managerial cognition, action and the business model of the Þrm
TRANSCRIPT
Managerial cognition action andthe business model of the firm
Henrikki TikkanenHelsinki School of Economics Helsinki Finland
Juha-Antti LambergInstitute of Strategy and International Business
Helsinki University of Technology Helsinki Finland
Petri ParvinenExecutive School of Business Helsinki University of Technology
Helsinki Finland and
Juha-Pekka KallunkiDepartment of Finance and Accounting Faculty of Economics and Industrial
Management University of Oulu Oulu Finland
Abstract
Purpose ndash The purpose of the paper was to outline a generic framework for the business model andilluminate its linkages to managerial cognition
Designmethodologyapproach ndash The paper reviewed the focal literature focusing on the actionsand evolution of a firm and built a synthesis that describes the different components of a businessmodel
Findings ndash The main finding was that a business model is essentially both a cognitive phenomenonas well as being built on the material aspects of a firm
Research limitationsimplications ndash The paper proposes that the business model can bescrutinized in future studies especially from the viewpoints of cognition thus creating new avenuesfor intra-firm evolutionary studies
Practical implications ndash The paper found several implications for practising managers First theconcept itself creates possibilities for self-analysis and scenario building Second the understandingthat a business model is systemic helps managers to evaluate their actions vis-a-vis the evolutionarypath of the business model Third the outlined business model is useful in executive education as itcreates a cognitive map of the various aspects of business activities
Originalityvalue ndash The paper offers new insights into the functions and evolution of firms and willbe of interest to both researchers and practising managers
Keywords Corporate strategy Cognition Evolution
Paper type Conceptual paper
IntroductionA growing number of management researchers economists and organizationaltheorists have invoked the concept of a business model in their search for answers to abroadening range of questions (eg Winter and Szulanski 2001 Amit and Zott 2001)For instance Magretta (2002) called for a consistent definition of the term ldquobusinessmodelrdquo stating that it is used erroneously and haphazardly among managers Despiteits vagueness the business model concept has become a pertinent notion in themanagerial vocabulary Seeking to clarify the concept and help to assess its utility for
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wwwemeraldinsightcomresearchregister wwwemeraldinsightcom0952-6862htm
Cognition actionand the business
model
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Management DecisionVol 43 No 6 2005
pp 789-809q Emerald Group Publishing Limited
0952-6862DOI 10110800251740510603565
management theory and practice this paper develops a conceptual framework thatidentifies the key ldquocomponentsrdquo of a business model
The starting point for this paper is that a business model can be conceptualized asthe sum of material objectively existing structures and processes as well as intangiblecognitive meaning structures at the level of a business organization The conceptualframework presented in this paper naturally represents an archetype (Greenwood andHinings 1993) Theoretically the aim is to merge existing understanding on thematerial aspects of business models with theories concerning cognitions and industrybelief systems (Porac et al 2002) From a managerial viewpoint the primarycontribution of this archetype is the explicit definition of the scope of the intuitivelyclear but theoretically vague business model concept
We are interested in how the material aspects of firm-level business models interactwith managerial cognition and action By the material aspects of a business model werefer to the tangible elements of a companyrsquos strategy business network operationsand finance and accounting By the cognitive aspects of a business model we refer tothe systemic meaning structures or the belief system of a company The belief systemis seen as the driver of decision making and subsequently action Business modelevolution is also defined by the relationships between managerial actions and theiroutcomes manifested in realized economic exchanges and business results
The paper is structured as follows First we briefly review the literature onfirm-level business models Second we discuss the role of cognition and action asdeterminants of a companyrsquos business model Third we present our propositions thatconceptualize the material aspects of a business model Finally we present a modelthat identifies relationships between the material aspects cognitive mechanisms andaction
Business model literature reviewThe concept of a business model is nearly absent from academically oriented literatureand thus remains more or less under-conceptualized (Amit and Zott 2001 Magretta2002) However the notion of a business model is frequently used applied in theliterature especially in the information and communication technologies (ICT) sector(Venkatraman 2000 Hamel 1999 von Krogh and Cusumano 2001 Sweet 2001Mahadevan 2000 Lechner and Hummel 2002) After the crash of the ICT sector in2000 some authors have sought to explain why the ldquonewrdquo business models were notable to revolutionize the economy (Ratliff 2002 Feng et al 2001 Williams 2001) Inrecent academically oriented management literature the business model concept mostoften refers to value creation and economic logic especially in terms of revenuecreation (Amit and Zott 2001 Venkatraman and Henderson 1998)
The following definitions of the business model concept highlight the fragmentednature of existing conceptualizations
Business model is a coordinated plan to design strategy along the customerinteraction asset configuration and knowledge leverage vectors (Venkatramanand Henderson 1998)
Business model depicts the content structure and governance of transactionsdesigned to create value through the exploitations of business opportunities(Amit and Zott 2001)
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Business model is typically a complex set of interdependent routines that isdiscovered adjusted and fine-tuned by ldquodoingrdquo (Winter and Szulanski 2001)
Amit and Zott 2001 business model concept is an exception in business modelliterature as it is explicitly theoretically anchored in value chain analysisSchumpeterian innovation transaction cost economics the resource-based view andstrategic networks The dimensions of their concept include content noveltycomplementarities among resources and capabilities and network effects Otherauthors have also pointed out the importance of the systematic inclusion of firmresources capabilities and learning in the firmrsquos business model (Eden andAckermann 2000) Moreover the importance of including dynamism in the study ofbusiness models has also been recently identified as a central issue Winter andSzulanski (2001) included dynamism in their analysis by identifying the need for thebusiness model to change at different phases of the replication strategyrsquos lifecycle andinternationalization Equally Sauer and Willcocks (2003) emphasized that moreimportant than knowing the structure of a business model is the ability to create andeffect new structures and processes quickly and at low cost
Despite these contributions there is a lack of a unitary conceptualization of thebusiness model in academic literature Thus a need exists to build a framework thataddresses all relevant components of a firmrsquos business model as well as theirinterrelationships in the functioning of the model In addition to these more tangibleaspects the cognitive and evolutionary aspects of a business model have been scarcelyrecognized in existing research
Cognition and actionThe functioning of a business model becomes visible in managerial decisions andactions Actions and outcomes also emerge autonomously as a result of the systemicconsequences of different organizational configurations (Miller 1986) Theactualization of any outcomes (eg in the nature of exchanges between economicparties or in the financial performance of the firm) is thus dependent on the systemicproperties of the firmrsquos business model From a dynamic perspective these outcomesalso directly influence the evolution of the business model
Thus the evolution of a business model is built on managerial actions that focus oncertain aspects of the business model As Giddens (1984) and later institutionaltheorists (Barley and Tolbert 1997) have proposed organizational actions are directlylinked with the wider institutional environment of the focal organization
The role of individual and organizational meanings and meaning structures iscrucial in the structuration process of a business model In the presented businessmodel framework organizational actors are seen as rule-followers who fulfill theiridentities by following procedures they see as appropriate in the current context(March and Olsen 1989) The formal rules beliefs and values define theappropriateness of different actions and thus make firmsrsquo evolution contingent notonly on the business environment but equally on the firmrsquos history since rule systemstypically evolve in time (March and Simon 1963)
In practice the cognitive aspects of the business model are firstly constituted by themeanings and meaning structures which actors maintain about the components of thebusiness model Second the cognitive aspects also relate to the way in which actorsperceive the functioning of the business model Briefly we see cognitions as the
Cognition actionand the business
model
791
conceptual and operational representations that humans develop while interactingwith complex systems Thus we refer to cognition as both an individual and anorganizational-level process (Hill and Levenhagen 1995 Walsh 1995) It is importantto note that we study managersrsquo cognitions of the business model of the firm they aredeveloping not the perception that others have of the firm or the perception thatmanagers have of other firms
As stated in behavioural organization theory cognitions act as a filter between theactorsrsquo understanding of the inter-organizational environments and theintra-organizational context (March and Simon 1963) Hence the belief systemfilters actorsrsquo perceptions and beliefs concerning the function of the business model tocertain organizational actions
Our perspective on shared belief systems resembles Porac et alrsquos (2002) four-levelbelief hierarchy that fuses several industry belief systems into a belief hierarchy inwhich higher- and lower-level beliefs are in constant interaction Higher-order beliefsthus motivate change or stability in lower order beliefs Following Porac et al (2002)our framework identifies four conceptual levels of managerial cognition related to thematerial aspects of the business model of the firm
(1) industry recipe
(2) reputational rankings
(3) boundary beliefs and
(4) product ontologies
Industry recipes are beliefs related to the logic of the economic competitive andinstitutional environment and their effects on the focal firm (Spender 1990) Boundarybeliefs refer to social constructions that identify a focal firm with a certaininterorganizational community (Porac et al 2002) Product ontologies are cognitiverepresentations that link for instance product or service attributes usage conditionsand buyer characteristics into a definition of an offering that is hoped to becomesuperior on the target market (Porac et al 2002) Finally reputational ranking refers tohow organizations socially evaluate competition and their competitors vis-a-vis theirown performance
In sum our conceptualization of managerial cognition action and the businessmodel of the firm builds on the following logic Managers view and make decisionsregarding the material aspects based on their cognitions that can be located at the threeconceptual levels of beliefs identified above Consequently the mechanismunderpinning the actualization of any relevant business-related outcomes consists ofhow the material aspects of the business model interact with managerial beliefsystems This mechanism constitutes the business model of the firm
The material aspects of a firmrsquos business modelWe define the business model of a firm as a system manifested in the components andrelated material and cognitive aspects Key components of the business model includethe companyrsquos network of relationships operations embodied in the companyrsquosbusiness processes and resource base and the finance and accounting concepts of thecompany (Figure 1)
In the following we propose some relationships between managerial cognitionaction and the components of the business model of the firm Our propositions deal
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with reinforcement (ldquocognition X reinforces action in component Ardquo) constraints(ldquocognition Y constrains action in component Brdquo) or correlation (ldquothe higher cognitionZ the higher action in component Crdquo)
Strategy and structureStrategic intent strategy process and the content of strategy The function of thestrategy is to give meaning and direction to the development of the companyrsquosbusiness model In other words we see strategy as the comprehensive pattern of acompanyrsquos actions and intents binding together all the components of the businessmodel (Mintzberg and Waters 1982) Strategic intent on the other hand is the ldquodriverrdquoof the content and process of a companyrsquos strategy (Hamel and Prahalad 1990)Strategic intent involves long-term organizational commitment to ambitious businessobjectives creating a shared mindset and a sense of direction for the company
By the concept of the strategy process we refer to the dichotomy of autonomous andinduced strategy processes (Burgelman 2002) The induced strategy process refers tohighly focused strategy processes managed by rational actors represented by the topmanagement of the company The autonomous process then again refers to theinternal-ecological emergent processes that occur at all levels of the organizationespecially among middle management The induced strategy process has a tendency tofocus on some component or components of the business model of a company whereasthe pure autonomous mode automatically takes into consideration most of thecomponents In most cases however both modes of strategy process co-evolvereflecting for instance the culture structure and operations in the organization
Approaches to the content of strategy have ranged from the classical planningperspective (Ansoff 1965 Andrews 1980) to the widely referenced typology of Milesand Snow (1978) to generic strategies of Porter (1980) and to more recent emergentand evolutionary approaches to strategy (Mintzberg 1987 Burgelman 2002) Theseperspectives concentrate on where strategy comes from for example striving todifferentiate the environment the daily actions of the organization the plan and theplanner or the perceived typological role of the company
As the business model approach presented in this paper does not concentrate onwhere strategy content comes from but rather discusses the components of thebusiness model which embody ldquothe strategyrdquo it rejects no origin In essence strategy
Figure 1The business model of
the firm
Cognition actionand the business
model
793
does not concentrate on any particular aspect but on the totality constituted by thecomponents of the business model (see Hambrick and Fredrickson 2001) Theemphasis is thus on which ldquooriginsrdquo have an influence on which component orcomponents of the business model and what this influence is In addition weacknowledge that there is substantial interplay between the components of thebusiness model
Organizational structure From the perspective of a firmrsquos business model theeffects of strategies processes and the environment on the organizational structuresare vital in order to find the link with organizational performance (Ketchen et al 1996)These relationships are partially explained by configurations and emphasize the needto understand the effects of organizational structure not only on strategy but on thestrategic actions and consequent economic development and business results as well(Ketchen et al 1997)
We adopt the view that a leap from one structural archetype to another mustproceed through a number of phases and that organizations are thus capable ofadapting to changing environments (Miller and Friesen 1982) This means thatorganizations are unable to transform their structures without risk as each leap createsa disruption in organizational life (Mintzberg and Waters 1982) In this paper weadvocate a co-evolutionary perspective which emphasizes the relationship betweenstructure and strategy On the one hand organizational structure is a key determinantof decision making On the other hand strategic action is perceived to have power overorganizational structures Strategic choices and resulting actions do changeorganizational structures albeit mostly in an incremental fashion Evidence of thisis that the current organizational reality can be thought to narrow down thealternatives available for strategic action thus emphasizing strategizing as a functionof the present structure
Governance A further element in understanding corporate strategy deals withunderstanding the existence boundaries and internal organization of the firm The ideaof organizational governance tackles these issues and has emerged as an importantstrategic perspective (Williamson 1999 Madhok 2002 Foss 1999) Governance iscentrally comprised of contracting-based literature that concentrates on the generaltreatment of contracting around the issues of appropriation ownership alignment ofincentives (Madhok 2002) self-interest as well as authority the employmentrelationship economizing and coordination financial structure regulation andproperty rights (Williamson 1999)
The managerial decision-making processes surrounding governance at the level ofthe firm can be conceptualized to operate in two realms First governance modes canbe managed by initiating action along four continua These are
(1) the market-hierarchy continuum
(2) the economic logic continuum
(3) the private-civic interest continuum and
(4) the legal incorporation continuum
Typical actions include influencing the tightness of relationships (eg alliance-building)tightening or loosening the profit-making orientation (eg relinquishingprofit-maximization targets) redefining the prioritization of stakeholder groups andchanging the legal incorporation of the organization (eg privatization)
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Second the governance practices of the company are susceptible to strategicdecision making Governance practices encompass a wide but not indefinite set ofcontractual arrangements within the firm that are more strategic than administrativein nature Typical governance practices include corporate governance practicesstakeholder management strategies outsourcing strategies process ownershipsystems reward monitoring and penalty systems legal and contracting practicesand even rules for process optimization within the firm
Regarding the relationships between the belief system of the firm and its strategyand structure we offer the following propositions
P1 The less ambiguous the link between firm strategy and the totality of firmrsquosbelief system the more crystallized the strategic intent of a company and themore consistent its actions
P2 The more mature the industry and the more stable the related industry recipethe more narrow the alternatives for structural change
Business networkCustomer relationship portfolio The management of the customer relationshipportfolio (customer base) is identified as one of the most crucial aspects in themanagement of a companyrsquos business model This task is executed through a customerrelationship management (CRM alternatively key account management or KAM)process addressing all aspects of identifying customers creating customer knowledgebuilding customer relationships and shaping their perceptions of the organization andits offerings (Srivastava et al 1999 Hunt and Morgan 1995) The task of managing thecustomer relationship portfolio is also seen as an evolutionary interactive processoccurring in the business network of a firm (Anderson et al 1994)
In order to manage existing or potential customer relationships their state natureoutcomes and developmental phases have to be understood In terms of their state andnature business relationships can vary between competitive (market-based)cooperative (partnership-based) and command (dominance-based or hierarchical)modes (Campbell 1985) The outcomes of business relationships have often beencategorized into the more objective techno-economic outcomes (eg customerrelationship profitability new technology development) on the one hand and themore subjective psychosocial outcomes (eg trust commitment and feelings of success)on the other (Tikkanen and Alajoutsijarvi 2001) Finally the development phases ofbusiness relationships typically include the pre-relationship exploratory developingstable (institutionalized) and dissolution stages (Ford 1980)
More specifically the CRM process consists of at least the following sub-processes identifying potential new customers determining the needs of existing and potential customers (customer value
creation) developing the companyrsquos product andor service offering developing and implementing marketing and sales programs developing and managing the channels of distribution
Cognition actionand the business
model
795
acquiring and leveraging information technology for customer contact
management of customer-oriented production teams especially in industrialcompanies
