SIMULTANEOUS EXPERIMENTATION AS ALEARNING STRATEGY: BUSINESS MODELDEVELOPMENT UNDER UNCERTAINTY
PETRA ANDRIES*, KOENRAAD DEBACKERE, and BART VAN LOOYCentre for R&D Monitoring, Department of Managerial Economics, Strategy,and Innovation, Katholieke Universiteit Leuven, Leuven, Belgium
Ventures operating under uncertainty face challenges defining a sustainable value proposition.Six longitudinal case studies reveal two approaches to business model development: focusedcommitment and simultaneous experimentation. While focused commitment positively affectsinitial growth, this commitment and lack of variety jeopardize long-term survival. Simultaneousexperimentation implies lower initial growth levels, but facilitates long-term survival byenacting variety in a resource-effective manner. This article enriches organizational learningtheory by demonstrating that not only distant search but also simultaneous experimentationresults in variety. Moreover, simultaneous experimentation implies effectual behavior andreconciles the apparent juxtaposition between ‘action’ and ‘planning.’ Copyright © 2013Strategic Management Society.
INTRODUCTION
Successful exploitation of an entrepreneurial oppor-tunity requires translating that opportunity into aviable business model (Amit and Zott, 2001).However, for many ventures, this is not straightfor-ward, given the considerable levels of uncertaintywith which they are confronted, both in terms oftechnical and market feasibility (Anderson andTushman, 1990). This is especially true in emergentindustries where what the market will becomedepends on multiple decisions by various stakehold-ers, and clarity will only arise when entrepreneurialactivities result in the industry’s development (Duttaand Crossan, 2005). As a consequence, the set offeasible opportunities and viable business models isoften not predictable in advance (Alvarez andBarney, 2007).
Recent work (e.g., Gruber, MacMillan, andThompson, 2008; Andries and Debackere, 2007)concludes that experimenting with and redefining,business models—based on consumer and marketreactions—is highly instrumental under such uncer-tain circumstances. According to Sarasvathy (2001,2008), traditional planning will not suffice inrapidly changing and uncertain environments.Instead, an effectual logic, in which entrepreneursproceed with available resources to envisage arange of possible business opportunities and try toimplement some of these opportunities throughpartnerships, is more suitable for leveraging unex-pected events and feedback. If the outcomes of thisexperimentation process are negative, the initialbusiness model is redefined and a new experimentis launched (Minniti and Bygrave, 2001; Vohora,Wright, and Lockett, 2004). Hence, experimentingwith a variety of business models appears crucialunder uncertainty.
However, current research offers little insight intowhat these business model experimentation pro-cesses actually look like and how they can be orga-nized effectively. Organizational learning theory
Keywords: business models; uncertainty; organizational learn-ing; experimentation; variety*Correspondence to: Petra Andries, Centre for R&D Monitor-ing, Katholieke Universiteit Leuven, Waaistraat 6, 3000Leuven, Belgium. E-mail: [email protected]
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Strategic Entrepreneurship JournalStrat. Entrepreneurship J., 7: 288–310 (2013)
Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1170
Copyright © 2013 Strategic Management Society
suggests that different approaches to experimenta-tion exist, but these have not been studied in thecontext of new ventures’ business model develop-ment. This article, therefore, seeks to investigatehow ventures develop their business models throughexperimentation. In particular, it intends to study(1) whether different experimentation and learningapproaches exist and, if so, (2) what the rationale andimplications of these approaches are.
Addressing these questions calls for fine-grainedinsights into the venture processes unfolding overtime (Yin, 1994). Hence, we opt for a longitudinalcase study design. We analyze in-depth six venturesactive in various industries, all of them faced withconsiderable levels of market and technologicaluncertainty and displaying variety in terms of busi-ness model development. Relying on rich dataobtained from 28 interviews, 17 business plans, 75press articles, and 250 pages of other internalcompany documents, we analyze how these six ven-tures develop their business models over time.
Our study makes several contributions. Besidesfocused commitment to one single business model,our cases reveal a previously undocumented entre-preneurial learning strategy labeled ‘simultaneousexperimentation,’ entailing the cost effective pursuitof a portfolio of business model experiments. Ana-lyzing the rationale and implications of both learningstrategies shows that, while focused commitmentis initially instrumental in acquiring dedicatedresources, it reduces the variety of business modelexperiments being pursued and complicates thefinancing and execution of subsequent compulsorysearches, thereby jeopardizing long-term survival.Simultaneous experimentation, implying a portfolioof related but diverging searches, facilitates long-term survival by enacting variety in a resource effec-tive manner.
Our research extends organizational learningtheory by demonstrating that not only distant searchbut also simultaneous experimentation leads tovariety in terms of business models. In addition, itsuggests that simultaneous experimentation can beorganized in a resource effective way. Due to thiscombination of resource efficiency and variety,simultaneous experimentation presents itself as arelevant learning strategy for entrepreneurial ven-tures alongside focused commitment and previouslydocumented bootstrapping approaches.
The identification of a simultaneous experimenta-tion approach adds to the effectuation literature sinceit is one of the first illustrations of how an effectual
logic translates into effectual behavior. As thisapproach combines experimentation with carefulselection, deliberate planning, and efficient execu-tion of specific experiments, it also reconciles theapparent juxtaposition between ‘action’ and ‘plan-ning.’ While planning has traditionally been con-ceived as implying the ex ante selection of onespecific business model, our findings reveal thatsimultaneous experimentation implies deliberateplanning and selection, as well as effectual actionand experimentation.
THEORETICAL BACKGROUND
As a conceptual framework for studying the businessmodel development of ventures, we rely on two mainliterature streams: the literature on business modelsand their components on the one hand and organiza-tional learning theory on the other. The businessmodel literature formed the initial basis for thisresearch, while the relevance of organizational learn-ing theory emerged from the case study analyses (seerecommendations by Suddaby, 2006). For reasons ofclarity, both are discussed up front.
The business model and its components
Since the work of Amit and Zott (2001), researchershave defined the business model concept in a ratherbroad way, referring to a large variety of firm char-acteristics and decision variables, which translateentrepreneurial opportunities into particular configu-rations that create and capture value. Afuah (2003),for example, defines a business model as ‘the set ofactivities a firm performs, how it performs them, andwhen it performs them as it uses its resources toperform activities, given its industry, to create supe-rior customer value . . . and put itself in a position toappropriate the value’ (Afuah, 2003: 9).
As shown by Zott, Massa, and Amit (2011), thereis a consensus in the literature that business modelscombine a broad variety of components or ‘ingredi-ents,’ reflecting the fact that value creation arisesfrom multiple sources, including: (1) transactionefficiency as a major way of reducing costs; (2) dif-ferentiation raising buyers’ utility; (3) the combina-tion and development of a set of scarce, durable, anddifficult to imitate resources and capabilities; and(4) the density, centrality, size, and governance ofthe company’s strategic networks.
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According to a detailed literature review byMorris, Schindehutte, and Allen (2005), the mostconsistently emphasized business model compo-nents are: (1) factors related to the offering;(2) market factors; (3) internal capabilities; (4) com-petitive strategy factors; (5) economic factors, orhow the venture makes money; and (6) personal/investor factors (i.e., the venture’s time, scope, andsize ambitions). A business model’s performancedepends not only on the content of these individualcomponents, but also on the fit between them(Hamel, 2000). Just like a recipe, the business modelincludes both the main elements of a firm’s activityand their integration. A change in one componentinteracts with many other components to determinethe value of the business model as a whole. A busi-ness model can, hence, be described as a configura-tion of interdependent business model components.
Developing a business model throughexperimentation: insights from organizationallearning theory
It is now generally accepted that entrepreneurialventures—when operating under uncertainty—should experiment with a range of business models(Gruber et al., 2008; Andries and Debackere, 2007).Through experimentation, the initial value proposi-tion evolves into a viable business model by meansof ‘a series of trial and error changes pursued alongvarious dimensions’ (Nicholls-Nixon, Cooper, andWoo, 2000: 496). By experimenting with a specificbusiness model and incorporating feedback fromthe environment, entrepreneurial ventures adopt anactive stance to learning about the environment. Ifoutcomes are negative, the initial business model isredefined and a new experiment is launched (Minnitiand Bygrave, 2001), implying ventures will deviatefrom their initial business model configurations asthey learn about and incorporate information thatbecomes available during the entrepreneurial trajec-tory (Gruber et al., 2008).
The literature on organizational learning proposestwo main approaches to learning and experimenta-tion under uncertainty. Both approaches differ in theway configurations are adapted over time. On theone hand, organizations can develop throughstepwise, incremental changes. In each step of thelearning process, they alter one single componentof their configuration and verify whether thischange improves performance (Levinthal, 1997).This process is called ‘local search’ or ‘related
search.’As a result of these incremental changes, theset of solutions in the immediate neighborhood ofthe existing configuration is examined (March andSimon, 1958; Cyert and March, 1963) and the orga-nization will evolve toward a configuration thatis closely related to its initial one (Minniti andBygrave, 2001). On the other hand, organizationscan make radical changes to their configurations bysimultaneously altering multiple components oftheir configuration in each learning step. This learn-ing process is called ‘distant search,’ ‘search throughlong jumps’ (Levinthal, 1997), or ‘path-creatingsearch’ (Ahuja and Katila, 2004) because it leadsorganizations to experiment with configurationsthat differ to a large extent from their initialconfigurations.
In line with the literature on organizational learn-ing, it would then appear that ventures can eitherchange their business model configurations throughlocal search, i.e., by changing one single businessmodel component at a time, or through distantsearch, i.e., by altering multiple business modelcomponents in each new experiment. However,which of the two approaches is more suitable forentrepreneurial ventures operating under uncertaintyremains unclear. With this article, we contribute tothe literature by analyzing: (1) how ventures developand redefine business models under uncertainty;(2) why they opt for a specific search approach;and (3) how these choices affect the developmenttrajectory of the venture.
METHODOLOGICAL APPROACH
Case selection
Given our focus on the business model developmentprocess, we have opted for longitudinal case studies(Eisenhardt, 1989), with ventures as the unit ofanalysis. We started by studying a sample of 21 newventures in the framework of a broader researchproject on incubation, venture creation, and venturefinancing. These 21 ventures were initially selectedto reflect industry variety. Since the current contri-bution focuses on different approaches to businessmodel development under uncertainty, we haveretained only the subset of ventures that, at the timeof their launch, were clearly faced with uncertaintyregarding their technology and markets while, at thesame time, displaying variety in terms of businessmodel development. Indeed, as argued by Eisenhardt
290 P. Andries, K. Debackere, and B. Van Looy
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and Graebner (2007), including a diverse set of casesis more likely to result in robust insights (for a recentillustration in the field of entrepreneurship, seeClarysse, Bruneel, and Wright, 2011).
