The
business world has never been more accessible. Recent technology developments
mean that the days of having to make huge investments, train a hefty team, rent
office space and buy expensive equipment, are long gone. Now, all that’s needed
to kick-start a corporation is an internet connection, some initial investment
funds and an innovative idea that meets market needs. Global internet access
and a worldwide culture of connectivity has rewritten the rules of business. It
is now no more difficult to sell your product to a company based on the other
side of the world, than it is to sell it to your next-door neighbour.Today’s
global market is accessible through simply the unlocking swipe of a finger. One
tap, click or scroll can connect you to millions of potential customers
instantly. There are infinite benefits to this for entrepreneurs, but only if
they can implement business strategies that harness this opportunity. Gone are
the days of having limited scope to sell your product. Now, any group you could
possibly imagine are not only within your reach, but are waiting for the Next
Big Thing to sweep them into a buying frenzy. With more people pursuing
enterprise with a reach that’s vastly expanded, the stakes of being an
entrepreneur have never been so high. As well as the business world being more
accessible, it’s also becoming more competitive. This means the corporate game
is more driven than ever, and global markets mean the potential rewards are exponential.
Whilst the digital age has made it easier to become a successful entrepreneur,
it’s those who are committed to investing in their future that will capitalize
on this opportunity. By committing to a business degree, you will gain
knowledge from business leaders that will prove invaluable in the ever-changing
business landscape. A business degree will prepare you for the dynamic world of
21st Century business. Whilst anyone can start a crowd funding page to launch
their ethical fashion brand, studying the subject at university level will instill
an understanding of complex market forces. As a business student, you will
learn about business structures, management strategies and financial trends;
see it as an investment of the knowledge tool-box that will propel you to the
front of the business world. There’s no telling what the future holds, but if
tech trends continue, globalization will spread to developing countries as it
becomes cheaper to be digitally-connected. The only way to stay at the front of
this race to profit is to be aware of the underlying theories that a business
degree reveals.
DEFINITION OF
TERMS
Before going into a broader understanding of this
discourse, it is worthy of note we give definitions to the words “dynamic” and
“static”.
The term dynamic means continuously
changing or developing.
(Cambridge advanced learners dictionary
and thesaurus)
The term static means standing or fixed
in one place (Merriam-Webster dictionary).
BUSINESS MODEL
A business model describes the design or architecture of the
value creation, delivery, and capture mechanisms [a firm] employs. The essence
of a business model is in defining the manner by which the enterprise delivers
value to customers, entices customers to pay for value, and converts those
payments to profit (Teece, 2010).
BUSINESS MODEL AND DYNAMIC
CAPABILITIES
A business model describes architecture for how a firm
creates and delivers value to customers and the mechanisms employed to capture
a share of that value. It's a matched set of elements encompassing the flows of
costs, revenues, and profits. As the link to profits makes clear, the success
of a business depends as much on business model design and implementation as it
does on the selection of technologies and the operation of tangible assets and
equipment. The business model provides a pathway by which technological
innovation and knowhow combined with the utilization of tangible and intangible
assets are converted into a stream of profits. (Teece, 1986, Teece, 2006).
While the resource-based view of the firm focuses on the
bringing together of assets that meet the four key criteria defined by Barney (1991)
for resources and capabilities that can support durable competitive
advantage—valuable, rare, imperfectly imitable, and non-substitutable
(VRIN)—this is only one part of a process. The VRIN resources must be harnessed
to a coherent strategy and a sound business model. Most successful business
models, however, will eventually be imitated to some extent by other firms, and
VRIN assets associated with a model can provide at least some protection
against inroads by competitors. The design and operation of business models are
dependent on a firm's capabilities. The crafting, refinement, implementation,
and transformation of business models are outputs of high-order (dynamic)
capabilities. Dynamic capabilities, which are underpinned by organizational
routines and managerial skills, are the firm's ability to integrate, build, and
reconfigure internal competences to address, or in some cases to bring about,
changes in the business environment (Teece et al.,
1997, Teece, 2007).
The strength of a firm's dynamic capabilities is vital in many ways to its
ability to maintain profitability over the long term, including the ability to
design and adjust business models.