acquisition and dissemination of relevant market and customer information and
cross-selling and up-selling of product and service offerings (see Srivastava et al1999)
In our business model framework the customer relationship portfolio of the companyis the major source of revenues and knowledge that facilitates an understanding ofcustomer value creation and thus the development of offerings (Anderson and Narus1999) Customer value creation is inherently connected to the core competencies of thecompany and its business network (Anderson et al 1994) Moreover customer valuecreation is seen as the key determinant of segmentation (Anderson and Narus 1999) Inother words companies orient their core competencies and business processes towardsoptimal value creation for their key customers or customer segments
On a more general level the CRM process is related to the functioning of a businessmodel essentially comprises of the management of the processes of
exchanges and communication between the economic parties
the coordination of production and exchange (transactions)
adaptations in both the offering and the coordinating structures and processesand
customer and market intelligence (see Moller and Wilson 1995)
The marketcustomer orientation of the organization doing marketing is also a basicemphasis in CRM In marketing literature a market orientation typically characterizesa companyrsquos disposition to deliver superior value to its customers This requires anorganization-wide commitment to continuous information gathering and coordinationof customer needs competitorsrsquo capabilities and the provisions of other significantmarket agents and authorities (Slater and Narver 1994) The result is an integratedorganizational effort which gives rise to superior firm performance (Kohli andJaworski 1990)
Supplier relationship portfolio The management of a companyrsquos supplierrelationship portfolio (supplier base) involves the continuous enhancement of theacquisition of inputs and their transformation into desired customer outputs in theform of the aforementioned optimal offering This task is implemented through asupply chain management (SCM) process that incorporates the acquisition of alltangible and intangible inputs as well as the efficiency and effectiveness with whichthey are transformed into customer solutions (Srivastava et al 1999) Thus the SCMprocess connects the suppliersrsquo business processes to the companyrsquo internal processessuch as materials management and manufacturing
Supplier relationships can be scrutinized and managed on the basis of their statenature outcomes and developmental phases much like the customer relationshipsdiscussed above In recent industrial supply chain management literature however alot of emphasis is put on designing an appropriate supply architecture This is usuallyachieved by focusing strongly on a few key or first-tier suppliers operating a portfolioof second-tier suppliers etc
MD436
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Key sub-processes of supply chain management include at least the selection andqualification of desired suppliers logistics management order processing pricingbilling rebates and managing customer services to enable product use From theviewpoint of our business model framework the supplier relationship portfoliomanagement is essential for
the establishment of a secure basis for operational excellence and therebylowering operational risk and
aligning the inputs for maximized value creation through procurement(Srivastava et al 1999)
The latter aspect deals with a much larger set of inputs than is traditionally understoodin industrial supply chain management as for example add-on and after-sales servicespresent a major possibility for value leverage from the viewpoint of the businessmodel
Product development network The development of new customer solutions andorthe reinvigoration of existing solutions is accomplished through a productdevelopment management (PDM) process (Srivastava et al 1999) More generally ithas been noted that companiesrsquo research and development (RampD) processes arebecoming increasingly networked (eg Powell et al 1996)
Key sub-processes of product development management include ascertainingcustomer needs and value creation offering development and testing identifying andmanaging internal relationships and developing and maintaining linkages withexternal co-operators Moreover the management of the companyrsquos productdevelopment project portfolio is of importance The objective of the PDM activitiesis to develop offerings that ascertain optimal customer value creation On a moregeneral level the objective of RampD related to the development of a business model isthe productization and commercialization of innovations In the case that thedevelopment of a business model starts with an initial (technological) innovation basicresearch aiming at the creation of new innovations essentially falls out of the scope ofRampD activity as it is defined here In terms of our business model framework we thusprefer to talk primarily about PDM In our business model framework PDM consists oftwo interrelated key tasks
(1) the management of the companyrsquos entire product development project portfolioand
(2) the management of the key intra- and inter-organizational relationships relatedto these projects
Extra-business relationships In addition to the above-mentioned three key groups ofrelationships other stakeholders can also essentially influence the evolution of abusiness model (Achrol and Kotler 1999 Gummesson 1999 Gronroos 1994) Mostimportantly literature has identified at least relationships to competitors relationshipsto debtors and equity-holders and mega relationships as crucial to any companyrsquosoperations We have termed them extra-business relationships due to fact that theserelationships usually do not have a direct link to the companyrsquos core businessoperations Despite their importance in corporate finance we treat relationships tofinanciers also as extra-business relationships due to the fact that they most often do
Cognition actionand the business
model
797
not have a direct operational impact on the functioning of the business model with theexception of the price of debt finance negotiated directly with debtors
The function of extra-business relationships is to provide the business model of afirm with for example institutional structures reference points and resources andcapabilities that are necessary for the companyrsquos operations Extra-businessrelationships crucial for the operation of a business model should be identifiedscrutinized in terms of their state nature outcomes and developmental phases andmanaged in a systematic manner
Regarding the relationships between the belief system of the firm and its businessnetwork we offer the following propositions
P3 The higher the cognition of a firmrsquos own reputational ranking the higherreputational rankings the firm seeks and expects from its customers andsuppliers
P4 The targets of a firmrsquos marketing efforts are constrained by the firmrsquosboundary beliefs about who it can pursue as a customer or serve as a supplier
P5 The more focused the product ontology the more structured goal-oriented themanagement of the product development project portfolio
OperationsProcess architecture From the beginning of the twenty-first century the importance oforganizational processes ndash activity chains within organizations ndash has been recognizedMechanistic Taylorian management science is one example of an attempt to makebusiness organizationsrsquo work processes more effective The world-wide success ofJapanese companies led to the emergence of Japanese principles in Westernmanagement literature during the 1980s One could argue that this developmenttogether with Porterian value chain analyses gradually brought horizontal businessprocesses back to the focus of management attention For example total qualitymanagement (TQM) was a horizontal process cutting across the boundaries separatingorganizational units in order to leverage quality in companiesrsquo products and activities(Ghoshal and Bartlett 1995) More recent notions such as lean management (Womacket al 1990) and time-based competition and management (Stalk and Hout 1990) alsocontain the same basic ideas Finally business process reengineering (BPR) aimed atshowing companies how to organize functionally separated tasks into unifiedhorizontal business processes creating value for customers (Hammer 1990)
The basic idea behind conceptualizing and categorizing business processes inorganizations is to identify and design repeatable business processes that have enoughelements of consistency (eg clearly identified inputs and outputs) to justify developinga common ldquoaveragedrdquo process for an organization (Stoddard et al 1996) Davenport(1994 p 134) has defined the concept of an organizational process as
a structured set of activities designed to produce a specified output for a particularcustomer or market It has a beginning an end and clearly identified inputs and outputs Aprocess is therefore a structure for action for how work is done
Archer and Bowker (1995 p 32) introduce a broader less mechanistic approach
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the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
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company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
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Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
management theory and practice this paper develops a conceptual framework thatidentifies the key ldquocomponentsrdquo of a business model
The starting point for this paper is that a business model can be conceptualized asthe sum of material objectively existing structures and processes as well as intangiblecognitive meaning structures at the level of a business organization The conceptualframework presented in this paper naturally represents an archetype (Greenwood andHinings 1993) Theoretically the aim is to merge existing understanding on thematerial aspects of business models with theories concerning cognitions and industrybelief systems (Porac et al 2002) From a managerial viewpoint the primarycontribution of this archetype is the explicit definition of the scope of the intuitivelyclear but theoretically vague business model concept
We are interested in how the material aspects of firm-level business models interactwith managerial cognition and action By the material aspects of a business model werefer to the tangible elements of a companyrsquos strategy business network operationsand finance and accounting By the cognitive aspects of a business model we refer tothe systemic meaning structures or the belief system of a company The belief systemis seen as the driver of decision making and subsequently action Business modelevolution is also defined by the relationships between managerial actions and theiroutcomes manifested in realized economic exchanges and business results
The paper is structured as follows First we briefly review the literature onfirm-level business models Second we discuss the role of cognition and action asdeterminants of a companyrsquos business model Third we present our propositions thatconceptualize the material aspects of a business model Finally we present a modelthat identifies relationships between the material aspects cognitive mechanisms andaction
Business model literature reviewThe concept of a business model is nearly absent from academically oriented literatureand thus remains more or less under-conceptualized (Amit and Zott 2001 Magretta2002) However the notion of a business model is frequently used applied in theliterature especially in the information and communication technologies (ICT) sector(Venkatraman 2000 Hamel 1999 von Krogh and Cusumano 2001 Sweet 2001Mahadevan 2000 Lechner and Hummel 2002) After the crash of the ICT sector in2000 some authors have sought to explain why the ldquonewrdquo business models were notable to revolutionize the economy (Ratliff 2002 Feng et al 2001 Williams 2001) Inrecent academically oriented management literature the business model concept mostoften refers to value creation and economic logic especially in terms of revenuecreation (Amit and Zott 2001 Venkatraman and Henderson 1998)
The following definitions of the business model concept highlight the fragmentednature of existing conceptualizations
Business model is a coordinated plan to design strategy along the customerinteraction asset configuration and knowledge leverage vectors (Venkatramanand Henderson 1998)
Business model depicts the content structure and governance of transactionsdesigned to create value through the exploitations of business opportunities(Amit and Zott 2001)
MD436
790
Business model is typically a complex set of interdependent routines that isdiscovered adjusted and fine-tuned by ldquodoingrdquo (Winter and Szulanski 2001)
Amit and Zott 2001 business model concept is an exception in business modelliterature as it is explicitly theoretically anchored in value chain analysisSchumpeterian innovation transaction cost economics the resource-based view andstrategic networks The dimensions of their concept include content noveltycomplementarities among resources and capabilities and network effects Otherauthors have also pointed out the importance of the systematic inclusion of firmresources capabilities and learning in the firmrsquos business model (Eden andAckermann 2000) Moreover the importance of including dynamism in the study ofbusiness models has also been recently identified as a central issue Winter andSzulanski (2001) included dynamism in their analysis by identifying the need for thebusiness model to change at different phases of the replication strategyrsquos lifecycle andinternationalization Equally Sauer and Willcocks (2003) emphasized that moreimportant than knowing the structure of a business model is the ability to create andeffect new structures and processes quickly and at low cost
Despite these contributions there is a lack of a unitary conceptualization of thebusiness model in academic literature Thus a need exists to build a framework thataddresses all relevant components of a firmrsquos business model as well as theirinterrelationships in the functioning of the model In addition to these more tangibleaspects the cognitive and evolutionary aspects of a business model have been scarcelyrecognized in existing research
Cognition and actionThe functioning of a business model becomes visible in managerial decisions andactions Actions and outcomes also emerge autonomously as a result of the systemicconsequences of different organizational configurations (Miller 1986) Theactualization of any outcomes (eg in the nature of exchanges between economicparties or in the financial performance of the firm) is thus dependent on the systemicproperties of the firmrsquos business model From a dynamic perspective these outcomesalso directly influence the evolution of the business model
Thus the evolution of a business model is built on managerial actions that focus oncertain aspects of the business model As Giddens (1984) and later institutionaltheorists (Barley and Tolbert 1997) have proposed organizational actions are directlylinked with the wider institutional environment of the focal organization
The role of individual and organizational meanings and meaning structures iscrucial in the structuration process of a business model In the presented businessmodel framework organizational actors are seen as rule-followers who fulfill theiridentities by following procedures they see as appropriate in the current context(March and Olsen 1989) The formal rules beliefs and values define theappropriateness of different actions and thus make firmsrsquo evolution contingent notonly on the business environment but equally on the firmrsquos history since rule systemstypically evolve in time (March and Simon 1963)
In practice the cognitive aspects of the business model are firstly constituted by themeanings and meaning structures which actors maintain about the components of thebusiness model Second the cognitive aspects also relate to the way in which actorsperceive the functioning of the business model Briefly we see cognitions as the
Cognition actionand the business
model
791
conceptual and operational representations that humans develop while interactingwith complex systems Thus we refer to cognition as both an individual and anorganizational-level process (Hill and Levenhagen 1995 Walsh 1995) It is importantto note that we study managersrsquo cognitions of the business model of the firm they aredeveloping not the perception that others have of the firm or the perception thatmanagers have of other firms
As stated in behavioural organization theory cognitions act as a filter between theactorsrsquo understanding of the inter-organizational environments and theintra-organizational context (March and Simon 1963) Hence the belief systemfilters actorsrsquo perceptions and beliefs concerning the function of the business model tocertain organizational actions
Our perspective on shared belief systems resembles Porac et alrsquos (2002) four-levelbelief hierarchy that fuses several industry belief systems into a belief hierarchy inwhich higher- and lower-level beliefs are in constant interaction Higher-order beliefsthus motivate change or stability in lower order beliefs Following Porac et al (2002)our framework identifies four conceptual levels of managerial cognition related to thematerial aspects of the business model of the firm
(1) industry recipe
(2) reputational rankings
(3) boundary beliefs and
(4) product ontologies
Industry recipes are beliefs related to the logic of the economic competitive andinstitutional environment and their effects on the focal firm (Spender 1990) Boundarybeliefs refer to social constructions that identify a focal firm with a certaininterorganizational community (Porac et al 2002) Product ontologies are cognitiverepresentations that link for instance product or service attributes usage conditionsand buyer characteristics into a definition of an offering that is hoped to becomesuperior on the target market (Porac et al 2002) Finally reputational ranking refers tohow organizations socially evaluate competition and their competitors vis-a-vis theirown performance
In sum our conceptualization of managerial cognition action and the businessmodel of the firm builds on the following logic Managers view and make decisionsregarding the material aspects based on their cognitions that can be located at the threeconceptual levels of beliefs identified above Consequently the mechanismunderpinning the actualization of any relevant business-related outcomes consists ofhow the material aspects of the business model interact with managerial beliefsystems This mechanism constitutes the business model of the firm
The material aspects of a firmrsquos business modelWe define the business model of a firm as a system manifested in the components andrelated material and cognitive aspects Key components of the business model includethe companyrsquos network of relationships operations embodied in the companyrsquosbusiness processes and resource base and the finance and accounting concepts of thecompany (Figure 1)
In the following we propose some relationships between managerial cognitionaction and the components of the business model of the firm Our propositions deal
MD436
792
with reinforcement (ldquocognition X reinforces action in component Ardquo) constraints(ldquocognition Y constrains action in component Brdquo) or correlation (ldquothe higher cognitionZ the higher action in component Crdquo)
Strategy and structureStrategic intent strategy process and the content of strategy The function of thestrategy is to give meaning and direction to the development of the companyrsquosbusiness model In other words we see strategy as the comprehensive pattern of acompanyrsquos actions and intents binding together all the components of the businessmodel (Mintzberg and Waters 1982) Strategic intent on the other hand is the ldquodriverrdquoof the content and process of a companyrsquos strategy (Hamel and Prahalad 1990)Strategic intent involves long-term organizational commitment to ambitious businessobjectives creating a shared mindset and a sense of direction for the company
By the concept of the strategy process we refer to the dichotomy of autonomous andinduced strategy processes (Burgelman 2002) The induced strategy process refers tohighly focused strategy processes managed by rational actors represented by the topmanagement of the company The autonomous process then again refers to theinternal-ecological emergent processes that occur at all levels of the organizationespecially among middle management The induced strategy process has a tendency tofocus on some component or components of the business model of a company whereasthe pure autonomous mode automatically takes into consideration most of thecomponents In most cases however both modes of strategy process co-evolvereflecting for instance the culture structure and operations in the organization
Approaches to the content of strategy have ranged from the classical planningperspective (Ansoff 1965 Andrews 1980) to the widely referenced typology of Milesand Snow (1978) to generic strategies of Porter (1980) and to more recent emergentand evolutionary approaches to strategy (Mintzberg 1987 Burgelman 2002) Theseperspectives concentrate on where strategy comes from for example striving todifferentiate the environment the daily actions of the organization the plan and theplanner or the perceived typological role of the company
As the business model approach presented in this paper does not concentrate onwhere strategy content comes from but rather discusses the components of thebusiness model which embody ldquothe strategyrdquo it rejects no origin In essence strategy