This approach resulted in a set of six ventures, allfaced with considerable degrees of uncertainty at thetime of founding, and active in diverse industries,including machine visions systems, software foradvanced laser applications, E-commerce, and soft-ware development related to emerging Internet use(see Table 1 for an overview of the cases). It turnsout that the six cases also vary in terms of success,although this was not a selection criterion. Imageand L-goritm1 identified viable business models,turned breakeven, went public, and eventuallybecame global players in their market niches.@Music and OOPs both failed to identify a viablebusiness model and went bankrupt. At the time ofdata collection, it was not yet clear whether or notSiS’ and Regmed’s efforts would result in sustain-able revenues.
Data collection
For each venture, we have documented the periodfrom the emergence of the idea to establish acompany until: (1) the point in time at which theventure ceases to exist (in our cases, either throughbankruptcy or voluntary closure); (2) the point intime where the company turns breakeven; or (3) forfirms that still exist but have not yet turnedbreakeven, the point in time when the data collectionis terminated (i.e., the first quarter of 2005). Thisimplies that, for some companies, we observe moreyears than for others (see Table 1). Also, one casein our sample—namely Image—was significantlyolder than the other five cases, and we had to go backfurther in time to document the initial businessmodel development.2
A historical description of each company has beencreated, based on the information from semi-structured interviews and document analysis (seeTable 1). Data collection and interviews were con-ducted from the first quarter of 2004 to the firstquarter of 2005. Available documents (including
company Web sites and press articles) were analyzedin preparation for the interviews. Twenty-eight inter-views were conducted (see Table 1), lasting approxi-mately two hours on average, with the shortesttaking about 50 minutes and the longest takingalmost three hours. For each case, we interviewed atleast one founder and one person not part of thefounding team. Wherever possible, we includedexternal views such as those of investors, consul-tants, and technology transfer officers involved. Theinterviewees provided complementary documentsafter the interviews. For each case, interviews anddocument analysis were performed until a consistentcase account could be constructed. When inconsis-tencies between interviews and documents emerged(e.g., in @Music and OOPs), additional interviewswere conducted to clarify pending issues.
In total, four company Web sites, 17 businessplans, 75 press articles (including online articles),and approximately 250 pages of other internal docu-ments have been analyzed. The resulting historicaldescriptions were presented to the interviewees toassess accuracy and completeness. In some cases,information has been added, refined, or corrected.We triangulated the documentation of our centralconstructs and involved key informants in eachventure to review our historical descriptions in orderto increase construct validity (Gibbert, Ruigrok, andWicki, 2008). This analysis results in narrativedescriptions of the entrepreneurial trajectory.
Central constructs: business models andtheir relatedness
When engaging in case study analysis, the use of aset of central constructs is beneficial in documentingphenomena of interest systematically (Eisenhardt,1989). As we aim to analyze ventures’ approaches tobusiness model development, we document andinterpret the business model concept as it changesover time. This construct stems directly from ourresearch questions and is, hence, specified a priori.
Whereas conceptually business models arebroadly conceived as the entirety of interrelatedactivities performed to create and capture value(Afuah, 2003), most empirical research on businessmodels adopts a more narrow measurement of theconcept. As summarized by Zott et al. (2011),researchers often adopt idiosyncratic business modeldescriptions and typologies. While this fits specificresearch questions, it hinders cumulative progress inthe field. In addition, most existing approaches are,
1 The names of the ventures in our case study have beenchanged for reasons of confidentiality.2 We are convinced that—due to the availability of detailedbusiness plans and privileged access to two consecutiveCEOs—retrospective biases for the Image case are comparableto the other five cases.
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Table 1. Case study overview
Company Activity Uncertainty at founding Data sources Time period
@Music E-commerce Market: awareness of critical issues,such as impact of Internet onindividuals’ buying behavior,musical genres, geographical scope;however, rate of diffusion unknown;regulation for sales through Internetnot existing
Technology: technical solutions forsales through Internet not existing
Three business plans, 250±pages of internal documents(e-mail correspondence,meeting reports, financialreports), four press articles,11 interviews with threefounders (one wasinterviewed twice), twoinvestors, and five employees
Sept 1998 toJuly 2002
OOPs SW productsthat enableE-commerce
Market: implicit assumption thatB-to-C will be considerable market;unawareness of the distributionapproach, of market interest inB-to-B
Technology: unawareness of thediscrepancy between thetechnological difficulties in adaptingstandardized solution to real settings
Two business plans, three pressarticles, six interviews withone investor, one consultant,one employee, and twofounders (one wasinterviewed twice)
Jan 1998 toFeb 2003
Image Machine visionsystems
Market: difficult to estimate size ofmarket and subsegments; highnumber of applications in differentindustries possible, but unclearwhich one is commerciallyinteresting
Technology: high number ofapplications in different industriespossible, but unclear which one isfeasible from technical point of view
Company Web site, fivebusiness plans, 37 pressarticles, two interviews withtwo former CEOs (of whichone was the founder)
Jan 1983 toOct 1988
L-goritm SW foradvancedlaserapplicationsin productdesign
Market: unawareness of relevance ofsales approach and geographicalscope
Technology: impact of software versushardware technology unknown
Company Web site, threebusiness plans, 21 pressarticles, three interviews withone founder/CEO, onecofounder, and one financemanager
Dec 1995 toDec 2001
SiS Securecommunicationservices
Market: high expectations, but alsohigh uncertainty regarding impact ofInternet on individuals’ buyingbehaviors; uncertainty regardingmarket potential of three potentialapplications; lack of knowledge ofinternational marketing and lack ofknowledge of fierce competition onhome market
Technology: technology platform stillunder development; uncertaintyregarding technical feasibility ofthree potential applications
Company Web site, twobusiness plans, three pressarticles, three interviews withone founder (interviewedtwice), and one technologytransfer officer
May 2000to May2005
RegMed Biomedicalregenerativemedicine
Market: lack of market knowledge;FDA testing procedures forbiomedical products not existing
Technology: uncertain results ofclinical studies
Company Web site, twobusiness plans, seven pressarticles, three interviews withtwo founders, and onetechnology transfer officer
Jan 2000 toJan 2005
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to some extent, sector specific, making them lessappropriate for mapping and analyzing the businessmodel evolution process across different industries(Demil and Lecocq, 2010).
Consequently, limited progress has been made inempirically operationalizing the business modelconcept in line with its definition as a broad set ofdecision variables related to the creation of a com-petitive advantage. An important exception is thedetailed coding scheme by Morris et al. (2005) com-prising a wide variety of business model compo-nents. For our empirical analysis, we rely on thiscoding scheme because it has three important advan-tages. First, it represents multiple sources of valuecreation and value capturing and, therefore, fits theconceptual view of the business model as a system-level, holistic approach to explaining how firms dobusiness (Zott et al., 2011). Second, even though thiscoding scheme is very detailed, it can be appliedacross industries. And finally, it allows for docu-menting changes over time.
For each case, we document and analyze changesin the business model components listed by Morriset al. (2005): (1) the (nature of) the offering, includ-ing the distribution approach; (2) the market;(3) internal capabilities; (4) the competitive strategy;(5) economic factors, i.e., the venture’s revenue/margin model; and (6) personal/investor factors, i.e.,the venture’s ambitions. We adapt the list of sub-items provided by Morris et al. (2005) in a way thatallows us to code not only changes in the businessmodel, but also the number of business modelsexperimented with.
Based on the adapted coding scheme in Table 2,we document changes in sub-items for each venture.We regard any observed combination of these sub-items as one specific business model. If a companyexperiments with two or more such combinations atthe same time, we classify these as different businessmodels. For example, if a venture simultaneouslysells a product directly and indirectly (through dis-tribution partners), we regard both activities as twodifferent business models. If a venture evolves fromoffering services only to offering both products andservices, we consider this the introduction of oneadditional business model. A similar logic applies ifthe venture changes from fixed to both fixed andflexible pricing. If a venture switches from fixed toflexible pricing or from business-to-business tobusiness-to-consumer activities, we regard this asthe abandonment of one business model and theadoption of another business model.
In line with the organizational learning literature,a second central construct adopted is the relatednessof a venture’s experiments.3 We analyze whetherventures develop their business models throughlocal or distant business model searches, and wealso map the overall variety of business modelsbeing explored over time. To do so, we compareeach newly introduced business model to otherbusiness model(s) on the venture’s developmentpath. More specifically, we calculate four distancemeasures for each new business model, representingits distance to the venture’s most similar and leastsimilar business models (developed previously, aswell as simultaneously).
First, we compare the new business model withthe most similar business model used up to that pointin time. We count on how many business modelcomponents they differ. This implies comparisonwith (1) business models used both before and afterthat specific point in time, as well as (2) businessmodels that had been used up to that specific point intime but were abandoned afterward. So, if a ventureat a specific point in time is experimenting with threebusiness models and introduces a new businessmodel, we calculate how many components this newbusiness model differs from each of the three previ-ously used business models, irrespective of whetheror not these three are discontinued. We take thelowest value of these three differences as an indi-cation of the new business model’s relatedness toprevious experiments.
Second, we compare the new business modelwith the most similar business model used fromthat point in time onward. We count on how manybusiness model components they differ. Thisimplies comparison with (1) business models thathad been introduced beforehand and were stillmaintained at that specific point in time, as well as(2) business models that were introduced at thatspecific point in time but had not been usedbeforehand. This gives us an indication of the newbusiness model’s relatedness to simultaneouslyconducted experiments.
Third, we perform similar coding to map the dif-ference between each new business model and itsleast related counterpart. More precisely, we count
3 The inclusion of relatedness as a central concept emergedwhen conducting the case study analysis. Thus, our method-ological approach combines longitudinal case methods guidedby central constructs with more ‘grounded’ approaches in linewith recommendations advanced recently by Suddaby (2006).
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the number of business model components for whichthe new business model differs from the least similarbusiness model used up to that point in time and,finally, we count the number of components forwhich it differs from the least similar business modelused from that point in time onward. Whereas thefirst two distance measures allow us to assess the useof local and distant search, the latter two are indica-tive of the level of overall business model varietyenacted by the venture.