Dynamic capabilities are easier to
understand in the context of an organization's overall portfolio of
capabilities, which can be thought of as working on two levels (Winter 2003). At the base level are operational
and other ordinary capabilities, the routine activities, administration, and
basic governance that allow any organization to pursue a given production
program, or defined set of activities, more or less efficiently. Above these
are a layer of dynamic capabilities, which can be divided into “micro
foundations” and higher-order capabilities (Teece, 2007).
Micro foundations involve the adjustment and recombination of a firm's existing
ordinary capabilities as well as the development of new ones. They are
second-order dynamic capabilities that include new product development, expansion
into new sales regions, the assignment of product mandates across divisions in
large companies, and other actions that constitute astute managerial decision
making under uncertainty. Guiding these are the high-order dynamic capabilities
by which management, supported by organizational processes, senses likely
avenues for the future, devises business models to seize new or changed
opportunities, and determines the best configuration for the organization based
on its existing form and the new plans for the future.
In this paper, I will be referring
primarily to the highest-order dynamic capabilities, the sensing, seizing, and
transforming competencies that aggregate and direct the various ordinary
capabilities and the second-order dynamic capabilities. The highest-order
capabilities are those on which top management is (or should be) most focused.
They are the most relevant for the innovation and selection of business models
that address the problems and opportunities the company is endeavoring to
solve/exploit. The paper begins with brief definitions and expositions of
business models and dynamic capabilities. This is followed by a discussion that
separates business models from strategy and then positions both within the
dynamic capabilities framework. Next comes a discussion of the primary
interactions between business models and dynamic capabilities: (1) the
contribution of dynamic capabilities to business model innovation and (2) the
importance of organizational design for both constructs. A concluding section
provides a summary and discusses implications for future research. In other words,
identifying unmet customer needs, specifying the technology and organization
that will address them, and, last but by no means least, capturing value from
the activities are important functions of the business model. Without the right
balance between creation, delivery, and capture, the model will not be in
operation very long, at least not by for-profit enterprises. In short, the
business model outlines the (industrial) logic by which customers are served
and money is made.
DYNAMIC CAPABILITIES
Dynamic
capabilities, as mentioned in the introduction, include the sensing, seizing,
and transforming needed to design and implement a business model. They can
enable an enterprise to upgrade its ordinary capabilities and direct these, and
the capabilities of partners, toward high-payoff endeavors. This requires
developing and coordinating, or “orchestrating,” the firm's (and partner
firms') resources to address and even shape changes in the marketplace, or the
business environment more generally. The strength of a firm's dynamic
capabilities determines the speed and degree (and associated cost) of aligning
the firm's resources—including its business model(s)—with customer needs and
aspirations. To achieve this, organizations must be able to continuously sense
and seize opportunities, and to periodically transform aspects of the
organization and culture so as to be able to proactively reposition to address
yet newer threats and opportunities as they arise.
Dynamic capabilities are
multi-faceted, and firms will not necessarily be strong across all types. A
firm might excel at sensing new opportunities but be relatively weak at
identifying new business models to exploit them. Or a firm might be good at
developing new business models yet be mediocre at implementing and refining
them. I will, however, abstract from this here. “Strong dynamic capabilities”
will generally mean strong (relative to competitors) in all relevant areas of
sensing, seizing, and transforming. An enterprise with strong dynamic
capabilities will be able to profitably build and renew resources, assets, and
ordinary capabilities, reconfiguring them as needed to innovate and respond to
(or bring about) changes in the market. The firm's resources must be
orchestrated astutely and coordinated with the activities of partner firms to
deliver value to customers. Dynamic capabilities are underpinned in part by
organizational routines and processes, the gradual evolution of which is
punctuated by non-routine managerial interventions. Although some studies e.g
(Eisenhardt, and Martin, 2000) restrict the definition of capabilities to
organizational routines and managerial rules, I see this as too restrictive.
Setting up an early-stage business
model, for example, depends as much on art and intuition as on science and
analysis. It is a part of dynamic capabilities that is unlikely to be fully reutilized
(Teece, 2012).Organizational processes, such as frequent status meetings to
evaluate short-term results of a new business model, are helpful, but they are
inadequate by themselves to determine the best choices from among the myriad
available options. A key element of a firm's dynamic capabilities for seizing
new opportunities in most cases will be the managerial competences for devising
and refining business models (Teece, 2007). In fact, over the past decade,
managerial competences have developed into the sub-field of dynamic managerial capabilities
(Helfat, and Martin, 2015) of which designing and implementing new business
models is an important feature. In the world of the Internet, it may even be
the most important feature. Dynamic capabilities are hard for rivals to
replicate because they are built on the idiosyncratic characteristics of
entrepreneurial managers and the history-honed routines and culture of the
organization (Teece, 2014). In addition, there is the uncertain limitability of
a complex system that even those directly involved may not fully understand (Lippman,
and Rumelt, 1982). Because they are a unique and valuable general-purpose
resource, strong dynamic capabilities can serve as a firm foundation for
sustainable competitive advantage. This is especially true the more deeply
embedded the capabilities are in the organization, and the less they are
resident only in the top management team.