Figure 1The business model of
the firm
Cognition actionand the business
model
793
does not concentrate on any particular aspect but on the totality constituted by thecomponents of the business model (see Hambrick and Fredrickson 2001) Theemphasis is thus on which ldquooriginsrdquo have an influence on which component orcomponents of the business model and what this influence is In addition weacknowledge that there is substantial interplay between the components of thebusiness model
Organizational structure From the perspective of a firmrsquos business model theeffects of strategies processes and the environment on the organizational structuresare vital in order to find the link with organizational performance (Ketchen et al 1996)These relationships are partially explained by configurations and emphasize the needto understand the effects of organizational structure not only on strategy but on thestrategic actions and consequent economic development and business results as well(Ketchen et al 1997)
We adopt the view that a leap from one structural archetype to another mustproceed through a number of phases and that organizations are thus capable ofadapting to changing environments (Miller and Friesen 1982) This means thatorganizations are unable to transform their structures without risk as each leap createsa disruption in organizational life (Mintzberg and Waters 1982) In this paper weadvocate a co-evolutionary perspective which emphasizes the relationship betweenstructure and strategy On the one hand organizational structure is a key determinantof decision making On the other hand strategic action is perceived to have power overorganizational structures Strategic choices and resulting actions do changeorganizational structures albeit mostly in an incremental fashion Evidence of thisis that the current organizational reality can be thought to narrow down thealternatives available for strategic action thus emphasizing strategizing as a functionof the present structure
Governance A further element in understanding corporate strategy deals withunderstanding the existence boundaries and internal organization of the firm The ideaof organizational governance tackles these issues and has emerged as an importantstrategic perspective (Williamson 1999 Madhok 2002 Foss 1999) Governance iscentrally comprised of contracting-based literature that concentrates on the generaltreatment of contracting around the issues of appropriation ownership alignment ofincentives (Madhok 2002) self-interest as well as authority the employmentrelationship economizing and coordination financial structure regulation andproperty rights (Williamson 1999)
The managerial decision-making processes surrounding governance at the level ofthe firm can be conceptualized to operate in two realms First governance modes canbe managed by initiating action along four continua These are
(1) the market-hierarchy continuum
(2) the economic logic continuum
(3) the private-civic interest continuum and
(4) the legal incorporation continuum
Typical actions include influencing the tightness of relationships (eg alliance-building)tightening or loosening the profit-making orientation (eg relinquishingprofit-maximization targets) redefining the prioritization of stakeholder groups andchanging the legal incorporation of the organization (eg privatization)
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Second the governance practices of the company are susceptible to strategicdecision making Governance practices encompass a wide but not indefinite set ofcontractual arrangements within the firm that are more strategic than administrativein nature Typical governance practices include corporate governance practicesstakeholder management strategies outsourcing strategies process ownershipsystems reward monitoring and penalty systems legal and contracting practicesand even rules for process optimization within the firm
Regarding the relationships between the belief system of the firm and its strategyand structure we offer the following propositions
P1 The less ambiguous the link between firm strategy and the totality of firmrsquosbelief system the more crystallized the strategic intent of a company and themore consistent its actions
P2 The more mature the industry and the more stable the related industry recipethe more narrow the alternatives for structural change
Business networkCustomer relationship portfolio The management of the customer relationshipportfolio (customer base) is identified as one of the most crucial aspects in themanagement of a companyrsquos business model This task is executed through a customerrelationship management (CRM alternatively key account management or KAM)process addressing all aspects of identifying customers creating customer knowledgebuilding customer relationships and shaping their perceptions of the organization andits offerings (Srivastava et al 1999 Hunt and Morgan 1995) The task of managing thecustomer relationship portfolio is also seen as an evolutionary interactive processoccurring in the business network of a firm (Anderson et al 1994)
In order to manage existing or potential customer relationships their state natureoutcomes and developmental phases have to be understood In terms of their state andnature business relationships can vary between competitive (market-based)cooperative (partnership-based) and command (dominance-based or hierarchical)modes (Campbell 1985) The outcomes of business relationships have often beencategorized into the more objective techno-economic outcomes (eg customerrelationship profitability new technology development) on the one hand and themore subjective psychosocial outcomes (eg trust commitment and feelings of success)on the other (Tikkanen and Alajoutsijarvi 2001) Finally the development phases ofbusiness relationships typically include the pre-relationship exploratory developingstable (institutionalized) and dissolution stages (Ford 1980)
More specifically the CRM process consists of at least the following sub-processes identifying potential new customers determining the needs of existing and potential customers (customer value
creation) developing the companyrsquos product andor service offering developing and implementing marketing and sales programs developing and managing the channels of distribution
Cognition actionand the business
model
795
acquiring and leveraging information technology for customer contact
management of customer-oriented production teams especially in industrialcompanies
acquisition and dissemination of relevant market and customer information and
cross-selling and up-selling of product and service offerings (see Srivastava et al1999)
In our business model framework the customer relationship portfolio of the companyis the major source of revenues and knowledge that facilitates an understanding ofcustomer value creation and thus the development of offerings (Anderson and Narus1999) Customer value creation is inherently connected to the core competencies of thecompany and its business network (Anderson et al 1994) Moreover customer valuecreation is seen as the key determinant of segmentation (Anderson and Narus 1999) Inother words companies orient their core competencies and business processes towardsoptimal value creation for their key customers or customer segments
On a more general level the CRM process is related to the functioning of a businessmodel essentially comprises of the management of the processes of
exchanges and communication between the economic parties
the coordination of production and exchange (transactions)
adaptations in both the offering and the coordinating structures and processesand
customer and market intelligence (see Moller and Wilson 1995)
The marketcustomer orientation of the organization doing marketing is also a basicemphasis in CRM In marketing literature a market orientation typically characterizesa companyrsquos disposition to deliver superior value to its customers This requires anorganization-wide commitment to continuous information gathering and coordinationof customer needs competitorsrsquo capabilities and the provisions of other significantmarket agents and authorities (Slater and Narver 1994) The result is an integratedorganizational effort which gives rise to superior firm performance (Kohli andJaworski 1990)
Supplier relationship portfolio The management of a companyrsquos supplierrelationship portfolio (supplier base) involves the continuous enhancement of theacquisition of inputs and their transformation into desired customer outputs in theform of the aforementioned optimal offering This task is implemented through asupply chain management (SCM) process that incorporates the acquisition of alltangible and intangible inputs as well as the efficiency and effectiveness with whichthey are transformed into customer solutions (Srivastava et al 1999) Thus the SCMprocess connects the suppliersrsquo business processes to the companyrsquo internal processessuch as materials management and manufacturing
Supplier relationships can be scrutinized and managed on the basis of their statenature outcomes and developmental phases much like the customer relationshipsdiscussed above In recent industrial supply chain management literature however alot of emphasis is put on designing an appropriate supply architecture This is usuallyachieved by focusing strongly on a few key or first-tier suppliers operating a portfolioof second-tier suppliers etc
MD436
796
Key sub-processes of supply chain management include at least the selection andqualification of desired suppliers logistics management order processing pricingbilling rebates and managing customer services to enable product use From theviewpoint of our business model framework the supplier relationship portfoliomanagement is essential for
the establishment of a secure basis for operational excellence and therebylowering operational risk and
aligning the inputs for maximized value creation through procurement(Srivastava et al 1999)
The latter aspect deals with a much larger set of inputs than is traditionally understoodin industrial supply chain management as for example add-on and after-sales servicespresent a major possibility for value leverage from the viewpoint of the businessmodel
Product development network The development of new customer solutions andorthe reinvigoration of existing solutions is accomplished through a productdevelopment management (PDM) process (Srivastava et al 1999) More generally ithas been noted that companiesrsquo research and development (RampD) processes arebecoming increasingly networked (eg Powell et al 1996)
Key sub-processes of product development management include ascertainingcustomer needs and value creation offering development and testing identifying andmanaging internal relationships and developing and maintaining linkages withexternal co-operators Moreover the management of the companyrsquos productdevelopment project portfolio is of importance The objective of the PDM activitiesis to develop offerings that ascertain optimal customer value creation On a moregeneral level the objective of RampD related to the development of a business model isthe productization and commercialization of innovations In the case that thedevelopment of a business model starts with an initial (technological) innovation basicresearch aiming at the creation of new innovations essentially falls out of the scope ofRampD activity as it is defined here In terms of our business model framework we thusprefer to talk primarily about PDM In our business model framework PDM consists oftwo interrelated key tasks
(1) the management of the companyrsquos entire product development project portfolioand
(2) the management of the key intra- and inter-organizational relationships relatedto these projects
Extra-business relationships In addition to the above-mentioned three key groups ofrelationships other stakeholders can also essentially influence the evolution of abusiness model (Achrol and Kotler 1999 Gummesson 1999 Gronroos 1994) Mostimportantly literature has identified at least relationships to competitors relationshipsto debtors and equity-holders and mega relationships as crucial to any companyrsquosoperations We have termed them extra-business relationships due to fact that theserelationships usually do not have a direct link to the companyrsquos core businessoperations Despite their importance in corporate finance we treat relationships tofinanciers also as extra-business relationships due to the fact that they most often do
Cognition actionand the business
model
797
not have a direct operational impact on the functioning of the business model with theexception of the price of debt finance negotiated directly with debtors
The function of extra-business relationships is to provide the business model of afirm with for example institutional structures reference points and resources andcapabilities that are necessary for the companyrsquos operations Extra-businessrelationships crucial for the operation of a business model should be identifiedscrutinized in terms of their state nature outcomes and developmental phases andmanaged in a systematic manner
Regarding the relationships between the belief system of the firm and its businessnetwork we offer the following propositions
P3 The higher the cognition of a firmrsquos own reputational ranking the higherreputational rankings the firm seeks and expects from its customers andsuppliers
P4 The targets of a firmrsquos marketing efforts are constrained by the firmrsquosboundary beliefs about who it can pursue as a customer or serve as a supplier
P5 The more focused the product ontology the more structured goal-oriented themanagement of the product development project portfolio
OperationsProcess architecture From the beginning of the twenty-first century the importance oforganizational processes ndash activity chains within organizations ndash has been recognizedMechanistic Taylorian management science is one example of an attempt to makebusiness organizationsrsquo work processes more effective The world-wide success ofJapanese companies led to the emergence of Japanese principles in Westernmanagement literature during the 1980s One could argue that this developmenttogether with Porterian value chain analyses gradually brought horizontal businessprocesses back to the focus of management attention For example total qualitymanagement (TQM) was a horizontal process cutting across the boundaries separatingorganizational units in order to leverage quality in companiesrsquo products and activities(Ghoshal and Bartlett 1995) More recent notions such as lean management (Womacket al 1990) and time-based competition and management (Stalk and Hout 1990) alsocontain the same basic ideas Finally business process reengineering (BPR) aimed atshowing companies how to organize functionally separated tasks into unifiedhorizontal business processes creating value for customers (Hammer 1990)
The basic idea behind conceptualizing and categorizing business processes inorganizations is to identify and design repeatable business processes that have enoughelements of consistency (eg clearly identified inputs and outputs) to justify developinga common ldquoaveragedrdquo process for an organization (Stoddard et al 1996) Davenport(1994 p 134) has defined the concept of an organizational process as
a structured set of activities designed to produce a specified output for a particularcustomer or market It has a beginning an end and clearly identified inputs and outputs Aprocess is therefore a structure for action for how work is done
Archer and Bowker (1995 p 32) introduce a broader less mechanistic approach
MD436
798
the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
800
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
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conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
Business model is typically a complex set of interdependent routines that isdiscovered adjusted and fine-tuned by ldquodoingrdquo (Winter and Szulanski 2001)
Amit and Zott 2001 business model concept is an exception in business modelliterature as it is explicitly theoretically anchored in value chain analysisSchumpeterian innovation transaction cost economics the resource-based view andstrategic networks The dimensions of their concept include content noveltycomplementarities among resources and capabilities and network effects Otherauthors have also pointed out the importance of the systematic inclusion of firmresources capabilities and learning in the firmrsquos business model (Eden andAckermann 2000) Moreover the importance of including dynamism in the study ofbusiness models has also been recently identified as a central issue Winter andSzulanski (2001) included dynamism in their analysis by identifying the need for thebusiness model to change at different phases of the replication strategyrsquos lifecycle andinternationalization Equally Sauer and Willcocks (2003) emphasized that moreimportant than knowing the structure of a business model is the ability to create andeffect new structures and processes quickly and at low cost
Despite these contributions there is a lack of a unitary conceptualization of thebusiness model in academic literature Thus a need exists to build a framework thataddresses all relevant components of a firmrsquos business model as well as theirinterrelationships in the functioning of the model In addition to these more tangibleaspects the cognitive and evolutionary aspects of a business model have been scarcelyrecognized in existing research
Cognition and actionThe functioning of a business model becomes visible in managerial decisions andactions Actions and outcomes also emerge autonomously as a result of the systemicconsequences of different organizational configurations (Miller 1986) Theactualization of any outcomes (eg in the nature of exchanges between economicparties or in the financial performance of the firm) is thus dependent on the systemicproperties of the firmrsquos business model From a dynamic perspective these outcomesalso directly influence the evolution of the business model
Thus the evolution of a business model is built on managerial actions that focus oncertain aspects of the business model As Giddens (1984) and later institutionaltheorists (Barley and Tolbert 1997) have proposed organizational actions are directlylinked with the wider institutional environment of the focal organization
The role of individual and organizational meanings and meaning structures iscrucial in the structuration process of a business model In the presented businessmodel framework organizational actors are seen as rule-followers who fulfill theiridentities by following procedures they see as appropriate in the current context(March and Olsen 1989) The formal rules beliefs and values define theappropriateness of different actions and thus make firmsrsquo evolution contingent notonly on the business environment but equally on the firmrsquos history since rule systemstypically evolve in time (March and Simon 1963)
In practice the cognitive aspects of the business model are firstly constituted by themeanings and meaning structures which actors maintain about the components of thebusiness model Second the cognitive aspects also relate to the way in which actorsperceive the functioning of the business model Briefly we see cognitions as the
Cognition actionand the business
model
791
conceptual and operational representations that humans develop while interactingwith complex systems Thus we refer to cognition as both an individual and anorganizational-level process (Hill and Levenhagen 1995 Walsh 1995) It is importantto note that we study managersrsquo cognitions of the business model of the firm they aredeveloping not the perception that others have of the firm or the perception thatmanagers have of other firms
As stated in behavioural organization theory cognitions act as a filter between theactorsrsquo understanding of the inter-organizational environments and theintra-organizational context (March and Simon 1963) Hence the belief systemfilters actorsrsquo perceptions and beliefs concerning the function of the business model tocertain organizational actions
Our perspective on shared belief systems resembles Porac et alrsquos (2002) four-levelbelief hierarchy that fuses several industry belief systems into a belief hierarchy inwhich higher- and lower-level beliefs are in constant interaction Higher-order beliefsthus motivate change or stability in lower order beliefs Following Porac et al (2002)our framework identifies four conceptual levels of managerial cognition related to thematerial aspects of the business model of the firm
(1) industry recipe
(2) reputational rankings
(3) boundary beliefs and
(4) product ontologies
Industry recipes are beliefs related to the logic of the economic competitive andinstitutional environment and their effects on the focal firm (Spender 1990) Boundarybeliefs refer to social constructions that identify a focal firm with a certaininterorganizational community (Porac et al 2002) Product ontologies are cognitiverepresentations that link for instance product or service attributes usage conditionsand buyer characteristics into a definition of an offering that is hoped to becomesuperior on the target market (Porac et al 2002) Finally reputational ranking refers tohow organizations socially evaluate competition and their competitors vis-a-vis theirown performance
In sum our conceptualization of managerial cognition action and the businessmodel of the firm builds on the following logic Managers view and make decisionsregarding the material aspects based on their cognitions that can be located at the threeconceptual levels of beliefs identified above Consequently the mechanismunderpinning the actualization of any relevant business-related outcomes consists ofhow the material aspects of the business model interact with managerial beliefsystems This mechanism constitutes the business model of the firm