ANALYSIS AND FINDINGS
Not only does longitudinal case study researchbenefit from the use of central constructs, but italso implies different levels of analysis (Pentland,1999)—from describing the actual process of busi-ness model development within each venture to inter-preting the observed findings by means of the centralconstructs and by situating the findings in relation tothe current literature. Moving from description to
Table 2. Subcomponents of the business model (adapted from Morris et al., 2005)
OfferingHow does the company create value? (select one from each set)■ product / service■ standardized / some customization / high customization■ internal manufacturing or service delivery / outsourcing / licensing / reselling / value-added reselling■ direct distribution / indirect distributionMarketWho does the company create value for? (select one from each set)■ type of customer (b-to-b / b-to-c)■ local / regional / international■ position of customer in the value chain: upstream supplier / downstream supplier / government / institutional /
wholesaler / retailer / service provider / final consumer■ broad market / niche market■ transactional / relationalInternal capabilitiesWhat is the company’s source of competence? (select one or more)■ production / operating systems■ selling / marketing■ information management / mining / packaging■ technology / R&D / creative or innovative capability / intellectual■ financial transactions / arbitrage■ supply chain management■ networking / resource leveragingCompetitive strategyHow does the company competitively position itself? (select one or more)■ image of operational excellence / consistency / speed■ product or service quality / selection / features / availability■ innovation leadership■ low cost / efficiency■ intimate customer relationship / experienceEconomic factorsHow does the company make money? (select one from each set)■ pricing and revenue sources: fixed / flexible■ operating leverage: high / medium / low■ volumes: high / medium / low■ margins: high / medium / lowPersonal / investor factorsWhat are the company’s ambitions? (select one)■ subsistence model / income model / growth model / speculative model
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analysis implies an iterative process consisting ofwithin-case analysis and between-case comparison(Eisenhardt, 1989). We analyze business modeldevelopment in each venture in our sample andcompare the development pattern over the six cases.
Based on the historical description constructed foreach case and using the coding scheme in Table 2,we coded whether and when the business models ofthe six ventures in our sample changed. Thesechanges include instances in which new businessmodels were introduced and/or previous businessmodels were abandoned. In a next step, we codedhow many business models were added and droppedin each instance. We then used the coding scheme inTable 2 to map each new business model in detail. Ina final step, we used these detailed mappings tocalculate the distance measures discussed earlier inthe Methodology section.
Coding was performed independently by two ofthe authors, who identified the same 23 changes overall six ventures; i.e., the same 23 points in time atwhich the business model changed. Of these 23events, 19 were initially coded as the exact samenumber of abandoned and adopted business models.Taking into account the different categories usedby the two coders, this implies a Cohen’s kappa of0.59. The differences in coding have been resolvedthrough discussion and by obtaining additionalinformation from the ventures, resulting in consen-sus for all events in a second and final round. In anext step, the two authors independently mappedeach business model in detail and calculated its relat-edness to other business models, immediately reach-ing full agreement. For each case, the coding wasvisualized in (1) a timeline representing the numberof business models added or dropped over time and
(2) a detailed mapping of each new business modeland its relatedness to the venture’s previously andconcurrently developed business models. Figures 1and 2 and Tables 3 and 4 illustrate this for the casestudies of @Music and Image.4 A summary for allcases can be found in Table 5.
A first striking observation is that, for most ven-tures, consecutive and concurring business modelsdiffer on multiple aspects (see median distance mea-sures in Table 5). For all ventures except RegMed,the majority of business models differ on three ormore components from the least-related businessmodel developed previously and also from the least-related business model developed concurrently.These differences indicate that the ventures generatea considerable variety of experiments when search-ing for a viable business model.
However, visual comparison of the timetables ofthe different cases indicates that the six venturesdiffer significantly with respect to how they arrive atcreating variety. Four of them (@Music, OOPs, SiS,and RegMed) focus on one (in the case of RegMed,two) business model(s) very early on and commit tothis decision for several years (see Figure 1 for@Music). Only after a considerable time period do@Music, OOPs, and SiS abandon their initial busi-ness models and launch new business model experi-ments. So, whereas these four ventures focus on andcommit to one specific business model initially, threeof them switch to new business model experimentslater.
4 Due to space limitations, the figures and tables for the fourother cases are not included in this article. They are availablefrom the authors on request.
09/98initial idea
01/99founding
01/00 01/02 07/02@Music files for bankruptcy
01/01
BM1
BM2
BM3
BM4
Figure 1. Event history of @Music
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Image’s and L-goritm’s timelines display distinctpatterns (see Figure 2 for Image). They spend two tofive years developing a large portfolio of businessmodel experiments simultaneously, which they thengradually narrow down to one business model. Asindicated by the median distance measures inTable 5, the majority of these business model experi-ments differ with respect to only one or two businessmodel components from the most similar previousexperiments in the portfolio and with respect to onlyone business model component from the mostsimilar concurrent business model experiment.Stated otherwise, newly introduced business modelsare highly related to already existing businessmodels in the portfolio.
Image and L-goritm are, hence, developing port-folios of simultaneous, local, business modelsearches. While these search paths start from thesame experiment initially, they spread out in variousdirections over the performance landscape. So,although individual search paths in the portfolioconsist of related business model experiments, theventures end up experimenting with a set of businessmodels that, in the end, vary significantly. This canbe seen in the median distant measures in Table 5:while a new business model differs, in most cases,only with respect to one component from the mostsimilar business model previously or concurrently
developed, it often differs on three components fromthe least similar business model in the portfolio.
Consequently, we identified two distinct experi-mentation approaches in our sample: (1) focusedcommitment followed by consecutive businessmodel search and (2) simultaneous experimentation.In a next step, we carried out an in-depth analysis ofthese two approaches. More specifically, we revis-ited the historical case descriptions and investigatedwhy each venture opted for a specific approach andwhat the implications, advantages, and disadvan-tages were. We then compared our findings across allcases adhering to the same experimentation strategy.
Focused commitment followed by a period ofbusiness model experimentation
We find that some ventures select one specific busi-ness model very early on and then commit to thisbusiness model for several years. One could considerthis an extreme case of local, path-deepening search(Ahuja and Katila, 2004) in which the venture keepsexperimenting with the exact same model in thehope that it will become viable. Only when, after asignificant period of time, initial assumptions fail tomaterialize, do these ventures begin to experimentwith alternative business models.
01/83founding 01/84 01/85 01/86 01/87 01/88 10/88
BM1 BM2
BM3
BM4
BM5
BM6
BM7
BM8
BM9
BM10
Figure 2. Event history of Image
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Tabl
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n.a.
n.a.
n.a.
2cu
stom
ized
CD
s;so
me
cust
omiz
atio
n;va
lue-
adde
dre
selli
ng;
dire
ctsa
les
b-to
-b;
natio
nal;
nich
em
arke
t;tr
ansa
ctio
nal
mar
ketin
gpr
oduc
tfe
atur
esfle
xibl
epr
icin
g;m
ediu
mop
erat
ing
leve
rage
;m
ediu
mvo
lum
es;
med
ium
mar
gins
grow
thm
odel
5to
BM
15
toB
M1
5to
BM
16
toB
M3,
BM
4
3co
ncer
ts;
high
cust
omiz
atio
n;in
tern
alse
rvic
ede
liver
ing;
dire
ctsa
les
b-to
-c;
natio
nal;
nich
em
arke
ts;
tran
sact
iona
l
netw
orki
ngse
rvic
equ
ality
flexi
ble
pric
ing;
low
oper
atin
gle
vera
ge;
med
ium
volu
mes
;m
ediu
mm
argi
ns
inco
me
mod
el6
toB
M1
4to
BM
46
toB
M1
6to
BM
1,B
M2
4W
ebde
sign
serv
ices
;hi
ghcu
stom
izat
ion;
inte
rnal
serv
ice
deliv
erin
g;di
rect
sale
s
b-to
-c;
natio
nal;
broa
dm
arke
t;tr
ansa
ctio
nal
oper
atin
gsy
stem
s;W
ebde
sign
serv
ice
qual
ityfle
xibl
epr
icin
g;lo
wop
erat
ing
leve
rage
;m
ediu
mvo
lum
es;
low
mar
gins
inco
me
mod
el6
toB
M1
4to
BM
36
toB
M1
6to
BM
1,B
M2
New Ventures’ Business Model Development Under Uncertainty 297
Copyright © 2013 Strategic Management Society Strat. Entrepreneurship J., 7: 288–310 (2013)DOI: 10.1002/sej
Tabl
e4.
Bus
ines
sm
odel
sus
edby
Imag
e
BM
Off
erin
gM
arke
tIn
tern
alca
pabi
litie
sC
ompe
titiv
eSt
rate
gyE
cono
mic
sPe
rson
al/
inve
stor
fact
ors
Dis
tanc
eto
clos
est
prev
ious
BM
Dis
tanc
eto
clos
est
curr
ent
BM
Dis
tanc
eto
furt
hest
prev
ious
BM
Dis
tanc
eto
furt
hest
curr
ent
BM
1G
ener
alpu
rpos
em
achi
nevi
sion
syst
ems;
stan
dard
ized
;in
tern
ally
deve
lope
d;di
rect
sale
sto
user
s
b-to
-b;
natio
nal;
broa
d;re
latio
nal
imag
epr
oces
sing
tech
nolo
gyin
nova
tion
lead
ersh
ipfle
xibl
epr
icin
g;hi
ghop
erat
ing
leve
rage
;m
ediu
mvo
lum
es;
med
ium
mar
gins
grow
thm
odel
n.a.
n.a.
n.a.
n.a.
