An evolutionary approach to business model innovation

Abstract

In the article it is asserted that business model innovation potential has not yet been fully released first because of a lack of business model definition and a consistent methodological framework, second because, on a more general plan, the whole system of assumptions on which innovation activity of this kind has been based possibly needs re-evaluation. It is argued that a change of theoretical foundation is needed because of systemic inconsistencies which impede present approaches application. It is assumed that difficulties arise due to peculiarities of mainstream economics framework upon which these approaches have implicitly been built. While authors of neoclassical approaches admit outside factors influence on the business model, these factors remain conceptually isolated from the business model. To overcome this problem there has been suggested a framework for business model innovation based on the evolutionary economic theory. The evolutionary approach to business model innovation is characterised by focus on processes of long-term change and economic agents cause-effect relationship. It is being realised by reference to the evolutionary process that has moulded stable patterns of behaviour of companies on a chosen market. By this reference a trajectory of development of value perception and principles of value creation or business models can be traced and understood, since relationship between routines, value, and business models are mutually dependent. Generalised principles of value creation or basic business models of a market in question are to be adjusted to particular circumstances of an individual company.

Author’s note

The article represents a concise overview of the author’s PhD thesis on “An Evolutionary Approach to Business Model Innovation.” Ideas of the thesis, in their turn, are based on a 2009-2014 research of the patterns of behaviour of companies on the global high-end apparel market. Undertaken as a private academic initiative with no special funding the research had primarily been based on an author’s professional network and her working experience of more than 15 years in the industry in Saint-Petersburg (Russia) companies both of the luxury and premium apparel market sectors. Through involvement of these Russian companies in international activities the author has become familiar with practices of the leading Western companies of the industry since only the most entrepreneurial and powerful companies dared to enter Russian market after the dissolution of the Soviet Union and tried to collaborate with the first after the Revolution Russian private businesses. Thus the results of this basically methodological undertaking have been drawn through the empirical inductive research of the particular industry. It is assumed though, that the evolutionary approach to business model innovation, introduced in the article, is universally applicable.

Key words: business model, innovation, evolutionary economic theory

Introduction

In the research it is asserted that business model innovation potential has not yet been fully realised first because of a lack of business model definition and a consistent methodological framework, second because, on a more general plan, the whole system of assumptions on which innovation activity of this kind has been based possibly needs re-evaluation. In this research an effort has been undertaken to produce a methodological framework for business model innovation on a new theoretical foundation.

The first theories of business management originated from “the West's earliest models for organizing large numbers of people through command and control: the military and the Roman Catholic Church, with new contributions from manufacturer Henry Ford and efficiency consultant Frederick Winslow Taylor” (Chouinard & Stanley, 2012, p. 25). Recent approaches to organization of business activity have rather more in common with models of self-organization in nature built upon adaptation and selection principles and may be traced to the evolutionary theory. In this context there have been developed a business model concept and the approach to business model innovation suggested in this article.

An array of scholars and practitioners consider business model innovation potential being bigger than the one of any other kind of innovation. In opinion of Chesbrough, “a better business model will beat a better idea or technology” (as cited in Zott, Amit, & Massa, 2010, p. 19). Johnson, Christensen, and Kagermann (2008/2011) cite results of Economist Intelligence Unit 2005 survey reported that “over 50% of executives believe business model innovation will become even more important for success than product or service innovation” (pp. 40-41). A lack of business model definition and “formal study into the dynamics and processes of business model development” are considered to be main problems on the way of business model innovation potential to be released (Johnson et al., 2008/2011, pp. 41-42).

Some efforts have been made though to address the issue. Zott et al. (2010), having investigated contributors to the development of the business model concept, site, among others, business model definitions of: Timmers (1998); Amit and Zott (2001); Chesbrough and Rosenbloom (2002); Morris, Schindehutte, and Allen (2005); Johnson Christensen, and Kagermann (2008); Casadesus-Masanell and Ricart (2010); and Teece (2010) (p. 6). On the basis of analysis of these and other definitions Zott et al. come to a conclusion that “scholars do not agree on what a business model is” (2010, p. 1).

