims to help managers evaluating a set of the most effective criteria for selecting an airline business model. It also sought to understand sustainable airline development and identify its causal-effect factors, as well as the optimal portfolios of a service business model. Further, this study integrated the Decision-Making Trial and Evaluation Laboratory (DEMATEL), Analytic Network Process (ANP), and Zero-One Goal Programming (ZOGP) for decision evaluation on sustainable aviation service innovation under the consideration of resource optimization. The results revealed that customer requests and natural sustainability were the catalysts for evaluating a sustainable airline service innovation business model. On the other hand, converting airliners to freighters (CAF), resource supply chain (RSC), and jet engine leasing (JEL) were the optimal business model portfolios. This study highlights the importance of understanding the innovation business model evaluation for sustainable airline service. Furthermore, it offers a decision infrastructure to managers to help the airline industry realize sustainable circular value, simultaneously, it also contributes to achieving United Nations Sustainable Development Goals (SDG 7, SDG 9, and SDG 17).

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This article was funded by National Science Council, NSTC 112-2410-H-130 -006 -MY2, Chih-Hao Yang, MOST 111-2410-H-130 -012 -, Chih-Hao Yang.

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Yang, CH., Kuo, L., Liu, YY. et al. Incorporating resource optimization for sustainable airline service innovation business decision model: toward circular economy policy achievement. Ann Oper Res (2024). https://doi.org/10.1007/s10479-024-05981-y

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Received : 15 July 2021

Accepted : 28 March 2024

Published : 24 April 2024

DOI : https://doi.org/10.1007/s10479-024-05981-y

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