2M
achi
nevi
sion
syst
emfo
rflo
wer
insp
ectio
n;cu
stom
ized
;in
tern
ally
deve
lope
d;di
rect
sale
sto
user
s
b-to
-b;
natio
nal;
nich
e;re
latio
nal
imag
epr
oces
sing
tech
nolo
gyin
nova
tion
lead
ersh
ipfle
xibl
epr
icin
g;hi
ghop
erat
ing
leve
rage
;m
ediu
mvo
lum
es;
med
ium
mar
gins
grow
thm
odel
2to
BM
11
toB
M3,
BM
42
toB
M1
3to
BM
5,B
M6
3M
achi
nevi
sion
syst
emfo
rfr
uit
insp
ectio
n;cu
stom
ized
;in
tern
ally
deve
lope
d;di
rect
sale
sto
user
s
b-to
-b;
natio
nal;
nich
e;re
latio
nal
imag
epr
oces
sing
tech
nolo
gyin
nova
tion
lead
ersh
ipfle
xibl
epr
icin
g;hi
ghop
erat
ing
leve
rage
;m
ediu
mvo
lum
es;
med
ium
mar
gins
grow
thm
odel
2to
BM
11
toB
M2,
BM
42
toB
M1
3to
BM
5,B
M6
4M
achi
nevi
sion
syst
emfo
rau
tom
otiv
epa
rts
insp
ectio
n;cu
stom
ized
;in
tern
ally
deve
lope
d;di
rect
sale
sto
user
s
b-to
-b;
natio
nal;
nich
e;re
latio
nal
imag
epr
oces
sing
tech
nolo
gyin
nova
tion
lead
ersh
ipfle
xibl
epr
icin
g;hi
ghop
erat
ing
leve
rage
;m
ediu
mvo
lum
es;
med
ium
mar
gins
grow
thm
odel
2to
BM
11
toB
M2,
BM
32
toB
M1
3to
BM
5,B
M6
5M
achi
nevi
sion
syst
emfo
rau
tom
otiv
epa
rts
insp
ectio
n;st
anda
rdiz
ed;
inte
rnal
lyde
velo
ped;
dire
ctsa
les
tosy
stem
inte
grat
ors
b-to
-b;
inte
rnat
iona
l;ni
che;
tran
sact
iona
l
imag
epr
oces
sing
tech
nolo
gyin
nova
tion
lead
ersh
ipfix
edpr
icin
g;hi
ghop
erat
ing
leve
rage
;hi
ghvo
lum
es;
high
mar
gins
grow
thm
odel
3to
BM
11
toB
M6
3to
BM
13
toB
M2,
BM
3,B
M4
6M
achi
nevi
sion
syst
emfo
rph
arm
aceu
tics;
stan
dard
ized
;in
tern
ally
deve
lope
d;di
rect
sale
sto
syst
emin
tegr
ator
s
b-to
-b;
inte
rnat
iona
l;ni
che;
tran
sact
iona
l
imag
epr
oces
sing
tech
nolo
gyin
nova
tion
lead
ersh
ipfix
edpr
icin
g;hi
ghop
erat
ing
leve
rage
;hi
ghvo
lum
es;
high
mar
gins
grow
thm
odel
3to
BM
11
toB
M5
3to
BM
13
toB
M2,
BM
3,B
M4
7M
achi
nevi
sion
syst
emfo
rau
tom
otiv
epa
rts
insp
ectio
n;st
anda
rdiz
ed;
inte
rnal
lyde
velo
ped;
indi
rect
sale
sth
roug
hO
EM
s
b-to
-b;
inte
rnat
iona
l;ni
che;
rela
tiona
l
imag
epr
oces
sing
tech
nolo
gyin
nova
tion
lead
ersh
ipfix
edpr
icin
g;hi
ghop
erat
ing
leve
rage
;hi
ghvo
lum
es;
high
mar
gins
grow
thm
odel
2to
BM
5,B
M6
1to
BM
93
toB
M2,
BM
3,B
M4
3to
BM
2,B
M3,
BM
4,B
M8
8M
achi
nevi
sion
syst
emfo
rse
mic
ondu
ctor
insp
ectio
n;st
anda
rdiz
ed;
inte
rnal
lyde
velo
ped;
dire
ctsa
les
tosy
stem
inte
grat
ors
b-to
-b;
inte
rnat
iona
l;ni
che;
tran
sact
iona
l
imag
epr
oces
sing
tech
nolo
gyin
nova
tion
lead
ersh
ipfix
edpr
icin
g;hi
ghop
erat
ing
leve
rage
;hi
ghvo
lum
es;
high
mar
gins
grow
thm
odel
1to
BM
5,B
M6
1to
BM
5,B
M6
3to
BM
2,B
M3,
BM
4
3to
BM
2,B
M3,
BM
4,B
M7
9M
achi
nevi
sion
syst
emfo
rse
mic
ondu
ctor
insp
ectio
n;st
anda
rdiz
ed;
inte
rnal
lyde
velo
ped;
indi
rect
sale
sth
roug
hO
EM
s
b-to
-b;
inte
rnat
iona
l;ni
che;
rela
tiona
l
imag
epr
oces
sing
tech
nolo
gyin
nova
tion
lead
ersh
ipfix
edpr
icin
g;hi
ghop
erat
ing
leve
rage
;hi
ghvo
lum
es;
high
mar
gins
grow
thm
odel
2to
BM
5,B
M6
1to
BM
73
toB
M2,
BM
3,B
M4
3to
BM
2,B
M3,
BM
4
10‘s
econ
dop
tical
’m
achi
nevi
sion
syst
emfo
rse
mic
ondu
ctor
insp
ectio
n;st
anda
rdiz
ed;
inte
rnal
lyde
velo
ped;
indi
rect
sale
sth
roug
hO
EM
s
b-to
-b;
inte
rnat
iona
l;ni
che;
rela
tiona
l
imag
epr
oces
sing
tech
nolo
gyin
nova
tion
lead
ersh
ipfix
edpr
icin
g;hi
ghop
erat
ing
leve
rage
;hi
ghvo
lum
es;
high
mar
gins
grow
thm
odel
1to
BM
91
toB
M9
2to
BM
82
toB
M8
298 P. Andries, K. Debackere, and B. Van Looy
Copyright © 2013 Strategic Management Society Strat. Entrepreneurship J., 7: 288–310 (2013)DOI: 10.1002/sej
In the case of OOPs, the founders—soon afterinception in 1998—commit to the development of‘Spoot,’ a software product for B-to-C applications.Previous consulting activities were discontinued in1999 to concentrate solely on product developmentand sales. Even though many technical problemswere encountered and sales did not materialize asplanned, the company stuck to its business modeluntil 2001. At that point in time, the foundersstarted to analyze the lack of sales in-depth. Theyradically changed the business model’s offering,the competitive strategy it entailed, and its econom-ics. About a year later, they refined this businessmodel by identifying a niche market. Again, salesdid not materialize and yet another redirectionimposed itself.
In SiS, a very similar story unfolded. Although thefounders initially identified three possible applica-tions, they decided to develop communication ser-vices only. After two years of disappointing sales, aradical shift to storage applications took place. Thisimplied a complete overhaul in terms of envisagedcustomer segment, technology, and geographicalmarket. Also @Music (see Figure 1 and Table 3)focused from the very beginning on one specificbusiness model, namely online B-to-C sales of nichemusic labels. When, after three years, sales had stillnot materialized, they started to experiment withadditional business models, such as concert organiz-ing, Web design, and the production of custom-madeCDs (B-to-B). RegMed was slightly different fromthe other three cases in the sense that (1) it commit-ted very heavily to two parallel business models and(2) although these business models were still notgenerating sales after four years, no redirectionswere planned. The fact that RegMed was active in
biotech, a sector with long time horizons, probablyexplains this persistence.5
Rationale for focused commitment
From the historical descriptions, we find that earlycommitment by the ventures in our sample was notdue to a lack of awareness regarding uncertainty; itwas, in fact, a deliberate choice in the face of uncer-tainty. Founders and investors actually acknowl-edged at the start that many factors affecting thebusiness model’s viability were uncertain. Theyacknowledged technical uncertainties, uncertaintyabout how the market would evolve in terms of cus-tomer behavior and competition, and uncertaintyregarding regulation (see Table 6). Nevertheless,they decided to persistently focus on the develop-ment of one (or in the case of RegMed, two) specificbusiness model(s).
In our interviews (see Table 6), stakeholdersmentioned two main reasons for committing to onespecific business model despite the presence ofuncertainty. First, they focused early to capitalize onlearning effects. Both founders and investors wereconvinced that by putting all their efforts into onesingle business model, they would learn quicklyabout technical and market issues. They believed thiswould enable them to stay ahead of the competitionand capture a large market share. As one founder ofOOPs put it: ‘We just had to be first on that market.
5 The case of RegMed, which pursues multiple business modelsover longer time frames, is an example of what Westhead andWright (1998) call ‘portfolio entrepreneurship.’ Of course, suchpersistent adherence to multiple business models multipliesresource requirements compared to a persistent focus on onesingle business model.
Table 5. Overview of business model changes
Case Approach Average # ofnew business
models per year
Mean distanceto closest
previous BM
Mean distanceto closest
current BM
Mean distanceto furthest
previous BM
Mean distanceto furthest
current BM
@Music Focused commitment 1.00 6 4 6 6OOPs Focused commitment 0.83 4 4 4 4SiS Focused commitment 0.50 5 n.a. 5 n.a.RegMed Focused commitment 0.40 n.a. 1 n.a. 1Image Simultaneous
experimentation1.67 2 1 3 3
L-goritm Simultaneousexperimentation
1.57 2 1 3 3
New Ventures’ Business Model Development Under Uncertainty 299
Copyright © 2013 Strategic Management Society Strat. Entrepreneurship J., 7: 288–310 (2013)DOI: 10.1002/sej
Tabl
e6.
Quo
tatio
nson
focu
sed
com
mitm
ent
Rat
iona
leIm
plic
atio
ns
Ack
now
ledg
emen
tof
unce
rtai
nty
Incr
ease
dm
obil
izin
gpo
wer
Pro
mis
eof
achi
evin
gle
arni
ngef
fect
san
dfir
st-m
over
adva
ntag
es
Ded
icat
edor
gani
zati
onal
stru
ctur
ean
dco
nsid
erab
leex
pend
itur
es
Dif
ficul
ties
inre
orga
nizi
ngw
hen
assu
mpt
ions
fail
Dif
ficul
ties
inac
quir
ing
exte
rnal
inve
stm
ent
whe
nas
sum
ptio
nsfa
il
@M
usic
•W
eha
dth
isvi
sion
that
the
era
ofth
etr
aditi
onal
mus
icbu
sine
ssw
ould
beov
erso
on.I
tw
asex
pect
edth
atth
roug
hout
the
wor
ld,t
heIn
tern
etw
ould
com
plet
ely
chan
geco
nsum
ers’
buyi
ngbe
havi
or.O
fco
urse
,no
body
knew
whe
nan
dho
wth
isw
ould
happ
en.
•W
ew
ent
toa
big
inte
rnat
iona
lm
usic
fair
...A
llth
ese
labe
lsju
stlo
ved
us.W
eca
me
back
with
sign
edag
reem
ents
from
all
impo
rtan
tla
bels
...T
hein
vest
ors
wer
eth
rille
d.