Although without an expressed and agreed definition the concept has already widespread use in the business circles. There are consultants or “coaches”, seminars, incubators, competitions, that altogether have constituted a fully fledged “industry” of new business models generation with a particular focus on e-businesses. As an example of an established undertaking of this industry it can be given the Berkeley Startup Competition LAUNCH functioning from 1999. In 2010 in Saint-Petersburg Innovation Forum there took place presentations of the Berkeley contest participants. There was a requirement for a new business presentation to explain a new enterprise “business model” in four minutes. However, the business model notion was not expressly defined and all the participants represented their business ideas in their own way and form.

There can be noticed, however, that despite of somewhat unclear and varying perception of the business model concept and stresses on its different aspects, there are unifying traits in understanding of it by the interested parties. It appeared that both scientists and practitioners are for some time in the need of a holistic framework to deal with the enterprise as a system for value creation.

Touching the underlying causes of such a need we may assume, that the business model concept as some other concepts dealing with different aspects of business activity on the system level, e.g. Porter’s “value chain” (1985/1998a) or Senge’s “fifth discipline” (1990/2006), to a large degree have been rooted in a major economic shift in the 1980s, when a sudden onset of real interest rates occurred. Prior to the 1980s the real cost of capital tended to be negative or zero for several decades, then “the U.S. capital market restructuring and the 1984 recovery hit companies with real costs…and focused attention on lean processes and the supply chain” (Means & Schneider, 2000, L. 149). This reaction may be interpreted as the firm started being considered and managed on the system level, viewed as a system by itself integrated into bigger systems of national and international industry and economy. The new needs have been facilitated by the advent of the personal computer and the spreadsheet, which provide a technical means for generation and testing different business structures, processes, and scenarios.

The connection between business model concept coming into a widespread use and new technical possibilities has been noticed by Magretta (2002/2011, p. 74). Other authors call our attention to a coincidence of raise of publications on the business model concept in the middle of the 1990s with the birth of the internet (Zott et al., 2010, p. 5). Thus, till the middle of the 1990s the expressed need in a holistic framework to deal with business activity on the system level appeared as well as the technical means to address this need.

The business model concept, though being a holistic representation of business activity on the company level, must have a complex structure to comprise all the major components of this activity and their interrelation. This complexity has been addressed by some of business model researchers. Zott et al. (2010) give in their exhaustive review an account on business model components suggested in the period from 2000 to 2006 by a host of scholars (pp. 11-12). In the research on which the present article is based there have been closely examined propositions of Chesbrough and Rosenbloom (2001), Johnson et al. (2008/2011), and more recent work of Osterwalder and Pigneur (2010).

There have also been made at least two serious attempts to elaborate an approach to business model innovation: by Johnson et al. (2008/2011) and by Osterwalder and Pigneur (2010). These approaches as well as implicit approaches known to the author (examples can be met e.g. at start-up competitions) seem to be tacitly based on the postulations of mainstream economic theory and developed within its framework. In the article they will be hereafter called “neoclassical.”

Mainstream perception of the firm as static and isolated economic agent, whose voluntaristic activity is primarily driven by an urge of profit maximisation, leaves beyond the innovator’s focus objective reality of economic relationships in the industry, having developed gradually under influence of particular historic circumstances. In the research it is argued that these underlying mainstream perceptions inhibit the very possibility of building a coherent business model innovation theory.

Though the authors of the neoclassical approaches admit influence of outside factors on business models (Johnson et al., 2008/2011, pp. 55-57; Osterwalder & Pigneur, 2010, pp. 200-211), these factors remain conceptually isolated from the business model. That can be seen even in the structure of the neoclassical methodologies where sets of sources of new business opportunities are presented in a separate chapter in the end of the suggested recommendations (Johnson et al., 2008/2011, pp. 55-57; Osterwalder & Pigneur, 2010, pp. 200-211). Important outside factors of changes are methodologically not integrated in the mainstream approaches to business model innovation. The value is perceived and consequently a principle of value creation as rather an invention. A new business model comes to an entrepreneur through a revelation (Johnson et al., 2008/2011, p. 47) or as a result of business model components lucky “manipulation” (Osterwalder & Pigneur, 2010, p. 15).