The material aspects of a firmrsquos business modelWe define the business model of a firm as a system manifested in the components andrelated material and cognitive aspects Key components of the business model includethe companyrsquos network of relationships operations embodied in the companyrsquosbusiness processes and resource base and the finance and accounting concepts of thecompany (Figure 1)
In the following we propose some relationships between managerial cognitionaction and the components of the business model of the firm Our propositions deal
MD436
792
with reinforcement (ldquocognition X reinforces action in component Ardquo) constraints(ldquocognition Y constrains action in component Brdquo) or correlation (ldquothe higher cognitionZ the higher action in component Crdquo)
Strategy and structureStrategic intent strategy process and the content of strategy The function of thestrategy is to give meaning and direction to the development of the companyrsquosbusiness model In other words we see strategy as the comprehensive pattern of acompanyrsquos actions and intents binding together all the components of the businessmodel (Mintzberg and Waters 1982) Strategic intent on the other hand is the ldquodriverrdquoof the content and process of a companyrsquos strategy (Hamel and Prahalad 1990)Strategic intent involves long-term organizational commitment to ambitious businessobjectives creating a shared mindset and a sense of direction for the company
By the concept of the strategy process we refer to the dichotomy of autonomous andinduced strategy processes (Burgelman 2002) The induced strategy process refers tohighly focused strategy processes managed by rational actors represented by the topmanagement of the company The autonomous process then again refers to theinternal-ecological emergent processes that occur at all levels of the organizationespecially among middle management The induced strategy process has a tendency tofocus on some component or components of the business model of a company whereasthe pure autonomous mode automatically takes into consideration most of thecomponents In most cases however both modes of strategy process co-evolvereflecting for instance the culture structure and operations in the organization
Approaches to the content of strategy have ranged from the classical planningperspective (Ansoff 1965 Andrews 1980) to the widely referenced typology of Milesand Snow (1978) to generic strategies of Porter (1980) and to more recent emergentand evolutionary approaches to strategy (Mintzberg 1987 Burgelman 2002) Theseperspectives concentrate on where strategy comes from for example striving todifferentiate the environment the daily actions of the organization the plan and theplanner or the perceived typological role of the company
As the business model approach presented in this paper does not concentrate onwhere strategy content comes from but rather discusses the components of thebusiness model which embody ldquothe strategyrdquo it rejects no origin In essence strategy
Figure 1The business model of
the firm
Cognition actionand the business
model
793
does not concentrate on any particular aspect but on the totality constituted by thecomponents of the business model (see Hambrick and Fredrickson 2001) Theemphasis is thus on which ldquooriginsrdquo have an influence on which component orcomponents of the business model and what this influence is In addition weacknowledge that there is substantial interplay between the components of thebusiness model
Organizational structure From the perspective of a firmrsquos business model theeffects of strategies processes and the environment on the organizational structuresare vital in order to find the link with organizational performance (Ketchen et al 1996)These relationships are partially explained by configurations and emphasize the needto understand the effects of organizational structure not only on strategy but on thestrategic actions and consequent economic development and business results as well(Ketchen et al 1997)
We adopt the view that a leap from one structural archetype to another mustproceed through a number of phases and that organizations are thus capable ofadapting to changing environments (Miller and Friesen 1982) This means thatorganizations are unable to transform their structures without risk as each leap createsa disruption in organizational life (Mintzberg and Waters 1982) In this paper weadvocate a co-evolutionary perspective which emphasizes the relationship betweenstructure and strategy On the one hand organizational structure is a key determinantof decision making On the other hand strategic action is perceived to have power overorganizational structures Strategic choices and resulting actions do changeorganizational structures albeit mostly in an incremental fashion Evidence of thisis that the current organizational reality can be thought to narrow down thealternatives available for strategic action thus emphasizing strategizing as a functionof the present structure
Governance A further element in understanding corporate strategy deals withunderstanding the existence boundaries and internal organization of the firm The ideaof organizational governance tackles these issues and has emerged as an importantstrategic perspective (Williamson 1999 Madhok 2002 Foss 1999) Governance iscentrally comprised of contracting-based literature that concentrates on the generaltreatment of contracting around the issues of appropriation ownership alignment ofincentives (Madhok 2002) self-interest as well as authority the employmentrelationship economizing and coordination financial structure regulation andproperty rights (Williamson 1999)
The managerial decision-making processes surrounding governance at the level ofthe firm can be conceptualized to operate in two realms First governance modes canbe managed by initiating action along four continua These are
(1) the market-hierarchy continuum
(2) the economic logic continuum
(3) the private-civic interest continuum and
(4) the legal incorporation continuum
Typical actions include influencing the tightness of relationships (eg alliance-building)tightening or loosening the profit-making orientation (eg relinquishingprofit-maximization targets) redefining the prioritization of stakeholder groups andchanging the legal incorporation of the organization (eg privatization)
MD436
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Second the governance practices of the company are susceptible to strategicdecision making Governance practices encompass a wide but not indefinite set ofcontractual arrangements within the firm that are more strategic than administrativein nature Typical governance practices include corporate governance practicesstakeholder management strategies outsourcing strategies process ownershipsystems reward monitoring and penalty systems legal and contracting practicesand even rules for process optimization within the firm
Regarding the relationships between the belief system of the firm and its strategyand structure we offer the following propositions
P1 The less ambiguous the link between firm strategy and the totality of firmrsquosbelief system the more crystallized the strategic intent of a company and themore consistent its actions
P2 The more mature the industry and the more stable the related industry recipethe more narrow the alternatives for structural change
Business networkCustomer relationship portfolio The management of the customer relationshipportfolio (customer base) is identified as one of the most crucial aspects in themanagement of a companyrsquos business model This task is executed through a customerrelationship management (CRM alternatively key account management or KAM)process addressing all aspects of identifying customers creating customer knowledgebuilding customer relationships and shaping their perceptions of the organization andits offerings (Srivastava et al 1999 Hunt and Morgan 1995) The task of managing thecustomer relationship portfolio is also seen as an evolutionary interactive processoccurring in the business network of a firm (Anderson et al 1994)
In order to manage existing or potential customer relationships their state natureoutcomes and developmental phases have to be understood In terms of their state andnature business relationships can vary between competitive (market-based)cooperative (partnership-based) and command (dominance-based or hierarchical)modes (Campbell 1985) The outcomes of business relationships have often beencategorized into the more objective techno-economic outcomes (eg customerrelationship profitability new technology development) on the one hand and themore subjective psychosocial outcomes (eg trust commitment and feelings of success)on the other (Tikkanen and Alajoutsijarvi 2001) Finally the development phases ofbusiness relationships typically include the pre-relationship exploratory developingstable (institutionalized) and dissolution stages (Ford 1980)
More specifically the CRM process consists of at least the following sub-processes identifying potential new customers determining the needs of existing and potential customers (customer value
creation) developing the companyrsquos product andor service offering developing and implementing marketing and sales programs developing and managing the channels of distribution
Cognition actionand the business
model
795
acquiring and leveraging information technology for customer contact
management of customer-oriented production teams especially in industrialcompanies
acquisition and dissemination of relevant market and customer information and
cross-selling and up-selling of product and service offerings (see Srivastava et al1999)
In our business model framework the customer relationship portfolio of the companyis the major source of revenues and knowledge that facilitates an understanding ofcustomer value creation and thus the development of offerings (Anderson and Narus1999) Customer value creation is inherently connected to the core competencies of thecompany and its business network (Anderson et al 1994) Moreover customer valuecreation is seen as the key determinant of segmentation (Anderson and Narus 1999) Inother words companies orient their core competencies and business processes towardsoptimal value creation for their key customers or customer segments
On a more general level the CRM process is related to the functioning of a businessmodel essentially comprises of the management of the processes of
exchanges and communication between the economic parties
the coordination of production and exchange (transactions)
adaptations in both the offering and the coordinating structures and processesand
customer and market intelligence (see Moller and Wilson 1995)
The marketcustomer orientation of the organization doing marketing is also a basicemphasis in CRM In marketing literature a market orientation typically characterizesa companyrsquos disposition to deliver superior value to its customers This requires anorganization-wide commitment to continuous information gathering and coordinationof customer needs competitorsrsquo capabilities and the provisions of other significantmarket agents and authorities (Slater and Narver 1994) The result is an integratedorganizational effort which gives rise to superior firm performance (Kohli andJaworski 1990)
Supplier relationship portfolio The management of a companyrsquos supplierrelationship portfolio (supplier base) involves the continuous enhancement of theacquisition of inputs and their transformation into desired customer outputs in theform of the aforementioned optimal offering This task is implemented through asupply chain management (SCM) process that incorporates the acquisition of alltangible and intangible inputs as well as the efficiency and effectiveness with whichthey are transformed into customer solutions (Srivastava et al 1999) Thus the SCMprocess connects the suppliersrsquo business processes to the companyrsquo internal processessuch as materials management and manufacturing
Supplier relationships can be scrutinized and managed on the basis of their statenature outcomes and developmental phases much like the customer relationshipsdiscussed above In recent industrial supply chain management literature however alot of emphasis is put on designing an appropriate supply architecture This is usuallyachieved by focusing strongly on a few key or first-tier suppliers operating a portfolioof second-tier suppliers etc
MD436
796
Key sub-processes of supply chain management include at least the selection andqualification of desired suppliers logistics management order processing pricingbilling rebates and managing customer services to enable product use From theviewpoint of our business model framework the supplier relationship portfoliomanagement is essential for
the establishment of a secure basis for operational excellence and therebylowering operational risk and
aligning the inputs for maximized value creation through procurement(Srivastava et al 1999)
The latter aspect deals with a much larger set of inputs than is traditionally understoodin industrial supply chain management as for example add-on and after-sales servicespresent a major possibility for value leverage from the viewpoint of the businessmodel
Product development network The development of new customer solutions andorthe reinvigoration of existing solutions is accomplished through a productdevelopment management (PDM) process (Srivastava et al 1999) More generally ithas been noted that companiesrsquo research and development (RampD) processes arebecoming increasingly networked (eg Powell et al 1996)
Key sub-processes of product development management include ascertainingcustomer needs and value creation offering development and testing identifying andmanaging internal relationships and developing and maintaining linkages withexternal co-operators Moreover the management of the companyrsquos productdevelopment project portfolio is of importance The objective of the PDM activitiesis to develop offerings that ascertain optimal customer value creation On a moregeneral level the objective of RampD related to the development of a business model isthe productization and commercialization of innovations In the case that thedevelopment of a business model starts with an initial (technological) innovation basicresearch aiming at the creation of new innovations essentially falls out of the scope ofRampD activity as it is defined here In terms of our business model framework we thusprefer to talk primarily about PDM In our business model framework PDM consists oftwo interrelated key tasks
(1) the management of the companyrsquos entire product development project portfolioand
(2) the management of the key intra- and inter-organizational relationships relatedto these projects
Extra-business relationships In addition to the above-mentioned three key groups ofrelationships other stakeholders can also essentially influence the evolution of abusiness model (Achrol and Kotler 1999 Gummesson 1999 Gronroos 1994) Mostimportantly literature has identified at least relationships to competitors relationshipsto debtors and equity-holders and mega relationships as crucial to any companyrsquosoperations We have termed them extra-business relationships due to fact that theserelationships usually do not have a direct link to the companyrsquos core businessoperations Despite their importance in corporate finance we treat relationships tofinanciers also as extra-business relationships due to the fact that they most often do
Cognition actionand the business
model
797
not have a direct operational impact on the functioning of the business model with theexception of the price of debt finance negotiated directly with debtors
The function of extra-business relationships is to provide the business model of afirm with for example institutional structures reference points and resources andcapabilities that are necessary for the companyrsquos operations Extra-businessrelationships crucial for the operation of a business model should be identifiedscrutinized in terms of their state nature outcomes and developmental phases andmanaged in a systematic manner
Regarding the relationships between the belief system of the firm and its businessnetwork we offer the following propositions
P3 The higher the cognition of a firmrsquos own reputational ranking the higherreputational rankings the firm seeks and expects from its customers andsuppliers
P4 The targets of a firmrsquos marketing efforts are constrained by the firmrsquosboundary beliefs about who it can pursue as a customer or serve as a supplier
P5 The more focused the product ontology the more structured goal-oriented themanagement of the product development project portfolio
OperationsProcess architecture From the beginning of the twenty-first century the importance oforganizational processes ndash activity chains within organizations ndash has been recognizedMechanistic Taylorian management science is one example of an attempt to makebusiness organizationsrsquo work processes more effective The world-wide success ofJapanese companies led to the emergence of Japanese principles in Westernmanagement literature during the 1980s One could argue that this developmenttogether with Porterian value chain analyses gradually brought horizontal businessprocesses back to the focus of management attention For example total qualitymanagement (TQM) was a horizontal process cutting across the boundaries separatingorganizational units in order to leverage quality in companiesrsquo products and activities(Ghoshal and Bartlett 1995) More recent notions such as lean management (Womacket al 1990) and time-based competition and management (Stalk and Hout 1990) alsocontain the same basic ideas Finally business process reengineering (BPR) aimed atshowing companies how to organize functionally separated tasks into unifiedhorizontal business processes creating value for customers (Hammer 1990)
The basic idea behind conceptualizing and categorizing business processes inorganizations is to identify and design repeatable business processes that have enoughelements of consistency (eg clearly identified inputs and outputs) to justify developinga common ldquoaveragedrdquo process for an organization (Stoddard et al 1996) Davenport(1994 p 134) has defined the concept of an organizational process as
a structured set of activities designed to produce a specified output for a particularcustomer or market It has a beginning an end and clearly identified inputs and outputs Aprocess is therefore a structure for action for how work is done
Archer and Bowker (1995 p 32) introduce a broader less mechanistic approach
MD436
798
the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
800
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
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806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
conceptual and operational representations that humans develop while interactingwith complex systems Thus we refer to cognition as both an individual and anorganizational-level process (Hill and Levenhagen 1995 Walsh 1995) It is importantto note that we study managersrsquo cognitions of the business model of the firm they aredeveloping not the perception that others have of the firm or the perception thatmanagers have of other firms
As stated in behavioural organization theory cognitions act as a filter between theactorsrsquo understanding of the inter-organizational environments and theintra-organizational context (March and Simon 1963) Hence the belief systemfilters actorsrsquo perceptions and beliefs concerning the function of the business model tocertain organizational actions
Our perspective on shared belief systems resembles Porac et alrsquos (2002) four-levelbelief hierarchy that fuses several industry belief systems into a belief hierarchy inwhich higher- and lower-level beliefs are in constant interaction Higher-order beliefsthus motivate change or stability in lower order beliefs Following Porac et al (2002)our framework identifies four conceptual levels of managerial cognition related to thematerial aspects of the business model of the firm
(1) industry recipe
(2) reputational rankings
(3) boundary beliefs and
(4) product ontologies
Industry recipes are beliefs related to the logic of the economic competitive andinstitutional environment and their effects on the focal firm (Spender 1990) Boundarybeliefs refer to social constructions that identify a focal firm with a certaininterorganizational community (Porac et al 2002) Product ontologies are cognitiverepresentations that link for instance product or service attributes usage conditionsand buyer characteristics into a definition of an offering that is hoped to becomesuperior on the target market (Porac et al 2002) Finally reputational ranking refers tohow organizations socially evaluate competition and their competitors vis-a-vis theirown performance
In sum our conceptualization of managerial cognition action and the businessmodel of the firm builds on the following logic Managers view and make decisionsregarding the material aspects based on their cognitions that can be located at the threeconceptual levels of beliefs identified above Consequently the mechanismunderpinning the actualization of any relevant business-related outcomes consists ofhow the material aspects of the business model interact with managerial beliefsystems This mechanism constitutes the business model of the firm
The material aspects of a firmrsquos business modelWe define the business model of a firm as a system manifested in the components andrelated material and cognitive aspects Key components of the business model includethe companyrsquos network of relationships operations embodied in the companyrsquosbusiness processes and resource base and the finance and accounting concepts of thecompany (Figure 1)