•T
hegu
ysfr
omth
eau
thor
righ
tsau
thor
itydi
dn’t
know
wha
tto
dow
ithus
.The
yha
dne
ver
deal
tw
ithon
line
mus
icsa
les
...W
ew
ere
actu
ally
sitti
ngw
ithth
em,w
ritin
gre
gula
tions
abou
tau
thor
righ
tspr
otec
tion
and
tari
ffs
for
onlin
esa
les.
Itw
as,o
fco
urse
,agr
eat
adva
ntag
eto
doth
at.
•T
hein
vest
ors
had
this
idea
that
toge
ton
line
sale
sgo
ing,
we
shou
ldla
unch
abi
gm
arke
ting
cam
paig
n.A
nin
tern
atio
nal
mar
ketin
gm
anag
erw
asat
trac
ted
todo
that
.We
wer
ebu
rnin
gca
shlik
ehe
ll.B
utw
ew
ere
told
that
that
’sth
ew
ayyo
ush
ould
doit.
•T
hese
thin
gsha
dno
thin
gto
dow
ithth
ein
itial
idea
.It
was
not
wha
tI
sign
edup
for.
Iw
ante
dto
wor
kfo
ra
com
pany
selli
ngm
usic
onlin
e,go
ing
com
plet
ely
agai
nst
the
trad
ition
alm
usic
indu
stry
...
Iha
dle
ftm
yjo
bfo
rth
at.
Iw
asn’
tin
tere
sted
inW
ebde
sign
orin
orga
nizi
ngco
ncer
ts.
•T
hey
wer
ede
sper
atel
ytr
ying
toge
nera
tere
venu
esfr
omco
ncer
tor
gani
zing
,W
ebde
sign
and
othe
rst
uff.
The
sew
ere
not
the
type
sof
activ
ities
we
wan
ted
toin
vest
inas
vent
ure
capi
talis
ts.
OO
Ps•
Bas
edon
ago
vern
men
tsu
bsid
y,w
edi
da
proo
fof
conc
ept
for
the
Spoo
tpr
oduc
t.T
here
sults
wer
epr
omis
ing,
but
alo
tof
tech
nica
lis
sues
rem
aine
dun
solv
ed..
.It
was
uncl
ear
whe
ther
we
coul
dpu
llth
isof
f.N
ever
thel
ess,
we
aban
done
dou
rpr
ofit-
mak
ing
cons
ultin
gac
tiviti
esan
dfo
cuse
dal
lou
ref
fort
son
deve
lopi
ngth
ispr
oduc
t.
•W
ew
ere
quite
happ
yw
ithth
ere
venu
esco
min
gfr
omou
rco
nsul
ting
activ
ities
.At
leas
tit
prov
ided
som
eki
ndof
inco
me
...t
hat
coul
dpa
rtia
llysu
ppor
tth
ede
velo
pmen
tof
Spoo
t.B
utth
ein
vest
ors
wer
eno
tin
tere
sted
inye
tan
othe
rco
nsul
ting
com
pany
.The
yw
ante
dus
topu
tal
lef
fort
son
prod
uct
deve
lopm
ent.
•W
eju
stha
dto
befir
ston
that
mar
ket.
We
wou
ldbe
way
ahea
dof
com
petit
ors
byth
etim
eth
eyev
enun
ders
tood
the
oppo
rtun
ity.
•T
hein
vest
ors
brou
ght
ina
big
shot
with
tons
ofsa
les
expe
rien
cefr
oma
big
firm
...H
ebr
ough
thi
sem
ploy
ees
with
him
.Su
dden
ly,w
eha
dan
incr
edib
lyex
pens
ive
sale
ste
amof
20pe
ople
.Stil
lno
thin
gso
ld.
•W
eha
dse
para
teR
&D
and
serv
ice
divi
sion
s.Pe
ople
from
thes
edi
visi
ons
wer
eke
ptap
art.
The
yw
ere
inop
posi
tesi
des
ofth
ebu
ildin
g..
.We
had
this
idea
that
they
shou
ldno
tin
terf
ere
with
each
othe
r,bu
tsh
ould
focu
son
thei
rm
ain
task
.
•T
hesa
les
man
ager
and
his
entir
esa
les
team
wer
efir
ed.
Inst
ead,
the
mar
ketin
gte
ambe
cam
ere
spon
sibl
efo
rsa
les.
Toim
prov
eou
rin
sigh
tsin
cust
omer
need
s,al
lde
velo
pers
had
tost
art
wor
king
dire
ctly
for
the
cust
omer
...A
lthou
ghI
still
thin
kth
isw
asa
good
deci
sion
,it
also
pose
dpr
oble
ms.
Som
eof
thes
ede
velo
pers
wer
ere
ally
tech
nica
lpe
ople
,typ
ical
‘ner
ds’
let’
ssa
y.N
otth
ety
peof
peop
leyo
uw
ant
tose
ndto
acu
stom
er.
•Su
dden
ly,o
neof
the
inve
stor
s..
.com
esup
with
the
idea
tofo
rma
join
tve
ntur
e..
.He
just
didn
’tbe
lieve
anym
ore
that
we
coul
dm
ake
iton
our
own.
Now
,whi
leth
ism
erge
rpr
obab
lyw
ould
bebe
nefic
ial
for
him
,the
rew
asno
thin
gin
ther
efo
rm
e,an
dI
didn
’tag
ree
...
Ica
me
upw
ithan
idea
for
aw
hole
new
mar
ket
...
The
rew
asno
supp
ort
wha
tsoe
ver
onth
ebo
ard.
Iim
med
iate
lyre
aliz
edth
atth
eco
mpa
nyco
uld
not
goon
with
out
the
supp
ort
ofth
ein
vest
ors
...T
wo
mon
ths
late
r,I
filed
for
bank
rupt
cy.
SiS
•O
fco
urse
ther
ew
asa
lack
ofcl
arity
abou
tw
hat
the
mar
ket
wou
ldlo
oklik
e.N
obod
yre
ally
knew
whe
ther
peop
lew
ould
buy
onlin
e.W
ekn
ewth
atth
isw
ould
bea
key
dete
rmin
ant.
•It
was
atig
htpl
an.E
very
body
coul
dea
sily
unde
rsta
ndw
hat
they
wan
ted
todo
...T
hest
ory
was
easy
tose
ll.
•O
fco
urse
ther
ew
asa
lack
ofcl
arity
abou
tw
hat
the
mar
ket
wou
ldlo
oklik
e..
.But
inan
yca
se,y
ouw
ante
dto
beth
ere
first
—to
obta
inm
arke
tsh
are
inca
seit
beca
me
asu
cces
s.
•W
ithth
em
oney
from
the
first
finan
cing
roun
d,w
eim
med
iate
lyst
arte
dto
hire
peop
le..
.to
exec
ute
our
plan
.
•T
his
was
real
lya
com
plet
eov
erha
ul.W
ew
ould
now
focu
son
this
new
appl
icat
ion,
but
we
didn
’tha
veth
eex
pert
ise.
We
had
tost
art
sour
cing
inte
chno
logy
from
exte
rnal
part
ners
,bec
ause
we
didn
’tha
veth
eca
pabi
litie
sto
deve
lop
itou
rsel
ves.
•O
urin
vest
orw
asn’
tin
tere
sted
anym
ore.
Luc
kily
,thi
sw
asal
lbe
fore
the
dotc
omcr
ash.
We
wer
eab
leto
attr
act
new
inve
stor
san
dw
ithth
isne
wca
pita
lin
ject
ion,
we
basi
cally
star
ted
all
over
agai
n.
Reg
Med
•T
his
isa
biot
ech
star
t-up
,ri
ght.
The
re’s
alw
ays
unce
rtai
nty
abou
tw
heth
erth
ete
chno
logy
will
wor
k,w
heth
eryo
u’ll
get
FDA
appr
oval
,and
thin
gslik
eth
at.
•Pr
ofes
sor
L.c
ame
back
from
the
Stat
esw
ithth
isve
rysp
ecifi
can
dcl
ear
idea
ofw
hat
hew
ante
dto
do..
.He
cam
eto
us(i
.e.,
the
TT
O).
We
have
confi
denc
eth
athe
can
pull
this
off.
He’
sin
tern
atio
nal
top
inth
isfie
ldan
dhe
real
lykn
ows
wha
the
’sdo
ing.
•W
ere
ally
need
toin
vest
all
poss
ible
effo
rts
inth
ispr
oduc
t.It
coul
dbe
com
eth
efir
stbi
otec
hpr
oduc
tge
tting
FDA
appr
oval
.Thi
sw
ould
open
upin
cred
ible
mar
ket
oppo
rtun
ities
.
•Y
ouca
n’t
just
hire
gene
ralis
tsfo
rth
isty
peof
wor
k.Y
oune
edre
sear
cher
sw
ithsp
ecifi
ckn
owle
dge
abou
tjo
ints
and
cart
ilage
.
(did
not
occu
rin
peri
oddo
cum
ente
d)(d
idno
toc
cur
inpe
riod
docu
men
ted)
300 P. Andries, K. Debackere, and B. Van Looy
Copyright © 2013 Strategic Management Society Strat. Entrepreneurship J., 7: 288–310 (2013)DOI: 10.1002/sej
We would be way ahead of competitors by the timethey even understood the opportunity.’ Persistentfocus is, hence, seen as a way to quickly reduceuncertainty over a specific business model and tocreate first-mover advantages.
Second, our interviews with founders and inves-tors further reveal that focus on one specific businessmodel improves the clarity of the value propositionfor different stakeholders. The fact that the compa-nies have well-delineated business models allowsthem to attract motivated employees and to convincestrategic partners. In all four cases, the independentventure capitalists (VCs) involved were very muchin favor of a persistent focus on a specific businessmodel. In the case of OOPs, the investors were actu-ally pushing the founders to focus solely on productdevelopment, as one founder recalled: ‘We werequite happy with the revenues coming from our con-sulting activities. At least it provided some kind ofincome . . . that could partially support the develop-ment of Spoot. But the investors were not interestedin yet another consulting company. They wanted usto put all efforts on product development.’