By the evolutionary approach, on the contrary, it is implied that the conception of value is rather independent of particular entrepreneur’s will and wit. It evolves gradually under influence of a complex of socio-cultural changes and an entrepreneur perceives or anticipates it sooner than invents. Consequently, the suggested evolutionary method of business model innovation relies upon prognosis of a development trajectory of the value conception and corresponding value creation principles. This prognosis is made by means of inductive research of persistent patterns of behaviour of companies on a chosen market.

Thus, it would be fair to say that an approach to business model innovation is still open to debate. This is despite understanding the need to have a consistent and viable methodological framework to unleash the potential of business model innovation. In the article it is asserted that inconsistencies which impede present approaches application arise due to peculiarities of mainstream economics basic assumptions upon which these approaches have implicitly been built. While authors of neoclassical approaches admit outside factors influence on the business model, these factors remain conceptually isolated from the business model. To overcome inconsistencies in neoclassical approaches to business model innovation it has been suggested a framework based on the evolutionary economic theory. In the next chapter, sources and implications of the evolutionary approach to business model innovation are indicated.

Sources and Implications of the Evolutionary Approach to Business Model Innovation

A method of building up the evolutionary framework for business model innovation has been based on evolutionary perceptions of the economy peculiar to Russian thought and concepts of the contemporary evolutionary economic theory.

The evolutionary approach to business model innovation has been elaborated to solve difficulties in application of the neoclassical approaches. With the help of frameworks of Johnson et al. (2008/2011) and Osterwalder and Pigneur (2010) it is possible to represent a business model of e.g. some existing enterprise, but the authors do not actually offer any means to build up a new or improved business model or guidelines and criteria to evaluate its timeliness, adequacy, and its place (inferiority or superiority) as regards to other enterprises of the industry business models. These methodologies produce a static snapshot of the company made outside the context of the industry and the economy as a whole. In the research it has been asserted that this seemingly applied problem arises due to basic assumptions on which these approaches to business model innovation have been built.

The alternative evolutionary approach has two major sources: evolutionary methods and attitudes “extracted” from Russian economic works (Navalnaya, 2014) and concepts of the contemporary evolutionary economic theory of Nelson and Winter (1982) and their theory followers further contributions (see e.g. Foster & Metcalfe, 2001).

A particular world view and a “special path” of historical development had prevented acceptance of ideas of mainstream economics in Russia till the country’s transition to the market economy when these ideas started to be thoroughly scrutinized and assimilated. It is argued by some scholars, though, that this assimilation remains in many respects just the official rhetoric (Makasheva, 2009, p. 39; Oldfield & Shaw, 2002, p. 396). At the same time concepts and approaches which had been developed in pre-revolutionary Russia and then in USSR till its dissolution show some similarity with the evolutionary economic theory, a “Western alternative” to economic orthodoxy for the last 30 years.

In the research, evolutionary traits of Russian economic analysis have been defined through scrutiny of several well-known treatises of Russian economists: Kondratiev’s statics and dynamics theory (1924/1989; 1930-38/1991); Chayanov’s theory of non-capitalist economic systems (1924/1989a) and his peasant farm organisation theory (1923/1989b); Leontief’s input-output model (1973); and Kantorovich’s (1975; 1990) optimisation theory (see a detailed report on this subject: Navalnaya, 2014). The evolutionary approaches of Russian scholars to economic analysis have been examined and compared with the Nelson and Winter (1982) evolutionary economic theory ideas as well as with ideas of their theory further contributors (Foster & Metcalfe, 2001; Zollo & Winter, 2002). The comparison has revealed important traits these bodies of thought have in common. They share: the focus of theoretical attention on market processes rather than equilibrium conditions; perception of changes as continuous and reciprocally conditioned; regard to economic systems as expanding or contracting with no presumption that the industry is approaching equilibrium; and inductive and empirical research methods. In both cases the concept of firm maximising behaviour is questioned, though, on different grounds. The evolutionary economic theory rejects the idea on the basis of imperfection and asymmetry of information. In Russia, perhaps, the individualistic value concept had not been accepted (at least till dissolution of USSR) due to overall universalism, holism (Avtonomov, Ananyn, & Makasheva, pp. 385-386), and systemic world view inherent to Russian economic thought.

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