Explorative Versus Exploitative Business Model Change: The Cognitive Antecedents of Firm‐Level Responses to Disruptive Innovation

• Date: 01 March 2015
• Author: Jim Dewald,Oleksiy Osiyevskyy
• DOI: http://doi.org/10.1002/sej.1192
• Published date: 01 March 2015

EXPLORATIVE VERSUS EXPLOITATIVE BUSINESS

MODEL CHANGE: THE COGNITIVE ANTECEDENTS

OF FIRM-LEVEL RESPONSES TO

DISRUPTIVE INNOVATION

OLEKSIY OSIYEVSKYY1* and JIM DEWALD2

1D’Amore-McKim School of Business, Northeastern University, Boston,

Massachusetts

2Haskayne School of Business, University of Calgary, Calgary, Alberta, Canada

We develop a typology of incumbent adaptations to emerging disruptive business model

innovations, based on two generic strategies: (1) explorative adoption of a disruptive business

model; and (2) exploitative strengthening of the existing business model. We derive and test

hypotheses concerning the cognitive antecedents of managerial intentions to embrace each of

the two adaptation strategies. The results from our study of the real estate brokerage industry

show that the explorative intentions are driven by opportunity perception, perceived

performance-reducing threat, and risk experience. Exploitative intentions are negatively asso-

ciated with perceived critical threat and industry tenure and positively associated with risk

experience. We contribute to the literature on disruptive business models by combining prior

research into a definable framework and by testing the cognitive influences on strategic

response. Copyright © 2015 Strategic Management Society.

INTRODUCTION

In describing the phenomenon of disruptive tech-

nologies, Christensen’s (1997) early brilliance was

in recognizing that firms that own or control these

disruptive technologies (often the inventors of such

technologies) face a dilemma between sticking with

the ‘old’ suite of performance metrics embedded in

existing products/services and adopting ‘new’ mea-

sures offered through the disruptive technology.

Research has since developed to reveal that disrup-

tive technologies act as mere antecedents to disrup-

tive business model innovations (Christensen, 2006;

Markides, 2006), which extends the dilemma well

beyond firms that own disruptive technologies.

Indeed, as disruptive business model innovations

gain momentum, all incumbent managers within

established industries face a strategic dilemma of

whether to explore new disruptive business models

or exploit existing models that provided past

success. And there is no reliable answer, as the

choice of the optimal response is contingent upon

numerous contextual factors. For example, even

though enthusiastic adoption of the disruptive

approach can sometimes lead to disastrous conse-

quences for incumbents (Markides, 2006), refusal to

adopt may be equally harmful as a rigid response

(Casadesus-Masanell and Ricart, 2010, 2011;

Christensen, 1997; Leonard-Barton, 1992).

At first, disruptive business model innovations are

‘financially unattractive for the leading incumbent to

pursue, relative to its profit model and relative to

other investments that are competing for the organi-

zation’s resources’ (Christensen, 2006: 49). Being

Keywords: business model; disruptive innovation; decision

making; exploration; exploitation

*Correspondence to: Oleksiy Osiyevskyy, D’Amore-McKim

School of Business, Northeastern University, 360 Huntington

Ave., Boston, MA 02115, U.S.A. E-mail: o.osiyevskyy@

neu.edu

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 9: 58–78 (2015)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1192

Copyright © 2015 Strategic Management Society

perceived by incumbents and their most lucrative

customers as inferior, the innovation seeks to find a

new customer base, often initially among price-

sensitive non-consumers who do not need or cannot

pay for the full-featured products or services

(Christensen, 1997; DaSilva et al., 2013). However,

with time, the prior ‘inferior’ disruptive innovation

might gain momentum, develop, and ultimately

surpass the requirements of mainstream customers

who eventually switch to the new alternative.

Examples of industries turned upside down by dis-

ruptive business model innovations are numerous,

ranging from film photography (disrupted by digital

photography; Tripsas and Gavetti, 2000) and news-

paper publishing (disrupted by e-media; Gilbert,

2005) to industries dominated by small entrepre-

neurial firms, such as real estate (disrupted by dis-

counted models; Dewald and Bowen, 2010;

Osiyevskyy and Dewald, forthcoming) and travel

brokerages (disrupted by e-brokering).

The challenge of incumbent response to disruptive

business model innovations gaining momentum has

received consideration in management literature, but

largely without theoretical grounding. Christensen

(1997) observed a primary response to disruptive

technology—sticking with the existing technology

and going up-market to high-end segments, driven

by the need to avoid the conflict between traditional

and newborn approaches. Markides advanced the

field by concentrating explicitly on the dynamism of

incumbent responses as disruptive business model

innovations gain momentum (Markides, 1997, 1998;

Markides and Charitou, 2004; Markides, 2006). An

inductively developed action-response framework

provided the wider scope of possible incumbent

actions, embracing five basic types of business

model change in response to disruption (Charitou

and Markides, 2003); however,their framework does

not address the question of what drives incumbent

behavior.

The research stream of Gilbert (2005) is a funda-

mental block toward explaining the determinants of

actual incumbent behavior in times of industry-level

disruptive change. He demonstrated how cognitive

framing of the issue as a threat or an opportunity

drives further organizational actions, in terms of

committing resources and overcoming resource and

routine rigidities. We expand Gilbert’s model,

exposing perceptions of threat and opportunity as

drivers for change; but rather than concentrating on

micro-level actions (resource commitment and rou-

tines change), we explore the more aggregate

outcome—business model change as an alteration of

the meta-routine of value creation and appropriation

(e.g., Zott and Amit, 2007; Chesbrough, 2007; Zott,

Amit, and Massa, 2011).

More specifically, we complement and build on

prior research by applying decision-making theories

to explain an incumbent firms’ business model

change in response to disruptive business model

innovation gaining momentum in an established

industry. First, we propose a parsimonious typology

of incumbent adaptation strategies, embracing prior

frameworks within a two-dimensional representation

of the business model evolution process. Second, we

scrutinize the research question of what cognitive

antecedents determine specific intentions (within

established firms) to respond to an ongoing disrup-

tion. We concentrate on the managerial decision-

making perspective, explicitly assuming that the

decisions of strategic leaders can provide insights

concerning the ultimate behavior of their organiza-

tions in line with the strategic agency perspective

(e.g., Gavetti, 2012). We then derive and test hypoth-

eses concerning situational and dispositional ante-

cedents affecting managers’ intentions to embrace

each of the two adaptation strategies, using data col-

lected through a survey of Canadian realtors at a

time when a salient disruptive business model inno-

vation was gaining momentum.

CONCEPTUAL FRAMEWORK

Disruptive innovations as a business

model phenomenon

Initial studies of disruption concentrated on discon-

tinuous technological innovations (Christensen and

Bower, 1996; Christensen, 1997). Christensen and

Raynor (2003) extended the concept to include dis-

ruptive business models, uniting both technological

and business model disruptions under the umbrella

term ‘disruptive innovation’ (Christensen and

Raynor, 2003). The emphasis on business model dis-

ruptions was central to the work of Markides, scruti-

nizing the responses of established firms to disruptive

business model innovations (originally named ‘dis-

ruptive strategic innovations’—see Markides (2006:

19–20) for clarification of this term) gaining momen-

tum in established industries. Markides (1997: 9,

italics added) explicitly points out that ‘the compa-

nies succeed dramatically in attacking an established

industry leader without the help of radical technologi-

cal innovation’ and that ‘the common element in all

Explorative Versus Exploitative Business Model Change 59

Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J.,9: 58–78 (2015)

DOI: 10.1002/sej