Implications of focused commitment
Our historical case descriptions and our interviews(see Table 6) demonstrate that focusing on a specificbusiness model results not only in mobilizing powerbut also in clarity regarding the venture’s organiza-tional configuration. Objectives and activities aredeveloped in line with the envisaged value proposi-tion, and employees whose competencies reflectthe objectives outlined in the business model areattracted. As an OOPs employee testified: ‘Theinvestors brought in a big shot with tons of salesexperience from a big firm . . . He brought hisemployees with him.’ This results in a dedicatedorganizational structure, consisting of different func-tional departments, as indicated by that sameemployee: ‘We had separate R&D and service divi-sions. People from these divisions were kept apart.They were in opposite sides of the building.’ Thedevelopment of these dedicated activities impliessignificant expenditures. Our case studies clearlyshow that external investors are supportive of thesecostly initiatives, believing these will enable ven-tures to achieve fast growth. One @Music founderpointed out that: ‘The investors had this idea thatto get online sales going, we should launch a bigmarketing campaign. An international marketingmanager was attracted to do that. We were burning
cash like hell. But we were told that that’s the wayyou should do it.’
Over time, the venture develops the chosen busi-ness model and thereby reduces uncertainty pertain-ing to the underlying assumptions. This process canyield outcomes ranging from full confirmation ofinitial assumptions to the complete opposite. In threeout of the four case studies—OOPs, @Music, andSiS—crucial assumptions proved to be too optimis-tic. As the founder of SiS testified: ‘The competitionon the home market turned out to be much fiercerthan expected (because) this one big player decidedto become active.’ In multiple cases, including@Music, consumer buying behavior turned out to bedifferent than expected, as one employee recalled:‘Only later, we realized that people were just down-loading to listen, but were simply not willing to buy.’
Our case studies show that when ventures arefaced with discrepancies between initial assump-tions and unfolding reality, change becomes inevi-table for their survival (see Ambos and Birkinshaw,2010, on the role of cognitive dissonance in ven-tures’ development processes). From our analysis, itbecame clear that OOPs, @Music, and SiS turned toconsecutive business model search. These redirec-tions had serious implications for the ventures’ inter-nal organization. These ventures have attractedspecialized personnel and have introduced dedicatedorganizational structures—commitments, all in linewith their initial focus. Redefining the businessmodel then becomes complex, as it requires chang-ing the mind-set of the entrepreneurial team and itsstakeholders. It implies choosing a different set ofactivities, skills, and structures (Miller and Friesen,1984). Some of the specialized competencies maybecome obsolete, while others may be missing. Theventures’ core capabilities might, therefore, turn intocore rigidities (see also Dougherty, 1995, andAmbos and Birkinshaw, 2010, on disruptive transi-tions). In the case of OOPs, founders decide to dras-tically adapt their development and sales approachafter having undertaken an in-depth analysis of nega-tive sales results: ‘To improve our insights in cus-tomer needs, all developers had to start workingdirectly for the customer . . . Although I think thiswas a good decision, it also posed problems. Some ofthese developers were really technical people,typical “nerds” let’s say. Not the type of people youwant to send to a customer.’ Moreover, our casestudies confirm that employees themselves are notalways willing to take part in this change process.Or, as one @Music employee indicated: ‘These
New Ventures’ Business Model Development Under Uncertainty 301
Copyright © 2013 Strategic Management Society Strat. Entrepreneurship J., 7: 288–310 (2013)DOI: 10.1002/sej
things had nothing to do with the initial idea. It wasnot what I signed up for. I wanted to work for acompany selling music online, going completelyagainst the traditional music industry . . . I had leftmy job for that. I wasn’t interested in Web design orin organizing concerts.’
In addition, the case studies demonstrate that it isdifficult to convince investors to fund reconfigura-tions, since these investors question whether theinitial business model was wrong or whether theproblems are simply due to lousy execution bythe venture’s founders (cf. Bhide, 1992). Thisweakens investor confidence. As one OOPs founderexplained (see Table 6): ‘Suddenly, one of the inves-tors . . . comes up with the idea to form a jointventure with another company in his portfolio. Hejust didn’t believe anymore that we could make it onour own. Now, while this merger probably would bebeneficial for him, there was nothing in it for me, andI did not agree . . . I came up with an idea for a wholenew market . . . There was no support whatsoever onthe board. I immediately realized that the companycould not go on without the support of the investors. . . Two months later, I filed for bankruptcy.’ OOPsand @Music did not succeed in mobilizing resourcesfor executing consecutive business model searchesand went bankrupt.
Summary and propositions on focused commitment
Our case studies show that some ventures persistentlyfocus on a specific business model. This focus is adeliberate choice in the face of uncertainty since it isinstrumental in mobilizing different stakeholders(among whom independent VCs figure prominently),and ventures believe it can result in first-mover advan-tages. This approach entails significant expenditures:launching dedicated campaigns, developing an elabo-rate organizational structure, and hiring specializedpersonnel with skills matching the chosen businessmodel. Given that focused commitment is instrumen-tal in mobilizing resources, it facilitates rapid organi-zational growth during the initial phases of theventure’s life.
However, our case studies illustrate that, in reality,these first-mover advantages might not materialize(see also the work by Dowell and Swaminathan,2006, showing that the occurrence of first-moveradvantages in emergent industries is indeed a rareevent). When the initial assumptions underlying thebusiness model prove to be incorrect, the ventures inour study turn to consecutive searches and experi-
ment with new business models. As our cases illus-trate, such change processes are hazardous andpainful since they require the venture to becomeflexible again with regard to its assumptions and itsorganizational configuration. Given the specializedcapabilities and dedicated organizational structure,this becomes very difficult. Our case studies showthat founders and employees are not always capableor willing to do so and that investors are reluctant tofinance such changes. The ventures’ organizationalrigidities and financing problems reduce the possi-bility of exploring new business models, therebyhampering the venture’s ability to identify a viablebusiness model and, hence, also its long-term sur-vival. Based on these findings, we propose that:
Proposition 1: Focused commitment has a posi-tive effect on the initial growth of venturesoperating under uncertainty.
Proposition 2: Focused commitment jeopardizesthe long-term survival of ventures operatingunder uncertainty.
Simultaneous experimentation
We find that some ventures do not commit earlyon to a specific business model, but develop diverg-ing search paths by engaging in a series of relatedbusiness model experiments. L-goritm initiallyexperimented with a variety of business modelssimultaneously. In the first year of its existence, thecompany developed software enabling the use ofadvanced laser applications in product design,including applications for reverse engineering aswell as for quality control. The latter were sold incombination with quality control services. Duringthe entire period of 1997 to 1999, the companyexperimented with a combination of indirect anddirect sales of these software products. From 2000onward the company discontinued some of theseactivities, ending up with one business model by2001. This business model was viable in the sensethat it generated sufficient income for the companyto break even, grow internationally, and becomeworld leader in its niche market.
Image, however, began with one single businessmodel but immediately developed it into a portfolioof five different business models (see Figure 2 andTable 4). After four years, the venture gradually nar-rowed down its business model portfolio and, by1988 (i.e., five years after inception), one viable
302 P. Andries, K. Debackere, and B. Van Looy
Copyright © 2013 Strategic Management Society Strat. Entrepreneurship J., 7: 288–310 (2013)DOI: 10.1002/sej
business model remained. In this case too, the busi-ness model was the start of a highly prosperousinternational trajectory and a successful IPO.
Rationale for simultaneous experimentation
From interviews with stakeholders (see Table 7), wefound that multiple search paths of related businessmodel experiments were executed in parallel for tworeasons. First, although each new experiment wasrelated to another experiment in the portfolio, thefact that these search paths developed in differentdirections implies that ventures end up experiment-ing with a variety of business models. Ventures con-sider this instrumental in addressing uncertainty. Itallows them to learn and, hence, reduce uncertaintyabout a relatively broad range of opportunities. Ifone business model proves unviable, there is still achance that one of the other options may prove suc-cessful. In doing so, the ventures manage risk andretain strategic flexibility (Raynor, 2007; deWeerd-Nederhof et al., 2008). As one founder ofImage related: ‘It was impossible to foresee whichmarket niches would emerge and which ones wouldbecome profitable. We just had to spread ourchances.’ Or, as the CEO of L-goritm testified: ‘The(indirect) sales approach didn’t work . . . We had toabandon it. That wasn’t a problem really, becausewe already had experience with direct sales.’ Theventures in our sample used a combination of mul-tiple search paths to generate a variety of businessmodel experiments and, thereby, avoided prelimi-nary commitment to a suboptimal business model.
Second, learning about one option can also reduceuncertainty about other options, especially whennew business model experiments are related to atleast one other business model in the portfolio. Weobserve that ventures use the knowledge acquiredfrom exploring one option to reassess and redefinethe nature of, and the priorities for, the activity port-folio as a whole. L-goritm gathered knowledge andexpertise from its service activities and—based onthis experience—decided to add hardware compo-nents to its product offerings, as the CEO testified:‘What we saw when doing consulting activities isthat customers didn’t realize that it is the soft-ware that determines total performance. They werealways talking about the hardware. We realized thatif we wanted to develop a profitable software tool, wewould have to include hardware in order to sell itand to drive up the price.’ Hence, ventures explicitlyregard engagement in an additional business model
experiment as instrumental in re(de)fining otherbusiness models in the portfolio.
Our case study analysis reveals that also investorswere following this rationale. They did not regardthese experiments as resource-consuming errors thatneeded to be avoided, but as appropriate and neces-sary ways to select the most interesting entrepreneur-ial opportunity (see interview quotes in Table 7). Inthe cases of L-goritm and Image, both public sectorand independent VCs were willing to invest in ven-tures that explicitly acknowledge uncertainty anddevelop various related business model search pathsin parallel. L-goritm’s investors—when closing theinvestment agreement—were fully aware and sup-portive of the venture’s plan to experiment withvarious business models, as L-goritm’s cofoundertestified. ‘The investors did not mind. On the con-trary. They understood that we could not know inadvance what would work.’ In addition, the casestudies reveal that investors were closely monitoringprogress and—instead of providing a major capitalinjection upfront—were staging their investmentsaccordingly. As L-goritm’s cofounder observed: ‘. . .they were monitoring pretty closely what we weredoing in all these areas, just to make sure that wewere making progress overall. They didn’t provideus with a large investment sum you sometimes saw inother companies. Instead, they infused additionalcapital as some of our projects turned out to bepromising.’