In the following we propose some relationships between managerial cognitionaction and the components of the business model of the firm Our propositions deal
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with reinforcement (ldquocognition X reinforces action in component Ardquo) constraints(ldquocognition Y constrains action in component Brdquo) or correlation (ldquothe higher cognitionZ the higher action in component Crdquo)
Strategy and structureStrategic intent strategy process and the content of strategy The function of thestrategy is to give meaning and direction to the development of the companyrsquosbusiness model In other words we see strategy as the comprehensive pattern of acompanyrsquos actions and intents binding together all the components of the businessmodel (Mintzberg and Waters 1982) Strategic intent on the other hand is the ldquodriverrdquoof the content and process of a companyrsquos strategy (Hamel and Prahalad 1990)Strategic intent involves long-term organizational commitment to ambitious businessobjectives creating a shared mindset and a sense of direction for the company
By the concept of the strategy process we refer to the dichotomy of autonomous andinduced strategy processes (Burgelman 2002) The induced strategy process refers tohighly focused strategy processes managed by rational actors represented by the topmanagement of the company The autonomous process then again refers to theinternal-ecological emergent processes that occur at all levels of the organizationespecially among middle management The induced strategy process has a tendency tofocus on some component or components of the business model of a company whereasthe pure autonomous mode automatically takes into consideration most of thecomponents In most cases however both modes of strategy process co-evolvereflecting for instance the culture structure and operations in the organization
Approaches to the content of strategy have ranged from the classical planningperspective (Ansoff 1965 Andrews 1980) to the widely referenced typology of Milesand Snow (1978) to generic strategies of Porter (1980) and to more recent emergentand evolutionary approaches to strategy (Mintzberg 1987 Burgelman 2002) Theseperspectives concentrate on where strategy comes from for example striving todifferentiate the environment the daily actions of the organization the plan and theplanner or the perceived typological role of the company
As the business model approach presented in this paper does not concentrate onwhere strategy content comes from but rather discusses the components of thebusiness model which embody ldquothe strategyrdquo it rejects no origin In essence strategy
Figure 1The business model of
the firm
Cognition actionand the business
model
793
does not concentrate on any particular aspect but on the totality constituted by thecomponents of the business model (see Hambrick and Fredrickson 2001) Theemphasis is thus on which ldquooriginsrdquo have an influence on which component orcomponents of the business model and what this influence is In addition weacknowledge that there is substantial interplay between the components of thebusiness model
Organizational structure From the perspective of a firmrsquos business model theeffects of strategies processes and the environment on the organizational structuresare vital in order to find the link with organizational performance (Ketchen et al 1996)These relationships are partially explained by configurations and emphasize the needto understand the effects of organizational structure not only on strategy but on thestrategic actions and consequent economic development and business results as well(Ketchen et al 1997)
We adopt the view that a leap from one structural archetype to another mustproceed through a number of phases and that organizations are thus capable ofadapting to changing environments (Miller and Friesen 1982) This means thatorganizations are unable to transform their structures without risk as each leap createsa disruption in organizational life (Mintzberg and Waters 1982) In this paper weadvocate a co-evolutionary perspective which emphasizes the relationship betweenstructure and strategy On the one hand organizational structure is a key determinantof decision making On the other hand strategic action is perceived to have power overorganizational structures Strategic choices and resulting actions do changeorganizational structures albeit mostly in an incremental fashion Evidence of thisis that the current organizational reality can be thought to narrow down thealternatives available for strategic action thus emphasizing strategizing as a functionof the present structure
Governance A further element in understanding corporate strategy deals withunderstanding the existence boundaries and internal organization of the firm The ideaof organizational governance tackles these issues and has emerged as an importantstrategic perspective (Williamson 1999 Madhok 2002 Foss 1999) Governance iscentrally comprised of contracting-based literature that concentrates on the generaltreatment of contracting around the issues of appropriation ownership alignment ofincentives (Madhok 2002) self-interest as well as authority the employmentrelationship economizing and coordination financial structure regulation andproperty rights (Williamson 1999)
The managerial decision-making processes surrounding governance at the level ofthe firm can be conceptualized to operate in two realms First governance modes canbe managed by initiating action along four continua These are
(1) the market-hierarchy continuum
(2) the economic logic continuum
(3) the private-civic interest continuum and
(4) the legal incorporation continuum
Typical actions include influencing the tightness of relationships (eg alliance-building)tightening or loosening the profit-making orientation (eg relinquishingprofit-maximization targets) redefining the prioritization of stakeholder groups andchanging the legal incorporation of the organization (eg privatization)
MD436
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Second the governance practices of the company are susceptible to strategicdecision making Governance practices encompass a wide but not indefinite set ofcontractual arrangements within the firm that are more strategic than administrativein nature Typical governance practices include corporate governance practicesstakeholder management strategies outsourcing strategies process ownershipsystems reward monitoring and penalty systems legal and contracting practicesand even rules for process optimization within the firm
Regarding the relationships between the belief system of the firm and its strategyand structure we offer the following propositions
P1 The less ambiguous the link between firm strategy and the totality of firmrsquosbelief system the more crystallized the strategic intent of a company and themore consistent its actions
P2 The more mature the industry and the more stable the related industry recipethe more narrow the alternatives for structural change
Business networkCustomer relationship portfolio The management of the customer relationshipportfolio (customer base) is identified as one of the most crucial aspects in themanagement of a companyrsquos business model This task is executed through a customerrelationship management (CRM alternatively key account management or KAM)process addressing all aspects of identifying customers creating customer knowledgebuilding customer relationships and shaping their perceptions of the organization andits offerings (Srivastava et al 1999 Hunt and Morgan 1995) The task of managing thecustomer relationship portfolio is also seen as an evolutionary interactive processoccurring in the business network of a firm (Anderson et al 1994)
In order to manage existing or potential customer relationships their state natureoutcomes and developmental phases have to be understood In terms of their state andnature business relationships can vary between competitive (market-based)cooperative (partnership-based) and command (dominance-based or hierarchical)modes (Campbell 1985) The outcomes of business relationships have often beencategorized into the more objective techno-economic outcomes (eg customerrelationship profitability new technology development) on the one hand and themore subjective psychosocial outcomes (eg trust commitment and feelings of success)on the other (Tikkanen and Alajoutsijarvi 2001) Finally the development phases ofbusiness relationships typically include the pre-relationship exploratory developingstable (institutionalized) and dissolution stages (Ford 1980)
More specifically the CRM process consists of at least the following sub-processes identifying potential new customers determining the needs of existing and potential customers (customer value
creation) developing the companyrsquos product andor service offering developing and implementing marketing and sales programs developing and managing the channels of distribution
Cognition actionand the business
model
795
acquiring and leveraging information technology for customer contact
management of customer-oriented production teams especially in industrialcompanies
acquisition and dissemination of relevant market and customer information and
cross-selling and up-selling of product and service offerings (see Srivastava et al1999)
In our business model framework the customer relationship portfolio of the companyis the major source of revenues and knowledge that facilitates an understanding ofcustomer value creation and thus the development of offerings (Anderson and Narus1999) Customer value creation is inherently connected to the core competencies of thecompany and its business network (Anderson et al 1994) Moreover customer valuecreation is seen as the key determinant of segmentation (Anderson and Narus 1999) Inother words companies orient their core competencies and business processes towardsoptimal value creation for their key customers or customer segments
On a more general level the CRM process is related to the functioning of a businessmodel essentially comprises of the management of the processes of
exchanges and communication between the economic parties
the coordination of production and exchange (transactions)
adaptations in both the offering and the coordinating structures and processesand
customer and market intelligence (see Moller and Wilson 1995)
The marketcustomer orientation of the organization doing marketing is also a basicemphasis in CRM In marketing literature a market orientation typically characterizesa companyrsquos disposition to deliver superior value to its customers This requires anorganization-wide commitment to continuous information gathering and coordinationof customer needs competitorsrsquo capabilities and the provisions of other significantmarket agents and authorities (Slater and Narver 1994) The result is an integratedorganizational effort which gives rise to superior firm performance (Kohli andJaworski 1990)
Supplier relationship portfolio The management of a companyrsquos supplierrelationship portfolio (supplier base) involves the continuous enhancement of theacquisition of inputs and their transformation into desired customer outputs in theform of the aforementioned optimal offering This task is implemented through asupply chain management (SCM) process that incorporates the acquisition of alltangible and intangible inputs as well as the efficiency and effectiveness with whichthey are transformed into customer solutions (Srivastava et al 1999) Thus the SCMprocess connects the suppliersrsquo business processes to the companyrsquo internal processessuch as materials management and manufacturing
Supplier relationships can be scrutinized and managed on the basis of their statenature outcomes and developmental phases much like the customer relationshipsdiscussed above In recent industrial supply chain management literature however alot of emphasis is put on designing an appropriate supply architecture This is usuallyachieved by focusing strongly on a few key or first-tier suppliers operating a portfolioof second-tier suppliers etc
MD436
796
Key sub-processes of supply chain management include at least the selection andqualification of desired suppliers logistics management order processing pricingbilling rebates and managing customer services to enable product use From theviewpoint of our business model framework the supplier relationship portfoliomanagement is essential for
the establishment of a secure basis for operational excellence and therebylowering operational risk and
aligning the inputs for maximized value creation through procurement(Srivastava et al 1999)
The latter aspect deals with a much larger set of inputs than is traditionally understoodin industrial supply chain management as for example add-on and after-sales servicespresent a major possibility for value leverage from the viewpoint of the businessmodel
Product development network The development of new customer solutions andorthe reinvigoration of existing solutions is accomplished through a productdevelopment management (PDM) process (Srivastava et al 1999) More generally ithas been noted that companiesrsquo research and development (RampD) processes arebecoming increasingly networked (eg Powell et al 1996)
Key sub-processes of product development management include ascertainingcustomer needs and value creation offering development and testing identifying andmanaging internal relationships and developing and maintaining linkages withexternal co-operators Moreover the management of the companyrsquos productdevelopment project portfolio is of importance The objective of the PDM activitiesis to develop offerings that ascertain optimal customer value creation On a moregeneral level the objective of RampD related to the development of a business model isthe productization and commercialization of innovations In the case that thedevelopment of a business model starts with an initial (technological) innovation basicresearch aiming at the creation of new innovations essentially falls out of the scope ofRampD activity as it is defined here In terms of our business model framework we thusprefer to talk primarily about PDM In our business model framework PDM consists oftwo interrelated key tasks
(1) the management of the companyrsquos entire product development project portfolioand
(2) the management of the key intra- and inter-organizational relationships relatedto these projects
Extra-business relationships In addition to the above-mentioned three key groups ofrelationships other stakeholders can also essentially influence the evolution of abusiness model (Achrol and Kotler 1999 Gummesson 1999 Gronroos 1994) Mostimportantly literature has identified at least relationships to competitors relationshipsto debtors and equity-holders and mega relationships as crucial to any companyrsquosoperations We have termed them extra-business relationships due to fact that theserelationships usually do not have a direct link to the companyrsquos core businessoperations Despite their importance in corporate finance we treat relationships tofinanciers also as extra-business relationships due to the fact that they most often do
Cognition actionand the business
model
797
not have a direct operational impact on the functioning of the business model with theexception of the price of debt finance negotiated directly with debtors
The function of extra-business relationships is to provide the business model of afirm with for example institutional structures reference points and resources andcapabilities that are necessary for the companyrsquos operations Extra-businessrelationships crucial for the operation of a business model should be identifiedscrutinized in terms of their state nature outcomes and developmental phases andmanaged in a systematic manner
Regarding the relationships between the belief system of the firm and its businessnetwork we offer the following propositions
P3 The higher the cognition of a firmrsquos own reputational ranking the higherreputational rankings the firm seeks and expects from its customers andsuppliers
P4 The targets of a firmrsquos marketing efforts are constrained by the firmrsquosboundary beliefs about who it can pursue as a customer or serve as a supplier
P5 The more focused the product ontology the more structured goal-oriented themanagement of the product development project portfolio
OperationsProcess architecture From the beginning of the twenty-first century the importance oforganizational processes ndash activity chains within organizations ndash has been recognizedMechanistic Taylorian management science is one example of an attempt to makebusiness organizationsrsquo work processes more effective The world-wide success ofJapanese companies led to the emergence of Japanese principles in Westernmanagement literature during the 1980s One could argue that this developmenttogether with Porterian value chain analyses gradually brought horizontal businessprocesses back to the focus of management attention For example total qualitymanagement (TQM) was a horizontal process cutting across the boundaries separatingorganizational units in order to leverage quality in companiesrsquo products and activities(Ghoshal and Bartlett 1995) More recent notions such as lean management (Womacket al 1990) and time-based competition and management (Stalk and Hout 1990) alsocontain the same basic ideas Finally business process reengineering (BPR) aimed atshowing companies how to organize functionally separated tasks into unifiedhorizontal business processes creating value for customers (Hammer 1990)
The basic idea behind conceptualizing and categorizing business processes inorganizations is to identify and design repeatable business processes that have enoughelements of consistency (eg clearly identified inputs and outputs) to justify developinga common ldquoaveragedrdquo process for an organization (Stoddard et al 1996) Davenport(1994 p 134) has defined the concept of an organizational process as
a structured set of activities designed to produce a specified output for a particularcustomer or market It has a beginning an end and clearly identified inputs and outputs Aprocess is therefore a structure for action for how work is done
Archer and Bowker (1995 p 32) introduce a broader less mechanistic approach
MD436
798
the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
800
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
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Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
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804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
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806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
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Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
with reinforcement (ldquocognition X reinforces action in component Ardquo) constraints(ldquocognition Y constrains action in component Brdquo) or correlation (ldquothe higher cognitionZ the higher action in component Crdquo)
Strategy and structureStrategic intent strategy process and the content of strategy The function of thestrategy is to give meaning and direction to the development of the companyrsquosbusiness model In other words we see strategy as the comprehensive pattern of acompanyrsquos actions and intents binding together all the components of the businessmodel (Mintzberg and Waters 1982) Strategic intent on the other hand is the ldquodriverrdquoof the content and process of a companyrsquos strategy (Hamel and Prahalad 1990)Strategic intent involves long-term organizational commitment to ambitious businessobjectives creating a shared mindset and a sense of direction for the company
By the concept of the strategy process we refer to the dichotomy of autonomous andinduced strategy processes (Burgelman 2002) The induced strategy process refers tohighly focused strategy processes managed by rational actors represented by the topmanagement of the company The autonomous process then again refers to theinternal-ecological emergent processes that occur at all levels of the organizationespecially among middle management The induced strategy process has a tendency tofocus on some component or components of the business model of a company whereasthe pure autonomous mode automatically takes into consideration most of thecomponents In most cases however both modes of strategy process co-evolvereflecting for instance the culture structure and operations in the organization
Approaches to the content of strategy have ranged from the classical planningperspective (Ansoff 1965 Andrews 1980) to the widely referenced typology of Milesand Snow (1978) to generic strategies of Porter (1980) and to more recent emergentand evolutionary approaches to strategy (Mintzberg 1987 Burgelman 2002) Theseperspectives concentrate on where strategy comes from for example striving todifferentiate the environment the daily actions of the organization the plan and theplanner or the perceived typological role of the company
As the business model approach presented in this paper does not concentrate onwhere strategy content comes from but rather discusses the components of thebusiness model which embody ldquothe strategyrdquo it rejects no origin In essence strategy
Figure 1The business model of
the firm
Cognition actionand the business
model
793
does not concentrate on any particular aspect but on the totality constituted by thecomponents of the business model (see Hambrick and Fredrickson 2001) Theemphasis is thus on which ldquooriginsrdquo have an influence on which component orcomponents of the business model and what this influence is In addition weacknowledge that there is substantial interplay between the components of thebusiness model
