Unlocking the Hidden Value of Concepts: A Cognitive Approach to Business Model Innovation

• DOI: http://doi.org/10.1002/sej.1191
• Author: Bruce E. Greenbaum,Luis L. Martins,Violina P. Rindova
• Date: 01 March 2015
• Published date: 01 March 2015

UNLOCKING THE HIDDEN VALUE OF CONCEPTS:

A COGNITIVE APPROACH TO BUSINESS

MODEL INNOVATION

LUIS L. MARTINS*, VIOLINA P. RINDOVA, and BRUCE E. GREENBAUM

McCombs School of Business, University of Texas at Austin, Austin, Texas,

U.S.A.

We advance a theory of how business models can be innovated proactively in the absence of

exogenous changes, through processes of generative cognition. We contribute to the cognitive

perspective in strategy by analyzing business models as schemas that organize managerial

understandings about the design of firms’ value-creating activities and exchanges and by

theorizing how they can be innovated through processes for proactive schema change.

Drawing on cognitive psychology research on two major cognitive processes through which

individuals change their schema to cope with novelty, analogical reasoning and conceptual

combination, we theorize firm-level strategic processes for designing innovative business

models. Copyright © 2015 Strategic Management Society.

INTRODUCTION

Companies increasingly find the need to innovate not

only by developing new products and services, but

by creating or modifying business models. GE’s

2013 Global Innovation Barometer survey of more

than 3,000 senior executives in 25 countries finds

that a majority of the executives (52%) reported the

development of new business models as a strategic

priority for their firms. A recent report notes that of

the 26 companies that have been founded since 1984

and entered the Fortune 500 list from 1997 to 2007,

a majority owed their success to business model

innovations that either transformed existing indus-

tries or created new ones (Johnson, 2010). In line

with their growing prominence among managers,

entrepreneurship and strategy scholars have also

increasingly begun to study business models as an

important unit of analysis that is distinct from the

firm, industry, or network (Zott, Amit, and Massa,

2011). A business model is defined as the designed

system of activities through which a firm creates and

captures value (Zott and Amit, 2010). In a recent

comprehensive review of research on the topic, Zott

et al. (2011) concluded that while the construct is

clearly established, we need to develop better under-

standing of how new business models are created

and how existing ones change. They identified the

need for a better understanding of business model

innovation as an important direction for research in

the area.

The goal of this article is to respond to this call by

building on the cognitive perspective in strategy and

on research on generative cognition in psychology

to articulate systematic processes through which

new business models can be ideated and designed.

Our ideas represent an important departure from

current research on business model innovation,

which analyzes it as either a response to exogenous

Keywords: business models; business model innovation;

schemas; generative cognition; analogical reasoning; concep-

tual combination

*Correspondence to: Luis L. Martins, McCombs School of

Business, University of Texas atAustin, 2110 Speedway Stop

B6300, Austin, TX 78712-1750, U.S.A. E-mail: luis.martins@

mccombs.utexas.edu

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 9: 99–117 (2015)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1191

Copyright © 2015 Strategic Management Society

technological and regulatory shocks (e.g., Amit and

Zott, 2001; Teece, 2010) or as a result of trial-and-

error experimentation in response to changes in the

environment (e.g., Chesbrough, 2010; McGrath,

2010). While these perspectives effectively explain

how business models change to respond to environ-

mental changes, they offer little insight into the pos-

sibilities for business model innovation in the

absence of such exogenous change.

Yet, as anecdotal evidence suggests, new business

models are often the source, and not the outcome, of

industry change. Southwest Airlines, Walmart, and

Starbucks are among the most salient examples of

such changes. Each of these companies has gener-

ated tremendous shareholder value by designing

new business models in the absence of a need to

respond to either technological or regulatory

changes. Instead, the new business models that these

firms—and other business model innovators—

designed created large-scale disruptive industry

change (Markides, 2008). Therefore, understanding

the mechanisms that enable business model innova-

tion in the absence of exogenous change is critical to

understanding the possibilities for value creation

through business model innovation.

In this article, we take a step in this direction by

building on the conceptualization of business models

as reflections of managerial schemas and explicating

the cognitive logic and processes through which

schemas can be changed to ideate and design new

business models in the absence of exogenous

change. Our ideas are rooted in the cognitive per-

spective in strategy research (Barr, Stimpert, and

Huff, 1992; Gavetti, Levinthal, and Ocasio, 2007;

Gavetti and Rivkin, 2007; Narayanan, Zane, and

Kemmerer, 2011; Rajagopalan and Spreitzer, 1997)

and research on generative cognition in psychology

(Ward, 2004). We build on these ideas to theorize

how two cognitive processes that individuals use

naturally to cope with novelty—analogical reason-

ing (Gentner, 1983) and conceptual combination

(Wisniewski, 1997a)—can be developed as firm-

level strategic processes to ideate and design new

business models.

Our theory extends current research on business

model innovation by explaining how business

model innovation can occur in the absence of

exogenous change and how new business models

can be ideated and designed more generally. It pres-

ents a perspective on business model innovation that

differs from, but complements, those presented by

the existing rational positioning and evolutionary

learning perspectives. In particular, by articulating a

methodology for proactively generating business

model innovation, it addresses limitations in mana-

gerial implications of current perspectives on busi-

ness model innovation. Our ideas also contribute to

current efforts to provide a more dynamic, forward-

looking analysis within the cognitive perspective

on strategy (Ocasio, 2011; Porac and Tschang,

2013).

The article proceeds as follows: we first review the

literature on business models to examine the three

current underlying theoretical perspectives on busi-

ness models and highlight their limitations in

explaining business model innovation in the absence

of exogenous change. Next, we briefly review psy-

chology and strategy research on cognitive represen-

tations (schemas), emphasizing their key

characteristics and mechanisms through which they

change. Then, we build on these ideas to theorize

two strategic processes through which firms can

innovate their business models in the absence of

exogenous change. We illustrate our theoretical

ideas with examples of such business model innova-

tions. We conclude with a discussion of our

contributions.

CURRENT PERSPECTIVES ON

BUSINESS MODELS AND BUSINESS

MODEL INNOVATION

Business model researchers increasingly converge

on a definition of business models as systems of

‘interdependent organizational activities centered on

a focal firm’ (Zott and Amit, 2010: 217) that are

‘made up of components, linkages between compo-

nents, and dynamics’ (Afuah and Tucci, 2001: 4).

While researchers agree on the view of business

models as systems of activities, they differ in their

understanding of how firms develop such systems.

Reviewing the literature in the area, we identified

three theoretical perspectives on business models

with varying explanations for business model

change. Each of these perspectives is consistent with

a core theoretical school in strategy research—the

rational positioning school, the evolutionary learn-

ing school, and the cognitive school (see Gavetti and

Rivkin (2007) for further discussion of these schools

in the context of strategy creation, and Rajagopalan

and Spreitzer (1997) in the context of strategic

change).

100 L. L. Martins, V. P. Rindova, and B. E. Greenbaum

Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J.,9: 99–117 (2015)

DOI: 10.1002/sej