Responding in kind: How do incumbent firms swiftly deal with disruptive business model innovation?

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Abstract

Disruptive business model innovation (BMI) is a threat to incumbents. This study elaborates a new approach, developing a novel business model (BM) swiftly, to dealing with this threat rather than either imitating disruptive BMI or strengthening the existing BM as prescribed in the literature. Findings show that incumbent firms can swiftly develop a new BM through a two stage process. In the separation stage, firms establish autonomous units to experiment via experiential learning, which creates multiple BMs in co-existence. Subsequently, in the integration stage, the various BMs are consolidated into an integrated new BM, via learning from other industries.

Introduction

Disruptive business model innovation (BMI), which is a form of disruptive innovation (Christensen, 2006; Christensen et al., 2015), refers to “an activity system that includes new partners and activities configured in a way that is unprecedented in comparison to existing incumbents” (Snihur and Tarzijan, 2018: 1279). Disruptive BMI redefines value creation and value capture of an industry, threatens incumbent firms’ competitive position, and even disrupts incumbent firms (Christensen et al., 2018; Cozzolino et al., 2018; Kumaraswamy et al., 2018). For example, the emergence of software-as-a-service eroded market shares of traditional IT service providers (Snihur and Tarzijan, 2018). Apple and Google overthrew the market leader Nokia through new mobile operating systems, applications, and ecosystems, whereas Netflix nearly wiped out incumbents such as Blockbuster through online movie rentals and enhanced customer experience (Ansari and Krop, 2012). Potential threats trigger incumbents to experiment and adapt their business model (BM)2 in order to overcome the destruction of disruptive BMI (e.g., Christensen, 2006; Doz and Kosonen, 2010; Habtay and Holmen, 2014; Karimi and Walter, 2016; Markides and Charitou, 2004; Osiyevskyy and Dewald, 2015; Pinkse et al., 2014; Sabatier et al., 2012).

The extant literature shows that incumbent firms can respond to disruptive BMI by either strengthening their existing BM or adopting it (Osiyevskyy and Dewald, 2015). However, strengthening the existing BM can intensify organizational inertia (Casadesus-Masanell and Richart, 2011), whereas adopting the disruptive BMI rarely generates competitive advantages (Argyres et al., 2015). A more effective but largely overlooked response to disruptive BMI is to develop a novel BM (i.e., BMI) for the industry (Kumaraswamy et al., 2018; Yin et al., 2017), i.e., “to disrupt the disrupter” (Markides and Oyon, 2010: 27) or to respond in kind. Consequently, incumbent firms might be able to renew competitive advantages (Argyres et al., 2012).

Indeed prior studies have mentioned that incumbents should swiftly conduct BMI (i.e., developing a novel BM) before disruption penetrates through the industry (Christensen, 1997; Yin et al., 2017). Otherwise, once disruptive BMI becomes mature, it would be difficult for incumbents to compete with it (Christensen et al., 2015). However, incumbents face many cognitive and behavioral challenges as they carry out BMI. First, the incumbent firms are confronted with constraints arising from the current BM including cognitive inertia, path-dependent behaviors, and dependence on existing customer resources (Teece, 2010; Radnejad and Vredenburg, 2019). Second, BMI involves a complex system of interdependent components and their potential interactions are unknown and unforeseen in the beginning, which increases the risk and uncertainty of the innovation (Berends et al., 2016; Foss and Saebi, 2017; Yin et al., 2017). Though Berends et al. (2016) briefly mentioned that two sequential learning mechanisms of experiential learning and cognitive search could potentially help overcome barriers for BMI, they did not offer any advice on how. Moreover, such learning is not necessarily agile, stretching over multiple years. In short, the BMI literature provides little understanding on how incumbent firms develop a novel BM swiftly.

This research sets out to examine how an incumbent firm swiftly develops a novel BM when faced by disruptive BMI. Since BMI is a learning process of interactions between cognitive and behavioral changes (Berends et al., 2016; Demil et al., 2015; Sosna et al., 2010), we draw upon the organizational learning lens and the research of Berends et al. (2016) primarily on experiential learning and cognitive search.

In this explorative case study, we investigated Alpha (a pseudonym), a traditional beauty chain, which developed a novel BM in the industry rapidly within two years. A novel BM was Alpha’s response to disruptive BMI brought forward by the widespread adoption of the mobile Internet. Our findings unfold a two stage process, separation and integration. In the first stage, experiments inspired Alpha to establish autonomous units and to unravel cognitive and behavioral inertia, leading to multiple co-existing BMs. In the second stage, resolving problems emerged from the previous stage prompted cognitive search that drew lessons from best practices in other industries, which resulted in the integration of elements from multiple BMs and the formation of a new BM. This research makes the following three contributions. First, it enriches the disruptive innovation theory by elaborating an effective but largely overlooked approach to dealing with the threat of disruptive BMI, i.e., developing a new BM through separation and integration. Second, this paper contributes to the BMI literature by investigating how a new BM can be swiftly realized and demonstrating top managers’ role changes as a new internal driver for BMI.

Section snippets

Literature review

In this section, we first define key concepts of business models and business model innovation, followed by a review of disruptive BMI and alternative responses by incumbents, and lastly an introduction to our theoretical perspective.

Research methods

The single case study approach is adopted for the following three reasons. First, single case study research is ideally suited for understanding the dynamic evolution process of the formation of a new organization pattern (Corallo et al., 2007). Second, this approach is appropriate for answering the “how” question (Yin, 2017), which is the core of this research. Third, given that BMI of incumbent firms is a relatively new phenomenon, the case study approach is more desirable for generating new

Findings

The process of Alpha’s BMI is divided into two stages, separation followed by integration. Though in each stage both experiential learning and cognitive search took place, it was the primary learning mechanism that drove cognitive changes, thus further instigating BM redesign and implementation.

Discussion

This research investigated how an incumbent firm responded to disruptive BMI by swiftly developing a novel BM, which could help incumbents avoid direct competition and build heterogeneous resources and capabilities (Argyres et al., 2012). Our findings reveal a two stage process, separation and integration, both of them involve learning, BM design, and implementation, as shown in Fig. 5. In essence, learning results in cognitive changes, followed by BM innovation. The key in the separation stage

Conclusions

The following limitations of this research are worth noting. First, we lack industry data to demonstrate the detrimental effects of disruptive BMI (i.e., social commerce), or evidence from an independent source. Nevertheless, Alpha was an industry leader to begin with and its top managers had rich industry experience, and thus their assessment of the industry trend was deemed insightful and credible. Second, in our longitudinal investigation spanning nearly five years, we found that the

Acknowledgments

This research is funded by the National Natural Science Foundation of China (Project Numbers: 71702037 and 71320107005) and cultivation and innovation programs of the institute for enterprise development, Jinan University (Project Number: 2020CP02)

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