Organizational structure From the perspective of a firmrsquos business model theeffects of strategies processes and the environment on the organizational structuresare vital in order to find the link with organizational performance (Ketchen et al 1996)These relationships are partially explained by configurations and emphasize the needto understand the effects of organizational structure not only on strategy but on thestrategic actions and consequent economic development and business results as well(Ketchen et al 1997)
We adopt the view that a leap from one structural archetype to another mustproceed through a number of phases and that organizations are thus capable ofadapting to changing environments (Miller and Friesen 1982) This means thatorganizations are unable to transform their structures without risk as each leap createsa disruption in organizational life (Mintzberg and Waters 1982) In this paper weadvocate a co-evolutionary perspective which emphasizes the relationship betweenstructure and strategy On the one hand organizational structure is a key determinantof decision making On the other hand strategic action is perceived to have power overorganizational structures Strategic choices and resulting actions do changeorganizational structures albeit mostly in an incremental fashion Evidence of thisis that the current organizational reality can be thought to narrow down thealternatives available for strategic action thus emphasizing strategizing as a functionof the present structure
Governance A further element in understanding corporate strategy deals withunderstanding the existence boundaries and internal organization of the firm The ideaof organizational governance tackles these issues and has emerged as an importantstrategic perspective (Williamson 1999 Madhok 2002 Foss 1999) Governance iscentrally comprised of contracting-based literature that concentrates on the generaltreatment of contracting around the issues of appropriation ownership alignment ofincentives (Madhok 2002) self-interest as well as authority the employmentrelationship economizing and coordination financial structure regulation andproperty rights (Williamson 1999)
The managerial decision-making processes surrounding governance at the level ofthe firm can be conceptualized to operate in two realms First governance modes canbe managed by initiating action along four continua These are
(1) the market-hierarchy continuum
(2) the economic logic continuum
(3) the private-civic interest continuum and
(4) the legal incorporation continuum
Typical actions include influencing the tightness of relationships (eg alliance-building)tightening or loosening the profit-making orientation (eg relinquishingprofit-maximization targets) redefining the prioritization of stakeholder groups andchanging the legal incorporation of the organization (eg privatization)
MD436
794
Second the governance practices of the company are susceptible to strategicdecision making Governance practices encompass a wide but not indefinite set ofcontractual arrangements within the firm that are more strategic than administrativein nature Typical governance practices include corporate governance practicesstakeholder management strategies outsourcing strategies process ownershipsystems reward monitoring and penalty systems legal and contracting practicesand even rules for process optimization within the firm
Regarding the relationships between the belief system of the firm and its strategyand structure we offer the following propositions
P1 The less ambiguous the link between firm strategy and the totality of firmrsquosbelief system the more crystallized the strategic intent of a company and themore consistent its actions
P2 The more mature the industry and the more stable the related industry recipethe more narrow the alternatives for structural change
Business networkCustomer relationship portfolio The management of the customer relationshipportfolio (customer base) is identified as one of the most crucial aspects in themanagement of a companyrsquos business model This task is executed through a customerrelationship management (CRM alternatively key account management or KAM)process addressing all aspects of identifying customers creating customer knowledgebuilding customer relationships and shaping their perceptions of the organization andits offerings (Srivastava et al 1999 Hunt and Morgan 1995) The task of managing thecustomer relationship portfolio is also seen as an evolutionary interactive processoccurring in the business network of a firm (Anderson et al 1994)
In order to manage existing or potential customer relationships their state natureoutcomes and developmental phases have to be understood In terms of their state andnature business relationships can vary between competitive (market-based)cooperative (partnership-based) and command (dominance-based or hierarchical)modes (Campbell 1985) The outcomes of business relationships have often beencategorized into the more objective techno-economic outcomes (eg customerrelationship profitability new technology development) on the one hand and themore subjective psychosocial outcomes (eg trust commitment and feelings of success)on the other (Tikkanen and Alajoutsijarvi 2001) Finally the development phases ofbusiness relationships typically include the pre-relationship exploratory developingstable (institutionalized) and dissolution stages (Ford 1980)
More specifically the CRM process consists of at least the following sub-processes identifying potential new customers determining the needs of existing and potential customers (customer value
creation) developing the companyrsquos product andor service offering developing and implementing marketing and sales programs developing and managing the channels of distribution
Cognition actionand the business
model
795
acquiring and leveraging information technology for customer contact
management of customer-oriented production teams especially in industrialcompanies
acquisition and dissemination of relevant market and customer information and
cross-selling and up-selling of product and service offerings (see Srivastava et al1999)
In our business model framework the customer relationship portfolio of the companyis the major source of revenues and knowledge that facilitates an understanding ofcustomer value creation and thus the development of offerings (Anderson and Narus1999) Customer value creation is inherently connected to the core competencies of thecompany and its business network (Anderson et al 1994) Moreover customer valuecreation is seen as the key determinant of segmentation (Anderson and Narus 1999) Inother words companies orient their core competencies and business processes towardsoptimal value creation for their key customers or customer segments
On a more general level the CRM process is related to the functioning of a businessmodel essentially comprises of the management of the processes of
exchanges and communication between the economic parties
the coordination of production and exchange (transactions)
adaptations in both the offering and the coordinating structures and processesand
customer and market intelligence (see Moller and Wilson 1995)
The marketcustomer orientation of the organization doing marketing is also a basicemphasis in CRM In marketing literature a market orientation typically characterizesa companyrsquos disposition to deliver superior value to its customers This requires anorganization-wide commitment to continuous information gathering and coordinationof customer needs competitorsrsquo capabilities and the provisions of other significantmarket agents and authorities (Slater and Narver 1994) The result is an integratedorganizational effort which gives rise to superior firm performance (Kohli andJaworski 1990)
Supplier relationship portfolio The management of a companyrsquos supplierrelationship portfolio (supplier base) involves the continuous enhancement of theacquisition of inputs and their transformation into desired customer outputs in theform of the aforementioned optimal offering This task is implemented through asupply chain management (SCM) process that incorporates the acquisition of alltangible and intangible inputs as well as the efficiency and effectiveness with whichthey are transformed into customer solutions (Srivastava et al 1999) Thus the SCMprocess connects the suppliersrsquo business processes to the companyrsquo internal processessuch as materials management and manufacturing
Supplier relationships can be scrutinized and managed on the basis of their statenature outcomes and developmental phases much like the customer relationshipsdiscussed above In recent industrial supply chain management literature however alot of emphasis is put on designing an appropriate supply architecture This is usuallyachieved by focusing strongly on a few key or first-tier suppliers operating a portfolioof second-tier suppliers etc
MD436
796
Key sub-processes of supply chain management include at least the selection andqualification of desired suppliers logistics management order processing pricingbilling rebates and managing customer services to enable product use From theviewpoint of our business model framework the supplier relationship portfoliomanagement is essential for
the establishment of a secure basis for operational excellence and therebylowering operational risk and
aligning the inputs for maximized value creation through procurement(Srivastava et al 1999)
The latter aspect deals with a much larger set of inputs than is traditionally understoodin industrial supply chain management as for example add-on and after-sales servicespresent a major possibility for value leverage from the viewpoint of the businessmodel
Product development network The development of new customer solutions andorthe reinvigoration of existing solutions is accomplished through a productdevelopment management (PDM) process (Srivastava et al 1999) More generally ithas been noted that companiesrsquo research and development (RampD) processes arebecoming increasingly networked (eg Powell et al 1996)
Key sub-processes of product development management include ascertainingcustomer needs and value creation offering development and testing identifying andmanaging internal relationships and developing and maintaining linkages withexternal co-operators Moreover the management of the companyrsquos productdevelopment project portfolio is of importance The objective of the PDM activitiesis to develop offerings that ascertain optimal customer value creation On a moregeneral level the objective of RampD related to the development of a business model isthe productization and commercialization of innovations In the case that thedevelopment of a business model starts with an initial (technological) innovation basicresearch aiming at the creation of new innovations essentially falls out of the scope ofRampD activity as it is defined here In terms of our business model framework we thusprefer to talk primarily about PDM In our business model framework PDM consists oftwo interrelated key tasks
(1) the management of the companyrsquos entire product development project portfolioand
(2) the management of the key intra- and inter-organizational relationships relatedto these projects
Extra-business relationships In addition to the above-mentioned three key groups ofrelationships other stakeholders can also essentially influence the evolution of abusiness model (Achrol and Kotler 1999 Gummesson 1999 Gronroos 1994) Mostimportantly literature has identified at least relationships to competitors relationshipsto debtors and equity-holders and mega relationships as crucial to any companyrsquosoperations We have termed them extra-business relationships due to fact that theserelationships usually do not have a direct link to the companyrsquos core businessoperations Despite their importance in corporate finance we treat relationships tofinanciers also as extra-business relationships due to the fact that they most often do
Cognition actionand the business
model
797
not have a direct operational impact on the functioning of the business model with theexception of the price of debt finance negotiated directly with debtors
The function of extra-business relationships is to provide the business model of afirm with for example institutional structures reference points and resources andcapabilities that are necessary for the companyrsquos operations Extra-businessrelationships crucial for the operation of a business model should be identifiedscrutinized in terms of their state nature outcomes and developmental phases andmanaged in a systematic manner
Regarding the relationships between the belief system of the firm and its businessnetwork we offer the following propositions
P3 The higher the cognition of a firmrsquos own reputational ranking the higherreputational rankings the firm seeks and expects from its customers andsuppliers
P4 The targets of a firmrsquos marketing efforts are constrained by the firmrsquosboundary beliefs about who it can pursue as a customer or serve as a supplier
P5 The more focused the product ontology the more structured goal-oriented themanagement of the product development project portfolio
OperationsProcess architecture From the beginning of the twenty-first century the importance oforganizational processes ndash activity chains within organizations ndash has been recognizedMechanistic Taylorian management science is one example of an attempt to makebusiness organizationsrsquo work processes more effective The world-wide success ofJapanese companies led to the emergence of Japanese principles in Westernmanagement literature during the 1980s One could argue that this developmenttogether with Porterian value chain analyses gradually brought horizontal businessprocesses back to the focus of management attention For example total qualitymanagement (TQM) was a horizontal process cutting across the boundaries separatingorganizational units in order to leverage quality in companiesrsquo products and activities(Ghoshal and Bartlett 1995) More recent notions such as lean management (Womacket al 1990) and time-based competition and management (Stalk and Hout 1990) alsocontain the same basic ideas Finally business process reengineering (BPR) aimed atshowing companies how to organize functionally separated tasks into unifiedhorizontal business processes creating value for customers (Hammer 1990)
The basic idea behind conceptualizing and categorizing business processes inorganizations is to identify and design repeatable business processes that have enoughelements of consistency (eg clearly identified inputs and outputs) to justify developinga common ldquoaveragedrdquo process for an organization (Stoddard et al 1996) Davenport(1994 p 134) has defined the concept of an organizational process as
a structured set of activities designed to produce a specified output for a particularcustomer or market It has a beginning an end and clearly identified inputs and outputs Aprocess is therefore a structure for action for how work is done
Archer and Bowker (1995 p 32) introduce a broader less mechanistic approach
MD436
798
the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
800
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
does not concentrate on any particular aspect but on the totality constituted by thecomponents of the business model (see Hambrick and Fredrickson 2001) Theemphasis is thus on which ldquooriginsrdquo have an influence on which component orcomponents of the business model and what this influence is In addition weacknowledge that there is substantial interplay between the components of thebusiness model
Organizational structure From the perspective of a firmrsquos business model theeffects of strategies processes and the environment on the organizational structuresare vital in order to find the link with organizational performance (Ketchen et al 1996)These relationships are partially explained by configurations and emphasize the needto understand the effects of organizational structure not only on strategy but on thestrategic actions and consequent economic development and business results as well(Ketchen et al 1997)
We adopt the view that a leap from one structural archetype to another mustproceed through a number of phases and that organizations are thus capable ofadapting to changing environments (Miller and Friesen 1982) This means thatorganizations are unable to transform their structures without risk as each leap createsa disruption in organizational life (Mintzberg and Waters 1982) In this paper weadvocate a co-evolutionary perspective which emphasizes the relationship betweenstructure and strategy On the one hand organizational structure is a key determinantof decision making On the other hand strategic action is perceived to have power overorganizational structures Strategic choices and resulting actions do changeorganizational structures albeit mostly in an incremental fashion Evidence of thisis that the current organizational reality can be thought to narrow down thealternatives available for strategic action thus emphasizing strategizing as a functionof the present structure
Governance A further element in understanding corporate strategy deals withunderstanding the existence boundaries and internal organization of the firm The ideaof organizational governance tackles these issues and has emerged as an importantstrategic perspective (Williamson 1999 Madhok 2002 Foss 1999) Governance iscentrally comprised of contracting-based literature that concentrates on the generaltreatment of contracting around the issues of appropriation ownership alignment ofincentives (Madhok 2002) self-interest as well as authority the employmentrelationship economizing and coordination financial structure regulation andproperty rights (Williamson 1999)
The managerial decision-making processes surrounding governance at the level ofthe firm can be conceptualized to operate in two realms First governance modes canbe managed by initiating action along four continua These are
(1) the market-hierarchy continuum
(2) the economic logic continuum
(3) the private-civic interest continuum and
(4) the legal incorporation continuum
Typical actions include influencing the tightness of relationships (eg alliance-building)tightening or loosening the profit-making orientation (eg relinquishingprofit-maximization targets) redefining the prioritization of stakeholder groups andchanging the legal incorporation of the organization (eg privatization)
MD436
794
Second the governance practices of the company are susceptible to strategicdecision making Governance practices encompass a wide but not indefinite set ofcontractual arrangements within the firm that are more strategic than administrativein nature Typical governance practices include corporate governance practicesstakeholder management strategies outsourcing strategies process ownershipsystems reward monitoring and penalty systems legal and contracting practicesand even rules for process optimization within the firm
Regarding the relationships between the belief system of the firm and its strategyand structure we offer the following propositions
P1 The less ambiguous the link between firm strategy and the totality of firmrsquosbelief system the more crystallized the strategic intent of a company and themore consistent its actions
P2 The more mature the industry and the more stable the related industry recipethe more narrow the alternatives for structural change
Business networkCustomer relationship portfolio The management of the customer relationshipportfolio (customer base) is identified as one of the most crucial aspects in themanagement of a companyrsquos business model This task is executed through a customerrelationship management (CRM alternatively key account management or KAM)process addressing all aspects of identifying customers creating customer knowledgebuilding customer relationships and shaping their perceptions of the organization andits offerings (Srivastava et al 1999 Hunt and Morgan 1995) The task of managing thecustomer relationship portfolio is also seen as an evolutionary interactive processoccurring in the business network of a firm (Anderson et al 1994)
In order to manage existing or potential customer relationships their state natureoutcomes and developmental phases have to be understood In terms of their state andnature business relationships can vary between competitive (market-based)cooperative (partnership-based) and command (dominance-based or hierarchical)modes (Campbell 1985) The outcomes of business relationships have often beencategorized into the more objective techno-economic outcomes (eg customerrelationship profitability new technology development) on the one hand and themore subjective psychosocial outcomes (eg trust commitment and feelings of success)on the other (Tikkanen and Alajoutsijarvi 2001) Finally the development phases ofbusiness relationships typically include the pre-relationship exploratory developingstable (institutionalized) and dissolution stages (Ford 1980)
More specifically the CRM process consists of at least the following sub-processes identifying potential new customers determining the needs of existing and potential customers (customer value
creation) developing the companyrsquos product andor service offering developing and implementing marketing and sales programs developing and managing the channels of distribution
Cognition actionand the business
model
795
acquiring and leveraging information technology for customer contact
management of customer-oriented production teams especially in industrialcompanies
acquisition and dissemination of relevant market and customer information and
cross-selling and up-selling of product and service offerings (see Srivastava et al1999)
