The Performance Effects of Replication and Renewal in Dynamic Environments

Speaker A Hank, who is a professor of strategic management and business policy at the Department of Strategic Management and Entrepreneurship at the Rotterdam School of Management. Erasmus. He has published extensively on strategic renewal, co evolution and new organizational forms. His book building the Flexible Firm how to Remain Competitive is quite well known. I'm sure many of you know his.

Speaker B Work and I'll turn it over to him.

Speaker C First of all, thank you for organizing this and a nice introduction. Also, thank you all for being here because I know there are many competing programs. So I really appreciate that. We talked about organization designing organizational culture and designing ecosystem. I would like to broaden this discussion even a little bit further. Designing or redesigning business models. So I would like to talk about designing business models and the performance effect of replication and renewal in dynamic environments. Yeah, the business model is a very fashionable concept received recently a lot of attention from practitioners, but also from management scholars and I must say also from organization design theories. And some scholars also differentiated between different design strategies for business models. They mean replication or upscaling of existing business models versus renewal, meaning creation of completely new business models. And we were just interested in what is the effect on these two types of business model designs on performance, especially considering contingencies like environmental dynamism. And there is a lot of research in this field going on, mostly case studies, simulations, but not a lot of quantitative empirical research. So the question of this study is how does environmental dynamism weaken or strengthen the relationship between these different types of business model designs and performance? There was our research question. Maybe first I could give here more than 1000 definitions of a business model. But I tried to focus on the three essential elements of a business model. So a business model is a collection of activity which an organization conducts to fulfill a market needs. If you compare all the definition of business models, then most scholars stress that a business model consists of components and describes the relationship between these components. And we see different models regarding business models. So the business model can fest or the value system consisting of different activities. And some people talk about activity systems. But I think the second element is most important that business model analyzes how value is created and more important, how value how a firm also captures that value and appropriates a value and it should contribute to the competitive strategy of the firm. Now, given this definition of a business model, we consider three elements for designing a business model. The first one of course is that a business model has to do with business model components. That's the first element. The second element is that a business model design deals with how to create interdependency or complementary effects or synergies. And also business design with business model also has to take into account the market focus existing markets or new markets. So these are the three elements of business model design. And based on these three elements, we distinguish two business model design strategy and the first one is business model replication. And business model replication actually is more levering business model components and their interdependency. So it's actually more upscaling the existing business model over time and over location. So if I use these three elements of business model design, it's more regarding the components, it's more refinement of existing business model components. Regarding the complementarities, it has focused more on strengthening the existing complementarities among business model components. And regarding the market focus, it's more focused on existing markets, are similar but geographically different markets. I think a very nice example here of business model replication is of course McDonald's, which has very effectively replicated its business model over time, over place. There is still learning, but it's more strengthening the interdependencies. And of course, now we see that McDonald's faces some problems with strengthening their existing business model and maybe has to rethink its existing business model. But another example would be Ikea, also very successful in replicating their existing business model. Now, another organization design strategy regarding business model is what I would call business model renewal. And that more focuses on introduction of new business model components and also creating new complementary assets. So if I look at these three components of business model design, the firm creates new business model components, creates new complementarities among business model components and focuses more on new markets. And so that's a different strategy, of course, than upscaling or replicating your existing business model. Now, a very nice example. Business model renewal is a firm DSN, started in coal and mining, then moved into petrochemicals, now to life sciences and material sciences. For instance, they make these kind of coatings for solar, how do you call these things, solar panels. And so with this voting, they create the absorption capacity. And actually they have a kind of strategy that every year 20% of annual turnover has to come from new business models. And they have kind of strategy dialogues in which they redesign their business model. So it's a very nice example of business model renewal. They do it within the existing company, but also they have a kind of philosophy proudly found elsewhere. So you don't have to do it yourself if you find something else outside the company. So that's a completely other model than the model I showed you on business model replication that's very much focused on business model renewal. Now of course, and I think this is self explanatory, but business model replication of course provides firm with mostly new cost advantages and increased revenues and also makes the business model more ideal, more differentiates and is harder to imitate. So our estimation is that business model replication will result in higher performance. On the other hand, we also suspect that bid and mall renewal results in new market positions enables referring to certain new markets and also will result in higher performance. But of course, much more interesting is to see under what conditions business model replication is most effective and when business model renewal is more effective. So the model we have been studying is two types of business model designs the effect on performance and the moderating effect of environmental dynamism. Now, continuing environmental dynamism, I think in many industries with a low clock speed, firms have business model and they last for a long time and maybe after ten years the firm has to think about renewing the business model. But it's mainly a replication of the existing business model and there is a slow erosion of the business model and it's very predictable. You know, you have to design a new business model. But in many industries with a low clock speed or with high levels of disruption, we find frequent disruption of the business model. And so we find firms that have to renew their business model maybe every three years. And so yeah, depending on what kind of industry you are, what kind of business environment, replication could be more effective or renewal could be more effective. And so if we look at the moderating effect of environmental dynamism and so we measure that the frequency and intensity of changes, the idea is that if you face a dynamic environment, you have to change or redesign your business model. But should you spend more effort in replication or renewal? That's the question. Now, our assumption is that in more dynamic environments, if you keep on focusing on replicating your existing model, actually your strengths might become actually a liability. For instance, the strong interdependencies limit you to change and radically improve your business model and refinement of the components actually result in a lack of fit. So our hypothesis is that environmental dynamism actually weakens the relationship between business model replication and food performance. Now, regarding business model renewal, that assumption is in a very dynamic environment, probably pays off to invest in renewing your business model, to create new opportunities and provide firms with new opportunities, new markets. On the other hand, the idea is an extreme dynamic environment. You can renew your business model, but the environment is changing so fastly you're not able to really exploit your new business model. So we think at very high levels business model renewal actually will result in decreased performance effects. And so if I plot this in a diagram, then the idea is that on the high levels of environmental dynamism there will be positive effect, but there will also be a negative effect. So the assumption is that the relationship between bismal renewal and firm performance is stronger under intermediate levels of environmental dynamism. So we expect a curvilinear effect there's. Now, we tested this in a large survey and we received more than 500 responses. These are jets firms. Well, I won't go into the details here, but I only quickly present the results. And what we found is indeed that environmental dynamism model rates relationship between this model replication and performance in such a way that we can see effect. So we find a significant negative effect here. And if we look at the interaction plots, then you see indeed that the slope becomes more flat under high levels of the environmental dynamism. So replication pays off, but in very dynamic environments it lowers your performance. The second hypothesis we investigated is, well, what is the effect of business model renewal? And here we didn't find support, we didn't find a significant effect here, but the quadratic effect actually was significant here. So if I show you the relationship we found here and take care here, what we show here is the regression coefficient between business model renewal and firm performance. And you see under higher levels of environmental diagnosis it increases, but we expected an increase and then a decrease, but it stays at the same level. So we see a flattening effect but no decrease. And maybe you could help me for explaining this. Why is this the case?