Implications of simultaneous experimentation
The cases reveal that, although investors are support-ive of experimentation with a portfolio of businessmodels, they refrain from injecting large amounts ofcapital in the initial stages of the ventures’ life andinstead stage their investments as progress is made.We observe that to deal with these initial resourcelimitations, ventures adopt cost-effective strategies.First, business models are included only if they entailsignificant technical or commercial overlap withother business models in the portfolio. By develop-ing multiple search paths of related business models,ventures can redeploy activities in different businessmodel logics, thereby creating spillovers betweenthe different activities undertaken. Second, they uselow-cost probing strategies to find out which prod-ucts and services the markets prefer (cf. Brown andEisenhardt, 1997), as the founder of Image recalled:‘In these early days, our projects consisted mainly ofpilots. We set up a prototype and checked whether it
New Ventures’ Business Model Development Under Uncertainty 303
Copyright © 2013 Strategic Management Society Strat. Entrepreneurship J., 7: 288–310 (2013)DOI: 10.1002/sej
Tabl
e7.
Quo
tatio
nson
sim
ulta
neou
sex
peri
men
tatio
n Rat
iona
leIm
plic
atio
ns
Ris
km
anag
emen
tK
now
ledg
esp
illo
vers
Ext
erna
lin
vest
ors’
supp
ort
Cos
tef
ficie
ncy
Gra
dual
evol
utio
nfr
ompr
ojec
t-ba
sed
orga
niza
tion
tom
ore
elab
orat
est
ruct
ure
Imag
e•
Itw
asim
poss
ible
tofo
rese
ew
hich
mar
ket
nich
esw
ould
emer
gean
dw
hich
ones
wou
ldbe
com
epr
ofita
ble.
We
just
had
tosp
read
our
chan
ces.
•O
fco
urse
we
didn
’tju
stdo
anyt
hing
.We
delib
erat
ely
sele
cted
proj
ects
whe
rew
eco
uld
gene
rate
som
eki
ndof
cros
s-fe
rtili
zatio
n,w
here
the
thin
gsyo
ule
arn
inon
epr
ojec
tca
nbe
used
for
refin
ing
your
othe
rac
tiviti
es.
•W
ere
ceiv
edse
vera
lra
ther
limite
dca
pita
lin
fusi
ons
over
time,
depe
ndin
gon
the
iden
tifica
tion
ofpr
omis
ing
activ
ities
and
the
prog
ress
we
had
mad
e.•
We
neve
rha
dan
ytr
oubl
ede
fend
ing
our
proj
ects
toth
eex
tern
albo
ard
mem
bers
.
•In
thes
eea
rly
days
,ou
rpr
ojec
tsco
nsis
ted
mai
nly
ofpi
lots
.We
set
upa
prot
otyp
ean
dch
ecke
dw
heth
erit
coul
ddo
the
job.
•In
the
begi
nnin
g,w
ew
ere
doin
gev
eryt
hing
ours
elve
s.I
was
help
ing
him
tode
velo
pth
eso
ftw
are,
but
Iw
asal
sose
lling
and
doin
gqu
ality
cont
rol
serv
ices
.Iw
asa
sale
sman
,aco
nsul
tant
,and
apr
oduc
tde
velo
per
all
inon
epe
rson
.•
By
2001
,we
had
deve
lope
da
prof
essi
onal
stru
ctur
e,in
clud
ing
anR
&D
team
,asa
les
man
agem
ent
team
,am
arke
ting
and
sale
ssu
ppor
tte
am,a
nda
finan
cean
dad
min
istr
atio
nun
it.L
-gor
itm•
The
(ind
irec
t)sa
les
appr
oach
didn
’tw
ork
...W
eha
dto
aban
don
it.T
hat
was
n’t
apr
oble
mre
ally
,bec
ause
we
alre
ady
had
expe
rien
cew
ithdi
rect
sale
s.
•W
hat
we
saw
whe
ndo
ing
cons
ultin
gac
tiviti
esis
that
cust
omer
sdi
dn’t
real
ize
that
itis
the
soft
war
eth
atde
term
ines
tota
lpe
rfor
man
ce.T
hey
wer
eal
way
sta
lkin
gab
out
the
hard
war
e.W
ere
aliz
edth
atif
we
wan
ted
tode
velo
pa
profi
tabl
eso
ftw
are
tool
,we
wou
ldha
veto
incl
ude
hard
war
ein
orde
rto
sell
itan
dto
driv
eup
the
pric
e.
•T
hein
vest
ors
did
not
min
d.O
nth
eco
ntra
ry.T
hey
unde
rsto
odth
atw
eco
uld
not
know
inad
vanc
ew
hat
wou
ldw
ork.
But
they
wer
em
onito
ring
pret
tycl
osel
yw
hat
we
wer
edo
ing
inal
lth
ese
area
s—ju
stto
mak
esu
reth
atw
ew
ere
mak
ing
prog
ress
over
all.
The
ydi
dn’t
prov
ide
usup
fron
tw
itha
larg
ein
vest
men
tlik
eyo
uso
met
imes
saw
inot
her
com
pani
es.
Inst
ead,
they
infu
sed
addi
tiona
lca
pita
las
som
eof
our
proj
ects
turn
edou
tto
bepr
omis
ing.
•T
his
soft
war
ew
ould
take
time
tode
velo
p.So
we
need
edot
her
activ
ities
toge
nera
tem
oney
.O
ffer
ing
serv
ices
for
qual
ityco
ntro
lw
asth
eea
sies
tw
ayto
doth
at.
•O
fco
urse
we
had
diff
eren
tpe
ople
doin
gdi
ffer
ent
thin
gs.
But
ther
ew
asno
tre
ally
ahi
erar
chic
alst
ruct
ure.
The
rew
ere
nocl
ear
divi
sion
s..
.It
was
mor
epr
ojec
tba
sed.
Lat
eron
,onc
ew
eha
da
bette
rvi
ewof
wha
tou
rco
rem
arke
tw
ould
be,w
eof
cour
seor
gani
zed
ina
mor
epr
ofes
sion
alw
ay.Y
oukn
ow,
with
real
func
tiona
ldi
visi
ons
and
thin
gslik
eth
at.W
eal
soat
trac
ted
mor
epe
ople
.
304 P. Andries, K. Debackere, and B. Van Looy
Copyright © 2013 Strategic Management Society Strat. Entrepreneurship J., 7: 288–310 (2013)DOI: 10.1002/sej
could do the job.’ And finally, they include businessmodel experiments with short-term cash-generatingpotential in their portfolio. Similarly, the founder ofL-goritm stated: ‘This software would take time todevelop. So we needed other activities to generatemoney. Offering services for quality control was theeasiest way to do that.’
The development of the ventures’ organizationalstructures is in line with the chosen portfolioapproach. An organic project-based configurationemerges, which resembles the project-based natureof R&D departments and provides flexibility(Fiegenbaum and Karnani, 1991). During the firstyears, L-goritm’s founders took care of all businessactivities themselves. After awhile, three employeeswere hired, but the structure remained project ori-ented rather than functional. Over time, specificproject teams were formed, each of them focusing onbusiness models considered worthwhile pursuing.The founder’s quotations in Table 7 illustrate this:‘In the beginning, we were doing everything our-selves. I was helping him to develop the software, butI was also selling and doing quality control services.I was a salesman, a consultant and a product devel-oper all in one person.’
Since these ventures acknowledged that thevarious conceivable business models are all charac-terized by uncertainty, they postponed the decisionto commit to one option until more information withrespect to a range of value propositions becameavailable. As uncertainty decreased, the companiesgradually narrowed down the range of businessmodels until a viable business model remained.L-goritm gradually narrowed down its activity rangefrom 2000 onward and ended up with one successfulbusiness model by the end of 2001. A similar processtook place in Image. This portfolio reductionentailed organizational changes. The venturesevolved from loose configurations resembling R&Ddepartments’ project-based characteristics to moreelaborated structures, as they narrowed down therange of business models. Or as the CEO of L-goritmtestified: ‘Later on, once we had a better view ofwhat our core market would be, we of course orga-nized in a more professional way. You know, withreal functional divisions and things like that. We alsoattracted more people.’
Summary and propositions on simultaneousexperimentation
Our case studies reveal that some ventures developeda portfolio of business model experiments in order to
learn about a broad variety of potential businessmodels. Both public sector and independent inves-tors are supportive of this approach, as they considerit appropriate to select the most interesting entrepre-neurial opportunity. However, instead of injectinglarge amounts of capital in the initial stages of theventures’ life, they stage their investments as prog-ress is made. This limits initial organization growthand leads to the development of a project-basedorganization of limited scale.
To deal with these initial resource limitations,ventures deploy low-cost probing strategies, includebusiness model experiments with short-term cash-generating potential, and enact knowledge and costspillovers. The latter is achieved by including onlybusiness models that are related to at least one otherexperiment in the portfolio. The ventures, therefore,do not select experiments at random, but do so in adeliberate manner. Although each new experiment isrelated to at least one other experiment in the port-folio, the parallel search paths develop in variousdirections. As a result, the ventures reduce uncer-tainty with respect to a wide variety of businessmodels. This uncertainty reduction facilitates theselection of viable options over time. Staged invest-ments and the evolution of the ventures’ organiza-tional structures from informal and project-based tomore formal and divisional, reflect this process. Thefact that ventures learn about a wide variety of busi-ness models in a cost-effective manner increasestheir chances of identifying viable business modelsand, hence, facilitates their survival in the long run.Based on these findings, we propose that:
Proposition 3: Compared to focused commitment,simultaneous experimentation reduces the initialgrowth of ventures operating under uncertainty.
Proposition 4: Compared to focused commit-ment, simultaneous experimentation facilitateslong-term survival of ventures operating underuncertainty.
DISCUSSION
In this article, we have analyzed how ventures con-fronted with uncertainty develop their businessmodel through experimentation. In particular, weinvestigated (1) whether different experimentationand learning approaches exist and, if so, (2) what therationale and implications of these approaches are.
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In doing so, we drew on business model literatureand organizational learning theory. The latter pro-poses two main experimentation approaches tolearning under uncertainty: (1) local or relatedsearch versus (2) distant search or search throughlong jumps. While local search is expected to resultin a low to moderate variety, distant searches areoften deemed necessary to generate considerablelevels of variety.
Some ventures in our sample indeed tried toexplore a broader range of business models througha sequence of distant business model searches, oncetheir initial business models proved to be unviable.However, altering business models after a period offocused commitment is hazardous and painful. Theventures in our study all had considerable difficultiesin mobilizing stakeholders and additional resourcesfor these subsequent experiments, leading to bank-ruptcy in several cases.