In our business model framework the customer relationship portfolio of the companyis the major source of revenues and knowledge that facilitates an understanding ofcustomer value creation and thus the development of offerings (Anderson and Narus1999) Customer value creation is inherently connected to the core competencies of thecompany and its business network (Anderson et al 1994) Moreover customer valuecreation is seen as the key determinant of segmentation (Anderson and Narus 1999) Inother words companies orient their core competencies and business processes towardsoptimal value creation for their key customers or customer segments
On a more general level the CRM process is related to the functioning of a businessmodel essentially comprises of the management of the processes of
exchanges and communication between the economic parties
the coordination of production and exchange (transactions)
adaptations in both the offering and the coordinating structures and processesand
customer and market intelligence (see Moller and Wilson 1995)
The marketcustomer orientation of the organization doing marketing is also a basicemphasis in CRM In marketing literature a market orientation typically characterizesa companyrsquos disposition to deliver superior value to its customers This requires anorganization-wide commitment to continuous information gathering and coordinationof customer needs competitorsrsquo capabilities and the provisions of other significantmarket agents and authorities (Slater and Narver 1994) The result is an integratedorganizational effort which gives rise to superior firm performance (Kohli andJaworski 1990)
Supplier relationship portfolio The management of a companyrsquos supplierrelationship portfolio (supplier base) involves the continuous enhancement of theacquisition of inputs and their transformation into desired customer outputs in theform of the aforementioned optimal offering This task is implemented through asupply chain management (SCM) process that incorporates the acquisition of alltangible and intangible inputs as well as the efficiency and effectiveness with whichthey are transformed into customer solutions (Srivastava et al 1999) Thus the SCMprocess connects the suppliersrsquo business processes to the companyrsquo internal processessuch as materials management and manufacturing
Supplier relationships can be scrutinized and managed on the basis of their statenature outcomes and developmental phases much like the customer relationshipsdiscussed above In recent industrial supply chain management literature however alot of emphasis is put on designing an appropriate supply architecture This is usuallyachieved by focusing strongly on a few key or first-tier suppliers operating a portfolioof second-tier suppliers etc
MD436
796
Key sub-processes of supply chain management include at least the selection andqualification of desired suppliers logistics management order processing pricingbilling rebates and managing customer services to enable product use From theviewpoint of our business model framework the supplier relationship portfoliomanagement is essential for
the establishment of a secure basis for operational excellence and therebylowering operational risk and
aligning the inputs for maximized value creation through procurement(Srivastava et al 1999)
The latter aspect deals with a much larger set of inputs than is traditionally understoodin industrial supply chain management as for example add-on and after-sales servicespresent a major possibility for value leverage from the viewpoint of the businessmodel
Product development network The development of new customer solutions andorthe reinvigoration of existing solutions is accomplished through a productdevelopment management (PDM) process (Srivastava et al 1999) More generally ithas been noted that companiesrsquo research and development (RampD) processes arebecoming increasingly networked (eg Powell et al 1996)
Key sub-processes of product development management include ascertainingcustomer needs and value creation offering development and testing identifying andmanaging internal relationships and developing and maintaining linkages withexternal co-operators Moreover the management of the companyrsquos productdevelopment project portfolio is of importance The objective of the PDM activitiesis to develop offerings that ascertain optimal customer value creation On a moregeneral level the objective of RampD related to the development of a business model isthe productization and commercialization of innovations In the case that thedevelopment of a business model starts with an initial (technological) innovation basicresearch aiming at the creation of new innovations essentially falls out of the scope ofRampD activity as it is defined here In terms of our business model framework we thusprefer to talk primarily about PDM In our business model framework PDM consists oftwo interrelated key tasks
(1) the management of the companyrsquos entire product development project portfolioand
(2) the management of the key intra- and inter-organizational relationships relatedto these projects
Extra-business relationships In addition to the above-mentioned three key groups ofrelationships other stakeholders can also essentially influence the evolution of abusiness model (Achrol and Kotler 1999 Gummesson 1999 Gronroos 1994) Mostimportantly literature has identified at least relationships to competitors relationshipsto debtors and equity-holders and mega relationships as crucial to any companyrsquosoperations We have termed them extra-business relationships due to fact that theserelationships usually do not have a direct link to the companyrsquos core businessoperations Despite their importance in corporate finance we treat relationships tofinanciers also as extra-business relationships due to the fact that they most often do
Cognition actionand the business
model
797
not have a direct operational impact on the functioning of the business model with theexception of the price of debt finance negotiated directly with debtors
The function of extra-business relationships is to provide the business model of afirm with for example institutional structures reference points and resources andcapabilities that are necessary for the companyrsquos operations Extra-businessrelationships crucial for the operation of a business model should be identifiedscrutinized in terms of their state nature outcomes and developmental phases andmanaged in a systematic manner
Regarding the relationships between the belief system of the firm and its businessnetwork we offer the following propositions
P3 The higher the cognition of a firmrsquos own reputational ranking the higherreputational rankings the firm seeks and expects from its customers andsuppliers
P4 The targets of a firmrsquos marketing efforts are constrained by the firmrsquosboundary beliefs about who it can pursue as a customer or serve as a supplier
P5 The more focused the product ontology the more structured goal-oriented themanagement of the product development project portfolio
OperationsProcess architecture From the beginning of the twenty-first century the importance oforganizational processes ndash activity chains within organizations ndash has been recognizedMechanistic Taylorian management science is one example of an attempt to makebusiness organizationsrsquo work processes more effective The world-wide success ofJapanese companies led to the emergence of Japanese principles in Westernmanagement literature during the 1980s One could argue that this developmenttogether with Porterian value chain analyses gradually brought horizontal businessprocesses back to the focus of management attention For example total qualitymanagement (TQM) was a horizontal process cutting across the boundaries separatingorganizational units in order to leverage quality in companiesrsquo products and activities(Ghoshal and Bartlett 1995) More recent notions such as lean management (Womacket al 1990) and time-based competition and management (Stalk and Hout 1990) alsocontain the same basic ideas Finally business process reengineering (BPR) aimed atshowing companies how to organize functionally separated tasks into unifiedhorizontal business processes creating value for customers (Hammer 1990)
The basic idea behind conceptualizing and categorizing business processes inorganizations is to identify and design repeatable business processes that have enoughelements of consistency (eg clearly identified inputs and outputs) to justify developinga common ldquoaveragedrdquo process for an organization (Stoddard et al 1996) Davenport(1994 p 134) has defined the concept of an organizational process as
a structured set of activities designed to produce a specified output for a particularcustomer or market It has a beginning an end and clearly identified inputs and outputs Aprocess is therefore a structure for action for how work is done
Archer and Bowker (1995 p 32) introduce a broader less mechanistic approach
MD436
798
the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
800
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
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Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
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Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
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Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
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Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
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Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
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806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
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Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
Second the governance practices of the company are susceptible to strategicdecision making Governance practices encompass a wide but not indefinite set ofcontractual arrangements within the firm that are more strategic than administrativein nature Typical governance practices include corporate governance practicesstakeholder management strategies outsourcing strategies process ownershipsystems reward monitoring and penalty systems legal and contracting practicesand even rules for process optimization within the firm
Regarding the relationships between the belief system of the firm and its strategyand structure we offer the following propositions
P1 The less ambiguous the link between firm strategy and the totality of firmrsquosbelief system the more crystallized the strategic intent of a company and themore consistent its actions
P2 The more mature the industry and the more stable the related industry recipethe more narrow the alternatives for structural change
Business networkCustomer relationship portfolio The management of the customer relationshipportfolio (customer base) is identified as one of the most crucial aspects in themanagement of a companyrsquos business model This task is executed through a customerrelationship management (CRM alternatively key account management or KAM)process addressing all aspects of identifying customers creating customer knowledgebuilding customer relationships and shaping their perceptions of the organization andits offerings (Srivastava et al 1999 Hunt and Morgan 1995) The task of managing thecustomer relationship portfolio is also seen as an evolutionary interactive processoccurring in the business network of a firm (Anderson et al 1994)
In order to manage existing or potential customer relationships their state natureoutcomes and developmental phases have to be understood In terms of their state andnature business relationships can vary between competitive (market-based)cooperative (partnership-based) and command (dominance-based or hierarchical)modes (Campbell 1985) The outcomes of business relationships have often beencategorized into the more objective techno-economic outcomes (eg customerrelationship profitability new technology development) on the one hand and themore subjective psychosocial outcomes (eg trust commitment and feelings of success)on the other (Tikkanen and Alajoutsijarvi 2001) Finally the development phases ofbusiness relationships typically include the pre-relationship exploratory developingstable (institutionalized) and dissolution stages (Ford 1980)
More specifically the CRM process consists of at least the following sub-processes identifying potential new customers determining the needs of existing and potential customers (customer value
creation) developing the companyrsquos product andor service offering developing and implementing marketing and sales programs developing and managing the channels of distribution
Cognition actionand the business
model
795
acquiring and leveraging information technology for customer contact
management of customer-oriented production teams especially in industrialcompanies
acquisition and dissemination of relevant market and customer information and
cross-selling and up-selling of product and service offerings (see Srivastava et al1999)
In our business model framework the customer relationship portfolio of the companyis the major source of revenues and knowledge that facilitates an understanding ofcustomer value creation and thus the development of offerings (Anderson and Narus1999) Customer value creation is inherently connected to the core competencies of thecompany and its business network (Anderson et al 1994) Moreover customer valuecreation is seen as the key determinant of segmentation (Anderson and Narus 1999) Inother words companies orient their core competencies and business processes towardsoptimal value creation for their key customers or customer segments
On a more general level the CRM process is related to the functioning of a businessmodel essentially comprises of the management of the processes of
exchanges and communication between the economic parties
the coordination of production and exchange (transactions)
adaptations in both the offering and the coordinating structures and processesand
customer and market intelligence (see Moller and Wilson 1995)
The marketcustomer orientation of the organization doing marketing is also a basicemphasis in CRM In marketing literature a market orientation typically characterizesa companyrsquos disposition to deliver superior value to its customers This requires anorganization-wide commitment to continuous information gathering and coordinationof customer needs competitorsrsquo capabilities and the provisions of other significantmarket agents and authorities (Slater and Narver 1994) The result is an integratedorganizational effort which gives rise to superior firm performance (Kohli andJaworski 1990)
Supplier relationship portfolio The management of a companyrsquos supplierrelationship portfolio (supplier base) involves the continuous enhancement of theacquisition of inputs and their transformation into desired customer outputs in theform of the aforementioned optimal offering This task is implemented through asupply chain management (SCM) process that incorporates the acquisition of alltangible and intangible inputs as well as the efficiency and effectiveness with whichthey are transformed into customer solutions (Srivastava et al 1999) Thus the SCMprocess connects the suppliersrsquo business processes to the companyrsquo internal processessuch as materials management and manufacturing
Supplier relationships can be scrutinized and managed on the basis of their statenature outcomes and developmental phases much like the customer relationshipsdiscussed above In recent industrial supply chain management literature however alot of emphasis is put on designing an appropriate supply architecture This is usuallyachieved by focusing strongly on a few key or first-tier suppliers operating a portfolioof second-tier suppliers etc
MD436
796
Key sub-processes of supply chain management include at least the selection andqualification of desired suppliers logistics management order processing pricingbilling rebates and managing customer services to enable product use From theviewpoint of our business model framework the supplier relationship portfoliomanagement is essential for
the establishment of a secure basis for operational excellence and therebylowering operational risk and
aligning the inputs for maximized value creation through procurement(Srivastava et al 1999)
The latter aspect deals with a much larger set of inputs than is traditionally understoodin industrial supply chain management as for example add-on and after-sales servicespresent a major possibility for value leverage from the viewpoint of the businessmodel
Product development network The development of new customer solutions andorthe reinvigoration of existing solutions is accomplished through a productdevelopment management (PDM) process (Srivastava et al 1999) More generally ithas been noted that companiesrsquo research and development (RampD) processes arebecoming increasingly networked (eg Powell et al 1996)
Key sub-processes of product development management include ascertainingcustomer needs and value creation offering development and testing identifying andmanaging internal relationships and developing and maintaining linkages withexternal co-operators Moreover the management of the companyrsquos productdevelopment project portfolio is of importance The objective of the PDM activitiesis to develop offerings that ascertain optimal customer value creation On a moregeneral level the objective of RampD related to the development of a business model isthe productization and commercialization of innovations In the case that thedevelopment of a business model starts with an initial (technological) innovation basicresearch aiming at the creation of new innovations essentially falls out of the scope ofRampD activity as it is defined here In terms of our business model framework we thusprefer to talk primarily about PDM In our business model framework PDM consists oftwo interrelated key tasks
(1) the management of the companyrsquos entire product development project portfolioand
(2) the management of the key intra- and inter-organizational relationships relatedto these projects
Extra-business relationships In addition to the above-mentioned three key groups ofrelationships other stakeholders can also essentially influence the evolution of abusiness model (Achrol and Kotler 1999 Gummesson 1999 Gronroos 1994) Mostimportantly literature has identified at least relationships to competitors relationshipsto debtors and equity-holders and mega relationships as crucial to any companyrsquosoperations We have termed them extra-business relationships due to fact that theserelationships usually do not have a direct link to the companyrsquos core businessoperations Despite their importance in corporate finance we treat relationships tofinanciers also as extra-business relationships due to the fact that they most often do
Cognition actionand the business
model
797
not have a direct operational impact on the functioning of the business model with theexception of the price of debt finance negotiated directly with debtors
The function of extra-business relationships is to provide the business model of afirm with for example institutional structures reference points and resources andcapabilities that are necessary for the companyrsquos operations Extra-businessrelationships crucial for the operation of a business model should be identifiedscrutinized in terms of their state nature outcomes and developmental phases andmanaged in a systematic manner
Regarding the relationships between the belief system of the firm and its businessnetwork we offer the following propositions
P3 The higher the cognition of a firmrsquos own reputational ranking the higherreputational rankings the firm seeks and expects from its customers andsuppliers
P4 The targets of a firmrsquos marketing efforts are constrained by the firmrsquosboundary beliefs about who it can pursue as a customer or serve as a supplier
P5 The more focused the product ontology the more structured goal-oriented themanagement of the product development project portfolio
OperationsProcess architecture From the beginning of the twenty-first century the importance oforganizational processes ndash activity chains within organizations ndash has been recognizedMechanistic Taylorian management science is one example of an attempt to makebusiness organizationsrsquo work processes more effective The world-wide success ofJapanese companies led to the emergence of Japanese principles in Westernmanagement literature during the 1980s One could argue that this developmenttogether with Porterian value chain analyses gradually brought horizontal businessprocesses back to the focus of management attention For example total qualitymanagement (TQM) was a horizontal process cutting across the boundaries separatingorganizational units in order to leverage quality in companiesrsquo products and activities(Ghoshal and Bartlett 1995) More recent notions such as lean management (Womacket al 1990) and time-based competition and management (Stalk and Hout 1990) alsocontain the same basic ideas Finally business process reengineering (BPR) aimed atshowing companies how to organize functionally separated tasks into unifiedhorizontal business processes creating value for customers (Hammer 1990)
The basic idea behind conceptualizing and categorizing business processes inorganizations is to identify and design repeatable business processes that have enoughelements of consistency (eg clearly identified inputs and outputs) to justify developinga common ldquoaveragedrdquo process for an organization (Stoddard et al 1996) Davenport(1994 p 134) has defined the concept of an organizational process as
