Business Model Innovation Performance: When does Adding a New Business Model Benefit an Incumbent?

• Published date: 01 March 2015
• Author: Stephen K. Kim,Sungwook Min
• Date: 01 March 2015
• DOI: http://doi.org/10.1002/sej.1193

BUSINESS MODEL INNOVATION PERFORMANCE:

WHEN DOES ADDING A NEW BUSINESS MODEL

BENEFIT AN INCUMBENT?

STEPHEN K. KIM1and SUNGWOOK MIN2*

1College of Business, Iowa State University, Ames, Iowa, U.S.A.

2College of Business Administration, California State University, Long Beach,

California, U.S.A.

Many incumbent firms respond to the emergence of a disruptive business model by adding the

business model into their existing ones. But, not all incumbents perform better after adding new

business models to their existing ones; that raises the question about the conditions under

which adding a new business model improves incumbent performance. We develop a theoreti-

cal framework to address that question. After identifying two types of incumbent assets,

complementary and conflicting, we highlight the influence of two managerial choices—timing

and organizational mode of the new business model addition—that create opportunities to

translate the potential provided by incumbent assets into higher performance. The proposed

discriminating alignment thesis states that incumbent performance after new business model

addition improves when the incumbent firm aligns complementary assets with earlier addition

of the new business model and conflicting assets with an autonomous business unit for the new

business model. To test these hypotheses, we analyzed the performance change of those

physical store-based retailers that added online retailing as a new business model. The test

results supported all hypotheses, and key theoretical and managerial implications are pre-

sented. Copyright © 2015 Strategic Management Society.

INTRODUCTION

An industry often undergoes abrupt and rapid

changes with a new business model—a newly inte-

grated business framework to generate revenue and

profit by creating, communicating, and delivering

value to customers (Chesbrough and Rosenbloom,

2002; Zott, Massa, and Amit, 2011).The music indus-

try has been fundamentally changed by the online

music distribution model such as iTunes. Michael

Dell’s direct-to-customer model changed the way

personal computers are sold and distributed. While

fledgling literature on business models focuses on

entrepreneurial firms and their creation of new busi-

ness models (Amit and Zott, 2001; Zott and Amit,

2007), far less research attention has been paid to the

other group: incumbent firms that already have estab-

lished business models and their decision to add new

business models that disrupt the incumbent industry

(Christensen, 1997). Many incumbent firms in

various industries have added new business models

(Charitou and Markides, 2003), but did adding those

new business models benefit incumbents?

Consider physical store-based retailers that have

added online retailing as a new business model (Zott

et al., 2011). A review of such retailers’ post-

addition performances reveals wide variations:

Barnes and Noble, Inc., saw a 68 percent sales

increase over the four-year period following its

Keywords: business model Innovation; complementary assets;

conflicting assets; discriminating alignment

*Correspondence to: Sungwook Min, College of Business

Administration, California State University Long Beach, 1250

Bellflower Blvd., Long Beach, CA 90840, U.S.A. E-mail:

Sam.Min@csulb.edu

Both authors contributed equally to the article.

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 9: 34–57 (2015)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1193

Copyright © 2015 Strategic Management Society

online retailing addition in 1997, but Borders, Inc.,

and Books-a-Million, Inc., attained only 17 percent

and 8 percent sales increases, respectively, over their

four-year, post-addition periods. Another example is

online higher education: Indiana University added

an online MBA program in 1999 and had more than

1,400 students enrolled in that program in 2010 (U.S.

News and World Report, 2010), while many other

colleges added online MBA programs that remain

small.

This wide performance variation of incumbents

raises a question: when does adding a new business

model benefit an incumbent? The technology inno-

vation adoption literature offers some clues by high-

lighting the firm’s endowed resources as success

factors after innovation adoption.

Drawing mainly on the resource-based view of

the firm (Barney and Clark, 2007), scholars have

noted that those incumbents endowed with greater

complementary assets benefit from adopting the

innovation (Rothaermel and Hill, 2005; Teece,

1986). Despite strong empirical support for this

logic (Rothaermel, 2001; Teece, 2006), solely

focusing on innovation adoption and complemen-

tary assets leaves two important overlooked issues

for incumbents.

First, unlike new entrants, incumbent firms are

endowed with conflicting assets as well as with

complementary assets for a new business model.

Conflicting assets refer to the incumbent’s existing

resources that, when combined with a new business

model, detract from operations of the new business

model. In contrast to great emphasis on complemen-

tary assets, previous studies have assumed away the

performance implications of conflicting assets by

taking for granted that a new and superior technol-

ogy replaces incumbent firms’ old technology with

little friction. Yet, this implicit assumption misses

the important quandary an incumbent faces when

attempting to manage its old business model and

new business model simultaneously.If no conflicting

assets existed, adding a new business model would

pose few managerial challenges; only when an

incumbent’s resource endowment includes some

conflicting assets does the new business model addi-

tion decision pose a dilemma.

Second and more importantly, the fact that some

incumbents failed to benefit from new business

model addition even with great resources (Newbert,

2007) warrants a need to consider something in addi-

tion to firm resources. If possessing more comple-

mentary assets alone was sufficient to guarantee

improved performance, all the incumbent firm would

need to do is secure complementary assets. Simi-

larly, if possessing greater conflicting assets

detracted from performance, the incumbent firm

could just dispose of such assets. Plainly, neither of

these cases reflects reality. We propose that an

incumbent firm’s managerial choices—the planned

behaviors a firm undertakes to mobilize and deploy

its resources—are critical elements. An incumbent

firm’s managerial choice should also affect post-

addition performance because what is critical to

incumbent performance change is not only endowed

resources per se, but also how the incumbent firm

mobilizes and deploys those resources (Holcomb,

Holmes, and Connelly, 2009; Sirmon, Gove, and

Hitt, 2008). Thus, it is imperative to examine how an

incumbent firm’s managerial choices interplay with

its assets and influence performance change after

new business model addition. Therefore, the objec-

tive of this study is to address those two gaps, guided

by the research question of when adding a new busi-

ness model benefits an incumbent firm.

Our overarching premise is that while incum-

bent complementary (conflicting) assets create

performance-enhancing (detracting) potential, it is

the managerial choices that create the necessary

opportunity to benefit from (vaccinate against)

them. Incumbent assets and managerial choices

jointly influence performance after new business

model addition in ways neither can in isolation. An

incumbent firm’s managerial choices for its assets

serve dual roles: (1) choice on the timing of new

business model addition helps unlock the potential

of complementary assets; and (2) choice on the

organizational configuration of the new business

model helps vaccinate against the detriment of con-

flicting assets.

We test the proposed ideas using 10-year panel

data from online retailing addition and performance

change of 56 publicly traded physical store-based

retailers. The results, which explicitly account for

endogeneity of an incumbent firm’s new business

model addition decision, offer new insights into

when an incumbent benefits from adding a new busi-

ness model. Our unique contribution is showing how

managerial choices—acting as shift parameters—

help an incumbent firm realize (vaccinate against)

the potential benefits (detriments) of complementary

(conflicting) assets to improve incumbent perfor-

mance after new business model addition.

To the resource-based view (RBV) literature, we

revive original conceptualization of firm resources

Business Model Innovation Performance 35

Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J.,9: 34–57 (2015)

DOI: 10.1002/sej