At the same time, our research shows that thereare less hazardous ways to enact variety in terms ofbusiness models. Ventures can develop multiplediverging search paths of related business modelexperiments. These simultaneous search paths ini-tially start from the same business model but spreadout in various directions. As a result, ventures end upexperimenting with different business models. Theparallel pursuit of different business models createsa considerable variety of (real) options, whichincreases the odds for survival and growth (GuntherMcGrath, 1999). This finding enriches organiza-tional learning theory by going against the assump-tion that only distant search can lead to considerablelevels of variety. Our findings reveal that a portfolioof related search paths is equally instrumental inenacting variety.
Our findings not only reveal how simultaneousexperimentation generates variety in terms of busi-ness models, but also demonstrate how it does this ina cost-effective manner. By including only businessmodels that are related to at least one other experi-ment in the portfolio and adhering to low-costprobing strategies, the ventures can enact spilloversefficiently. Simultaneous experimentation, therefore,presents itself as a relevant learning strategy for ven-tures operating under uncertainty, alongside previ-ously documented bootstrapping approaches (Bhide,1992; Winborg and Landström, 2001).
Our work not only extends organizational learningtheory, it also contributes to the lively discussion oncausation and effectuation. Sarasvathy (2001) dis-cusses the relevance of causation and effectuation
processes to firm creation. Causation processesimply that entrepreneurs choose specific means (aspecific organizational structure, specific employeeskills, etc.) to create a desired effect (such as aspecific business model). Effectuation processes,however, imply that ventures draw on their knowl-edge and networks and select between possibleeffects that can be created with this set of means.Whereas existing work discusses effectuation ascognition or logic, research on how effectual logictranslates into effectual behavior is scarce (excep-tions include recent contributions by Fisher, 2012,and Mauer, 2009). In an effectual logic, the basis fortaking action is means driven, investment decisionsinvolve a commitment limit in terms of affordableloss, and stakeholders and unforeseen events heavilyinfluence the development direction (Read et al.,2009; Sarasvathy, 2008).
In our study, ventures deliberately develop portfo-lios of business model experiments, starting frominitial ideas, available capabilities, and experiences.They add specific business models to the portfolioand redefine others based on experiences and infor-mation gathered in the course of previous businessmodel experiments. Simultaneous experimentationconsequently represents an effectual logic, since ittakes a set of means as a given and focuses on select-ing between possible effects that can be created withthis set of means. Focused commitment, however,follows a causal logic where ventures choose spe-cific means (a specialized organizational structure,specialized personnel, and significant expenditures)to create a desired effect (namely, the implementa-tion of one, ex ante chosen business model).
In addition, the fact that simultaneous experimen-tation involves careful selection of related experi-ments suggests a reconciliation of the notions of‘action’ and ‘planning.’ In Sarasvathy’s work(Sarasvathy, 2001), effectuation is partly driven bycoincidence: ‘Whoever first buys . . . becomes, bydefinition, the first target customer. By continuallylistening to the customer and building an ever-increasing network of customers and strategic part-ners, the entrepreneur can then identify a workablesegment profile’ (Sarasvathy, 2001: 247). Otherauthors have also attributed an important role to‘initial coincidences’ in the creation of entrepreneur-ial opportunities (Alvarez and Barney, 2007).However, we find that the ventures in our casestudy do not just ‘go with the flow’ in developing aportfolio of business model experiments. Instead,they consciously select and design these experiments.
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Ventures deliberately select business model experi-ments that are related and that offer cross-fertilizationopportunities, allowing them to exploit their meansand strengths efficiently across a variety of businessmodels. Simultaneous experimentation, therefore,implies both effectual experimentation building onthe venture’s own means and strengths and the con-scious planning and selection of specific businessmodel experiments to be included in the portfolio.
Whereas ‘planning’ and ‘action’ or ‘planning’ and‘learning’ have been juxtaposed in management lit-erature (e.g., Liao and Gartner, 2006), our findingssuggest that these two notions can be reconciled ascomplementary aspects constituting the simultane-ous experimentation approach. Moreover, our find-ings suggest that this combination of action andplanning results not only in substantial variety, but itcan also be organized in a cost-effective manner and,therefore, it offers good prospects for the survivaland growth of entrepreneurial ventures operatingunder uncertainty. Simultaneous experimentation,thus, reconciles Sarasvathy’s (2001) preference foreffectual cognition with Liao and Gartner’s (2006)preference for planning as a way to deal withuncertainty.
Our work also demonstrates that some investors(including both public sector and independent VCs)are supportive of this combination of planning andaction. They finance ventures while being fullyaware of their intentions to experiment with multiplebusiness models. Those investors do not regard theseexperiments as resource-consuming errors that needto be avoided but as necessary efforts to select themost interesting entrepreneurial opportunity. Thus,these findings refute the widely held belief that VCsare willing to finance only ventures with a focusedbusiness plan. Whereas investment in focused com-panies requires managing risk at the level of theportfolio, financing ventures engaged in simultane-ous experimentation implies that risk is alsomanaged within the boundaries of the venture. Wesuggest that this approach has the potential toincrease the overall success rate and, hence, thevalue of VCs’ investment portfolios.
Finally, we believe our work contributes to thedevelopment of empirical studies on businessmodels in general and on business model innovationin particular. As shown by Zott et al. (2011),researchers’ use of idiosyncratic definitions andcoding schemes hinders cumulative scientific prog-ress. While our coding scheme is highly demandingin terms of information gathering, it allows for ana-
lyzing changes in a wide variety of business modelcomponents across various industries and facilitatesthe development of an encompassing view on thebusiness model as the firm’s underlying architec-ture. We hope it can be an inspiration for otherresearchers.
LIMITATIONS AND FUTURERESEARCH
In discussing our research, some limitations should,of course, be kept in mind. It is clear that one cannotgeneralize empirically from six cases and that thepropositions developed in this article require furthertesting. Our case studies suggest that focused com-mitment fosters short-term growth but limits variety,thereby jeopardizing long-term venture survival. Inaddition, we suggest that simultaneous experimenta-tion restricts initial growth but introduces higherlevels of requisite variety in a resource-effectivemanner which, in turn, fosters long-term survival.Further research is certainly warranted on how dif-ferent approaches to business model developmentinfluence short-term growth and long-term survival.Such assessments would involve translating our casestudy findings into an adequate panel-oriented lon-gitudinal research design comprising both focusedventures and ventures engaged in simultaneousexperimentation (e.g., De Carolis et al., 2009). Atthe firm level, indicators of economic growth couldbe regressed on the number of business models beingexplored simultaneously, controlling for human andfinancial resources invested as well as for comple-mentary success factors identified in previousresearch (such as industry characteristics, foundingteam characteristics, legitimacy, and available assets,including patents, alliances, and geographical loca-tion). Hazard models could be used to assess theimpact of the number of simultaneous businessmodel experiments on survival, again controlling forresources and other firm and industry characteristics.
Moreover, we observe only two distinct (combi-nations of) experimentation approaches in ourcase studies: (1) simultaneous experimentation and(2) focused commitment followed by consecutivebusiness model search. Although we have sampledventures with quite different business model devel-opment trajectories, it goes without saying thatfurther engagement in in-depth case studies mayresult in additional insights with respect to both thedelineation of additional, relevant approaches and
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the combination of different approaches over time.For example, it is conceivable that ventures maybegin with a sequence of distant business modelsearches—thereby identifying the most promisingdirection for subsequent development throughrelated business model searches—or they may use asequence of related business model searches toidentify a first client, which puts them in a betterposition to attract external investment and focus sin-gularly on that one specific business model. Othertemporal combinations can be imagined, and furtherresearch aimed at identifying these approaches,their rationales, and their implications seems highlyappropriate.
Finally, our research also points to the need andrelevance of further inquiry into the nature and con-sequences of different types of investor behavior.When and why are investors willing to supportsimultaneous experimentation versus when and whyare they inclined to restrict funding to ventures witha clear focus? (How) does this depend on VC fundcharacteristics and investment managers’ humancapital characteristics, as can be expected from exist-ing literature (Knockaert et al., 2010; Wright,Vohora, and Lockett, 2004)? To what extent do ven-tures with portfolios of simultaneous business modelexperiments affect the overall performance of VCinvestment portfolios? VCs usually spread their riskby investing in several focused ventures with differ-ent business models. Simultaneous experimentation,though, spreads risk within the venture. As businessmodels are in constant flux, the act of balancing riskboth within and between ventures introduces inter-esting research questions on optimizing investmentportfolio management and outcomes. We hope thisstudy contributes to and inspires future research inthis area.
CONCLUSIONS
While existing literature suggests that venturesshould experiment to develop and improve theirbusiness models, it is unclear how they should orga-nize these experimentation processes in an effectivemanner. This study extends organizational learningtheory by analyzing (1) whether ventures use differ-ent experimentation and learning approaches underuncertainty and, if so, (2) what the rationale andimplications of these approaches are.
Based on six longitudinal case studies, we iden-tified two distinctive approaches to business devel-
opment under uncertainty: (1) focused commitmentversus (2) simultaneous experimentation. While theformer is conceptually related to organizationallearning approaches identified in the literature, theidentification of ventures developing a portfolio ofdiverging related searches is less straightforward.These ventures spend from two to five years devel-oping their portfolios of business models throughrelated business model search, which they graduallynarrow down until a viable business model remains.Our research reveals that while focused commit-ment is initially instrumental in acquiring dedicatedresources, this dedication hinders the financing andexecution of subsequent searches. As a result,focused commitment limits the variety of businessmodel experiments and hampers long-term survi-val. Simultaneous experimentation with carefullyselected business models, executed in a disciplinedmanner, however, increases the chance of identify-ing a viable business model and, hence, of survivingin the long run.
Our research extends organizational learningtheory by demonstrating that enacting a variety ofbusiness model experiments does not intrinsicallyrequire distant search. Simultaneous experimenta-tion also allows ventures to explore a broad varietyof business models. In addition, it is far more effi-cient in this respect than focused commitment. Assimultaneous experimentation implies a combina-tion of means-driven experimentation with theconscious planning, execution, and selection ofexperiments, our study is one of the first to illustratethe translation of effectual logic into effectual behav-ior and also reconciles the apparent juxtapositionbetween ‘action’ and planning.’
ACKNOWLEDGEMENTS
The authors would like to thank Dr. Cathy Lecocq forhelp with data collection in the initial phase of thisresearch project. Our thanks also go to Mike Wright andtwo anonymous reviewers for their pertinent commentsand suggestions. Part of this research was made possiblethrough a research grant from C.I.M. Also, the supportof the BNP Paribas Fortis Chair ‘Herman Daems’ isgratefully acknowledged.
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