Speaker A So.

Speaker C Yeah, what is the contribution of this work on business model design? First of all, I think we conceptualize two types of business model design, namely replication and business model renewal. And we describe the elements, the attributes of these two types of business model design. Second, we provided some theoretical arguments about how environmental dynamism as a contingent variable moderates the effectiveness of these two business model design strategies. And we found empirical support that replication doesn't pay off in very dynamic environments. But we found some peculiar findings regarding the effect of business model renewal on performance. And yeah, we have been thinking about this, what could be the potential explanation for this, but maybe in very high dynamic environments and if you see at the work of Levenfal and Posen in their simulation study, they see a decrease in performance effect. We don't find that the reason for that could be that probably firms are more risk taking and they come up with more new business model business models that are also new to the industries. And so that's why you don't see this decreasing effect, but you see the same performance effect and probably also the followers try to decrease the performance gap with pioneer firms. The idea probably could be that in highly dynamic environments, firms keep on trying to come up with fundamentally new business models that gives the same performance effect. So this is a new work and we still are working on it. It certainly has some limitation. For instance, we didn't look at the role of leadership. Well, we did measure that too, but I didn't include it in this story. It certainly has an effect. Also, this is cross sectional data, so there's no time left and we hope to build it in the future. And of course, what we didn't consider here is that there are also firms that are a little bit mixed in the sense that they have a kind of dual design strategy so they replicate and they renew at the same time. So that's the limitation of this study. I don't see any signs that I should stop.

Speaker A You have three more minutes.