Business Model in a Dynamic
Capability Framework
In
addition to defining what a business model is, it is also worth considering
what it is not. This section will more carefully distinguish between business
models, dynamic capabilities, strategy, and investment decisions. Some
definitions of business models (e.g., Chesbrough and
Rosenbloom, 2002)
incorporate strategy. While strategic analysis is inevitably tied to business
model design, I see it as an analytically separate and more detailed exercise (Teece, 2010)A strategy can be defined as “a
coherent set of analyses, concepts, policies, arguments, and actions that
respond to a high-stakes challenge” (Rumelt, 2011: 6). It maps out in broad terms how
the company will compete. Strategic analysis leads to the selection of a
particular business model, market segments, and a go-to-market approach over
others. It often leads to abandoning an old business model for a new one in
order to create and maintain a distinct advantage in the marketplace (Casadesus-Masanell and Ricart, 2011).
According to Casadesus-Masanell and
Ricart (2011: 100): “Strategy has been the primary building block of
competitiveness over the past three decades, but in the future, the quest for
sustainable advantage may well begin with the business model.” It is perhaps
more accurate to say that unique capabilities are the primary building block of
firm-level competitiveness because they enable business model design, which is
deeply intertwined with strategy. In many cases, corporate strategy dictates
business model design. At times, however, the arrival of a new general-purpose
technology (e.g., the Internet) opens opportunities for radically new business
models to which corporate strategy must then respond. Once in place, a business
model shapes strategy inasmuch as it constrains some actions and facilitates
others. By determining costs and profitability, a business model impacts the
very feasibility of a strategy. In the event of a conflict between strategy and
the business model, it falls to top management to determine which of the two
should change. The dynamic capabilities framework—a multidisciplinary model of
the firm with dynamic capabilities at its core—reflects this interdependence. A
simplified version of the framework, omitting feedback channels such as that
between organization design and dynamic capabilities, is shown in Fig. 1. Dynamic capabilities and strategy
combine to create and refine a defensible business model, which guides
organizational transformation. Ideally, this leads to a level of profits
adequate to allow the enterprise to sustain and enhance its capabilities and resources.
 |
Simplified Schematic Diagram of
Dynamic Capabilities, Business Models, and Strategy
|
Business
Model-Dynamic Capability Interactions
Businesses models are enabled by
dynamic capabilities in the sense that a dynamically capable organization will
be able to rapidly implement, test, and refine new and revised business models.
Successful implementation draws on management's architectural design, asset
orchestration, and learning functions, which are core dynamic capabilities. At
the same time, dynamic capabilities depend in part on the organizational
flexibility allowed or denied by business model choices such as whether to
outsource the manufacture of a new product or build a factory.
This section will focus on two
aspects of business model-dynamic capability interaction in more detail. First,
the importance of dynamic capabilities for business model
innovation. Second, the importance of
organizational design for both business models and dynamic capabilities.
Business
Model Innovation
As mentioned earlier, management's
ability to develop and refine business models is a core micro foundation of
dynamic capabilities (Teece, 2007).
This is just as true for designing the original model as it is for replacing
and recombining elements of the model over time. An initial step for the
(innovating) enterprise is sensing the existence of customers with unmet needs
who are willing and able to pay for a product or service that can rectify their
predicament. A successful business model provides a customer solution that can
support a price high enough to cover all costs and leave a satisfactory profit.
In most cases, the development of such a business model starts with a deep
understanding of the customer's predicament (sometimes called user needs) and
from familiarity with the dozens of models that exist already. In highly
competitive developed economies, it is difficult, but by no means impossible,
to invent an entirely new business model. Truly new business models are periodically
enabled by technological progress. The Internet induced a great wave of such
innovation, with many industries being disinter mediated in whole or part by
online companies. In an earlier era, the telegraph and the railroads triggered
and supported scale and scope (Chandler, 1990).