Speaker C That's great to see then maybe for practical implications what we do now because it's a program within the Netherlands of Dutch firms that participated. So out of the study we also came with a business model design matrix and here you see it the vertical axis, the two business model design strategies renewal, replication. They can be strategy driven so more exemptity or they can be more customers driven. So some firms replicate or renew their business model because they have to follow their customers. And so we came up with four possible positions which is and if you ask managers where they plot themselves everybody wants to be here. Strategy driven business model renewal so that's explore and dominate. It's an organization wide transformation or customer driven business model renewal that's upgrading to new customers. But most firms do strategy driven business model replication so that's more directive improvement or they replicate their business model because they connect more to their existing customers so that's more connecting to existing customers. And so if you plot some firms in this diagram then this is the most attractive position. But if you plot all firms here in the matrix most of the firms are there and then my presentation so far was more a static model. But if you look at individual firms you see that they go to kind of migration trajectories of business model innovation in this business model design matrix. So the example I gave you of DSMS, they started over here then they really changed their business model based on a very clear strategy and then now they really fine tune the business model by co creating more with their customers. So it's of course a more dynamic story than I told you but I now see that the signs are zero which means I have to stop now. Thank you very much for your attention. Thank you.

Speaker B Very interesting presentation research. The fascinating part as you suggested is it doesn't go down on that chart. And just a couple of things is that we know that at least in theory that if you get enough environmental dynamism it has to go down. And so did you get enough measure in the dynamism of the environment to actually test the hypothesis people in question. And the other one is, is there a possible sample bias in the sense that you look maybe at successful firms and by successful I mean the ones that are still alive? Because another part of that is the probability of actually dying in that right hand side is probably higher than it is in some of the earlier sites. I don't know. Do you have any comment on that?

Speaker C Well, in our sample, we have a lot of rhymes also regarding this environmental dynamism. So we have also many observations on the extreme right, of course, central rides. We have firms from eight different industries and of course, if the firm doesn't exist anymore, they are not able to answer our survey. So, yeah, that's yeah, that's a limitation you always have. All theories are bound. You are very experienced in this field. So you say that. I wanted to ask a bit about.

Speaker B How you see this tying with autores design research in future. How might you contribute?

Speaker C Yeah, that's an excellent question. Someone preparing this presentation. I was also thinking about we design organizational forms. William's talking about structure, technology, culture. Now I think we have to broaden the definition of organization design. I think firms can design their business models and they actually do. They think about the components and the complementarities. So a design approach might help there. The question is to what extent it's really emergent or to what extent it's really proactive. I gave you the example of DSM there, it's very proactive. So they have every year strategy dialogues in which they involve top management, middle line management and frontline management. And they also make tough decisions on starting to build new business models. So it's a very design oriented approach. But as I showed you on the right upper column for many firms, customers won't think they cannot deliver and they have to think about how to deliver it and then it's more emerging approach, the new business model. But I think design field could really have an added value in the field on business model innovation.

Speaker D So I have a hypothesis for why your curve flattens out at the end. New business models require often a significant change in organization culture, especially a change from being a product company to a services company. In many parts of the developed economies of the world, companies that traditionally earn high margins from products IBM, Cisco, on and on and on are finding they have to go into a services model to retain the margins. But it's a completely different culture from a culture of competence and valuing technical excellence to a competence of interacting with customers and listening. And some people call it switching from a megaphone with earplugs, telling people how great your products are to putting duct tape over your mouth and listening carefully to a customer. It's very difficult for people to make that kind of change. So even when the market starts to change very quickly, sometimes the cultures of these organizations just cannot adapt to so much of what JimMarch would call exploration versus exploitation. It sounds like a similar set of arguments to the ones you're making.

Speaker C Yeah, actually I didn't show this in this presentation, but we also looked at antisequence of business model redesign and successful redesign and culture is a very important one for me. That's one of the facilitators or inhibits also leadership we also found, for instance, that identity. So those first with a strong identity, that was really a liability for business model renewal. So yeah, these soft factors have a very big impact. I fully agreed.

Speaker A Okay, thank you very much. Quick comment.

Speaker E We often use the phrase the organization design, but there are certain sectors of our community which are using the phrase organizational architecture, which is broader than what we usually think of as design. And I'm sort of excited about this sort of new dimension of what we might call organization design. But it does fit nicely under the idea of organizational architecture. I think this is really very interesting stuff.

Speaker C You made my day.

Speaker A Thank you. Ha.