Today, the Internet has enabled new business models that are sometimes
orthogonal to scale, allowing niche activities to thrive. But it has also
unleashed massive network effects such as when business models employ n-sided
markets, like eBay, that connect large but scattered groups of small buyers and
small sellers on a global scale (Armstrong, 2006).
It takes time for business model
innovation to catch up to technological possibilities, perhaps because business
models are more context-dependent than technology. A new wave of business model
innovation will likely accompany the emergence of the “internet of things”
(IOT), in which formerly stand-alone physical objects are given the ability to
sense and communicate details of their status and environment. This creates
opportunities to meter how customers use a product, which might, for example,
enable a model of usage-based rental instead of a one-time sale. Moreover, the
availability of massive amounts of data from the sensors distributed throughout
the IOT creates a new kind of intellectual capital that can be sold or used as
the basis for either internal innovation or an external collaboration. Most
“new” (to a given firm) business models will be similar to older ones,
involving a permutation or hybridization of existing models. A typical example
would be a firm that excels in a particular area of operations – running a
restaurant chain, producing branded software, etc. – and leverages its
expertise into a services business such as consulting or customization. A video
game maker might offer “fermium” versions of games likely to find a mass
audience but charge up-front fees for specialized games designed for a niche
audience with a high willingness to pay. The opportunities for recombination
are virtually endless. Firms are unlikely, however, to choose from the full
menu of business models. As a practical matter, the choices depend, in part, on
the strength of the firm's dynamic capabilities (Teece et al.,
2016).
ENTER DYNAMIC PLANNING
Dynamic
planning enables companies to evaluate risks, seize new opportunities, adjust
to new challenges, react quickly and properly to threats, adapt to changing
technology, and make decisions that help it thrive. The organization must still
set unambiguous, broad, visionary goals. Goals are like a roadmap for
determining whether an opportunity has a high enough ROI to pursue. It’s like
planning a trip: If you don’t know where you are going, how can you tell if you
are on the right path to get to there? Dynamic planning still requires the
organization to create longer-term plans and goals. The big difference with
static, traditional planning is that you set a much shorter horizon one and
consider it an ongoing process rather than a one-and-done. The traditional
planning process is focused on predicting, or guessing, what will happen in the
future, often with a timeframe of a year or more. Dynamic planning
focuses on shorter-term time periods. The strategy is to concentrate one’s
efforts in a more step-by-step process to lead to your ultimate goal, all the
while adjusting to changes, both pro and con, that occur.
BUILDING FLEXIBILITY INTO YOUR PLANS
For
example, instead of estimating what the next 12 months will look like, break
your planning process down into four quarters and adjust the plans as each
quarter rolls off. Focus on the short-term while actively analyzing the results
of your efforts. By monitoring your activities in the short term, you will gain
the flexibility to affect change as your surroundings change. A simple way of
viewing this is to think about taking a car trip across the United States. Your
goal is to travel from New York City to Los Angeles, roughly 3,000 miles, and
you expect it will take six days. As you are traveling, you may encounter
traffic, road closures, weather, and other factors that cause you to deviate
from your expected path, but you remain focused on your ultimate goal. Your
attention is on the immediate situation, focusing on how to minimize your time
given changes in your environment.
The goal of dynamic planning is not
just about minimizing the downside; it is also about maximizing the upside. It
is difficult, if not impossible, to forecast, predict, or plan for unforeseen
opportunities. By breaking your planning process into smaller consumable
pieces, you’re better able to seize upon opportunities. Maybe a competitor goes
out of business or changes its business plan. With the flexibility to deploy
resources, for example, you can take immediate actions that will move you
toward your long-term goals and plans.
CONCLUSION
More generally, an organization's overall design and
structure affects both its business model innovation and its dynamic
capabilities. Innovation requires an organization that is creative and, in the
implementation phase, responsive. In terms of organization design, this
typically involves shallow management hierarchies and decentralized authority,
although the correct balance between delegation and control can take some time
to find (Foss, 2003).
The choice of whether work groups are tightly coupled or only loosely aligned
can influence the product architectures (e.g., integrated or modular) that the
firm is able to support (MacCormack
et al., 2012). Similarly, the design of a firm's incentive
system and values can reinforce or undermine its dynamic capabilities (Ireland
et al., 2009).
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