a structured set of activities designed to produce a specified output for a particularcustomer or market It has a beginning an end and clearly identified inputs and outputs Aprocess is therefore a structure for action for how work is done
Archer and Bowker (1995 p 32) introduce a broader less mechanistic approach
MD436
798
the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
800
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
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804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
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806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
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Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
acquiring and leveraging information technology for customer contact
management of customer-oriented production teams especially in industrialcompanies
acquisition and dissemination of relevant market and customer information and
cross-selling and up-selling of product and service offerings (see Srivastava et al1999)
In our business model framework the customer relationship portfolio of the companyis the major source of revenues and knowledge that facilitates an understanding ofcustomer value creation and thus the development of offerings (Anderson and Narus1999) Customer value creation is inherently connected to the core competencies of thecompany and its business network (Anderson et al 1994) Moreover customer valuecreation is seen as the key determinant of segmentation (Anderson and Narus 1999) Inother words companies orient their core competencies and business processes towardsoptimal value creation for their key customers or customer segments
On a more general level the CRM process is related to the functioning of a businessmodel essentially comprises of the management of the processes of
exchanges and communication between the economic parties
the coordination of production and exchange (transactions)
adaptations in both the offering and the coordinating structures and processesand
customer and market intelligence (see Moller and Wilson 1995)
The marketcustomer orientation of the organization doing marketing is also a basicemphasis in CRM In marketing literature a market orientation typically characterizesa companyrsquos disposition to deliver superior value to its customers This requires anorganization-wide commitment to continuous information gathering and coordinationof customer needs competitorsrsquo capabilities and the provisions of other significantmarket agents and authorities (Slater and Narver 1994) The result is an integratedorganizational effort which gives rise to superior firm performance (Kohli andJaworski 1990)
Supplier relationship portfolio The management of a companyrsquos supplierrelationship portfolio (supplier base) involves the continuous enhancement of theacquisition of inputs and their transformation into desired customer outputs in theform of the aforementioned optimal offering This task is implemented through asupply chain management (SCM) process that incorporates the acquisition of alltangible and intangible inputs as well as the efficiency and effectiveness with whichthey are transformed into customer solutions (Srivastava et al 1999) Thus the SCMprocess connects the suppliersrsquo business processes to the companyrsquo internal processessuch as materials management and manufacturing
Supplier relationships can be scrutinized and managed on the basis of their statenature outcomes and developmental phases much like the customer relationshipsdiscussed above In recent industrial supply chain management literature however alot of emphasis is put on designing an appropriate supply architecture This is usuallyachieved by focusing strongly on a few key or first-tier suppliers operating a portfolioof second-tier suppliers etc
MD436
796
Key sub-processes of supply chain management include at least the selection andqualification of desired suppliers logistics management order processing pricingbilling rebates and managing customer services to enable product use From theviewpoint of our business model framework the supplier relationship portfoliomanagement is essential for
the establishment of a secure basis for operational excellence and therebylowering operational risk and
aligning the inputs for maximized value creation through procurement(Srivastava et al 1999)
The latter aspect deals with a much larger set of inputs than is traditionally understoodin industrial supply chain management as for example add-on and after-sales servicespresent a major possibility for value leverage from the viewpoint of the businessmodel
Product development network The development of new customer solutions andorthe reinvigoration of existing solutions is accomplished through a productdevelopment management (PDM) process (Srivastava et al 1999) More generally ithas been noted that companiesrsquo research and development (RampD) processes arebecoming increasingly networked (eg Powell et al 1996)
Key sub-processes of product development management include ascertainingcustomer needs and value creation offering development and testing identifying andmanaging internal relationships and developing and maintaining linkages withexternal co-operators Moreover the management of the companyrsquos productdevelopment project portfolio is of importance The objective of the PDM activitiesis to develop offerings that ascertain optimal customer value creation On a moregeneral level the objective of RampD related to the development of a business model isthe productization and commercialization of innovations In the case that thedevelopment of a business model starts with an initial (technological) innovation basicresearch aiming at the creation of new innovations essentially falls out of the scope ofRampD activity as it is defined here In terms of our business model framework we thusprefer to talk primarily about PDM In our business model framework PDM consists oftwo interrelated key tasks
(1) the management of the companyrsquos entire product development project portfolioand
(2) the management of the key intra- and inter-organizational relationships relatedto these projects
Extra-business relationships In addition to the above-mentioned three key groups ofrelationships other stakeholders can also essentially influence the evolution of abusiness model (Achrol and Kotler 1999 Gummesson 1999 Gronroos 1994) Mostimportantly literature has identified at least relationships to competitors relationshipsto debtors and equity-holders and mega relationships as crucial to any companyrsquosoperations We have termed them extra-business relationships due to fact that theserelationships usually do not have a direct link to the companyrsquos core businessoperations Despite their importance in corporate finance we treat relationships tofinanciers also as extra-business relationships due to the fact that they most often do
Cognition actionand the business
model
797
not have a direct operational impact on the functioning of the business model with theexception of the price of debt finance negotiated directly with debtors
The function of extra-business relationships is to provide the business model of afirm with for example institutional structures reference points and resources andcapabilities that are necessary for the companyrsquos operations Extra-businessrelationships crucial for the operation of a business model should be identifiedscrutinized in terms of their state nature outcomes and developmental phases andmanaged in a systematic manner
Regarding the relationships between the belief system of the firm and its businessnetwork we offer the following propositions
P3 The higher the cognition of a firmrsquos own reputational ranking the higherreputational rankings the firm seeks and expects from its customers andsuppliers
P4 The targets of a firmrsquos marketing efforts are constrained by the firmrsquosboundary beliefs about who it can pursue as a customer or serve as a supplier
P5 The more focused the product ontology the more structured goal-oriented themanagement of the product development project portfolio
OperationsProcess architecture From the beginning of the twenty-first century the importance oforganizational processes ndash activity chains within organizations ndash has been recognizedMechanistic Taylorian management science is one example of an attempt to makebusiness organizationsrsquo work processes more effective The world-wide success ofJapanese companies led to the emergence of Japanese principles in Westernmanagement literature during the 1980s One could argue that this developmenttogether with Porterian value chain analyses gradually brought horizontal businessprocesses back to the focus of management attention For example total qualitymanagement (TQM) was a horizontal process cutting across the boundaries separatingorganizational units in order to leverage quality in companiesrsquo products and activities(Ghoshal and Bartlett 1995) More recent notions such as lean management (Womacket al 1990) and time-based competition and management (Stalk and Hout 1990) alsocontain the same basic ideas Finally business process reengineering (BPR) aimed atshowing companies how to organize functionally separated tasks into unifiedhorizontal business processes creating value for customers (Hammer 1990)
The basic idea behind conceptualizing and categorizing business processes inorganizations is to identify and design repeatable business processes that have enoughelements of consistency (eg clearly identified inputs and outputs) to justify developinga common ldquoaveragedrdquo process for an organization (Stoddard et al 1996) Davenport(1994 p 134) has defined the concept of an organizational process as
a structured set of activities designed to produce a specified output for a particularcustomer or market It has a beginning an end and clearly identified inputs and outputs Aprocess is therefore a structure for action for how work is done
Archer and Bowker (1995 p 32) introduce a broader less mechanistic approach
MD436
798
the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
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company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
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Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
Key sub-processes of supply chain management include at least the selection andqualification of desired suppliers logistics management order processing pricingbilling rebates and managing customer services to enable product use From theviewpoint of our business model framework the supplier relationship portfoliomanagement is essential for
the establishment of a secure basis for operational excellence and therebylowering operational risk and
aligning the inputs for maximized value creation through procurement(Srivastava et al 1999)
The latter aspect deals with a much larger set of inputs than is traditionally understoodin industrial supply chain management as for example add-on and after-sales servicespresent a major possibility for value leverage from the viewpoint of the businessmodel
Product development network The development of new customer solutions andorthe reinvigoration of existing solutions is accomplished through a productdevelopment management (PDM) process (Srivastava et al 1999) More generally ithas been noted that companiesrsquo research and development (RampD) processes arebecoming increasingly networked (eg Powell et al 1996)
Key sub-processes of product development management include ascertainingcustomer needs and value creation offering development and testing identifying andmanaging internal relationships and developing and maintaining linkages withexternal co-operators Moreover the management of the companyrsquos productdevelopment project portfolio is of importance The objective of the PDM activitiesis to develop offerings that ascertain optimal customer value creation On a moregeneral level the objective of RampD related to the development of a business model isthe productization and commercialization of innovations In the case that thedevelopment of a business model starts with an initial (technological) innovation basicresearch aiming at the creation of new innovations essentially falls out of the scope ofRampD activity as it is defined here In terms of our business model framework we thusprefer to talk primarily about PDM In our business model framework PDM consists oftwo interrelated key tasks
(1) the management of the companyrsquos entire product development project portfolioand
(2) the management of the key intra- and inter-organizational relationships relatedto these projects
Extra-business relationships In addition to the above-mentioned three key groups ofrelationships other stakeholders can also essentially influence the evolution of abusiness model (Achrol and Kotler 1999 Gummesson 1999 Gronroos 1994) Mostimportantly literature has identified at least relationships to competitors relationshipsto debtors and equity-holders and mega relationships as crucial to any companyrsquosoperations We have termed them extra-business relationships due to fact that theserelationships usually do not have a direct link to the companyrsquos core businessoperations Despite their importance in corporate finance we treat relationships tofinanciers also as extra-business relationships due to the fact that they most often do
Cognition actionand the business
model
797
not have a direct operational impact on the functioning of the business model with theexception of the price of debt finance negotiated directly with debtors
The function of extra-business relationships is to provide the business model of afirm with for example institutional structures reference points and resources andcapabilities that are necessary for the companyrsquos operations Extra-businessrelationships crucial for the operation of a business model should be identifiedscrutinized in terms of their state nature outcomes and developmental phases andmanaged in a systematic manner
Regarding the relationships between the belief system of the firm and its businessnetwork we offer the following propositions
P3 The higher the cognition of a firmrsquos own reputational ranking the higherreputational rankings the firm seeks and expects from its customers andsuppliers
P4 The targets of a firmrsquos marketing efforts are constrained by the firmrsquosboundary beliefs about who it can pursue as a customer or serve as a supplier
P5 The more focused the product ontology the more structured goal-oriented themanagement of the product development project portfolio
OperationsProcess architecture From the beginning of the twenty-first century the importance oforganizational processes ndash activity chains within organizations ndash has been recognizedMechanistic Taylorian management science is one example of an attempt to makebusiness organizationsrsquo work processes more effective The world-wide success ofJapanese companies led to the emergence of Japanese principles in Westernmanagement literature during the 1980s One could argue that this developmenttogether with Porterian value chain analyses gradually brought horizontal businessprocesses back to the focus of management attention For example total qualitymanagement (TQM) was a horizontal process cutting across the boundaries separatingorganizational units in order to leverage quality in companiesrsquo products and activities(Ghoshal and Bartlett 1995) More recent notions such as lean management (Womacket al 1990) and time-based competition and management (Stalk and Hout 1990) alsocontain the same basic ideas Finally business process reengineering (BPR) aimed atshowing companies how to organize functionally separated tasks into unifiedhorizontal business processes creating value for customers (Hammer 1990)
The basic idea behind conceptualizing and categorizing business processes inorganizations is to identify and design repeatable business processes that have enoughelements of consistency (eg clearly identified inputs and outputs) to justify developinga common ldquoaveragedrdquo process for an organization (Stoddard et al 1996) Davenport(1994 p 134) has defined the concept of an organizational process as
a structured set of activities designed to produce a specified output for a particularcustomer or market It has a beginning an end and clearly identified inputs and outputs Aprocess is therefore a structure for action for how work is done
Archer and Bowker (1995 p 32) introduce a broader less mechanistic approach
MD436
798
the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
800
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
not have a direct operational impact on the functioning of the business model with theexception of the price of debt finance negotiated directly with debtors
The function of extra-business relationships is to provide the business model of afirm with for example institutional structures reference points and resources andcapabilities that are necessary for the companyrsquos operations Extra-businessrelationships crucial for the operation of a business model should be identifiedscrutinized in terms of their state nature outcomes and developmental phases andmanaged in a systematic manner
Regarding the relationships between the belief system of the firm and its businessnetwork we offer the following propositions
P3 The higher the cognition of a firmrsquos own reputational ranking the higherreputational rankings the firm seeks and expects from its customers andsuppliers
P4 The targets of a firmrsquos marketing efforts are constrained by the firmrsquosboundary beliefs about who it can pursue as a customer or serve as a supplier
P5 The more focused the product ontology the more structured goal-oriented themanagement of the product development project portfolio
OperationsProcess architecture From the beginning of the twenty-first century the importance oforganizational processes ndash activity chains within organizations ndash has been recognizedMechanistic Taylorian management science is one example of an attempt to makebusiness organizationsrsquo work processes more effective The world-wide success ofJapanese companies led to the emergence of Japanese principles in Westernmanagement literature during the 1980s One could argue that this developmenttogether with Porterian value chain analyses gradually brought horizontal businessprocesses back to the focus of management attention For example total qualitymanagement (TQM) was a horizontal process cutting across the boundaries separatingorganizational units in order to leverage quality in companiesrsquo products and activities(Ghoshal and Bartlett 1995) More recent notions such as lean management (Womacket al 1990) and time-based competition and management (Stalk and Hout 1990) alsocontain the same basic ideas Finally business process reengineering (BPR) aimed atshowing companies how to organize functionally separated tasks into unifiedhorizontal business processes creating value for customers (Hammer 1990)
The basic idea behind conceptualizing and categorizing business processes inorganizations is to identify and design repeatable business processes that have enoughelements of consistency (eg clearly identified inputs and outputs) to justify developinga common ldquoaveragedrdquo process for an organization (Stoddard et al 1996) Davenport(1994 p 134) has defined the concept of an organizational process as
a structured set of activities designed to produce a specified output for a particularcustomer or market It has a beginning an end and clearly identified inputs and outputs Aprocess is therefore a structure for action for how work is done
Archer and Bowker (1995 p 32) introduce a broader less mechanistic approach
MD436
798
the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
800
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
the concept of business process [ ] is the paradigmatic change in the way in whichorganizations are designed and subsequently managed It represents a decisive movementaway from the traditional functional concept with its high emphasis on verticaldifferentiation and hierarchical control to a view which stresses horizontal integrationacross intra- and interorganizational functions
Process thinking thus permeates organizational and functional boundaries Factualconspicuous organizational processes include for example order fulfillment productdevelopment marketing and selling customer service network creation andoperations procurement facilities systems finance human resources regulationand governance (Stoddard et al 1996 p 59) Processes are the means through whichcompanies are able to realize their core competencies ie what they really can performfor the customers Process architecture refers to a designed portfolio of dynamicprocesses It is a horizontally integrated collection of different kinds of processes inwhich the companyrsquos core competencies crystallize
Resource capability and competence base In strategy and organization researchcompetence-based approaches emerged after the 1970s Most importantly they consistof the resource-based perspective of the firm (eg the resource dependence view byPfeffer and Salancik 1978 the resource-based view of for example Wernerfelt 1984and Dierickx and Cool 1989) the dynamic capabilities perspective (Nelson 1991 Teeceet al 1997) the knowledge-based theory of the firm (Kogut and Zander 1992 Nonakaand Takeuchi 1995) and the core competenciescompetence-based competition theoryapproach (Hamel and Prahalad 1990 Sanchez and Heene 1997)
Resources can be defined as
anything which could be thought of as a strength or weakness of a given firm [ ] as those(tangible and intangible) assets which are tied semipermanently to the firm [ ] brand namesin-house knowledge of technology employment of skilled personnel trade contacts(Wernerfelt 1984)
Organizational resources that are valuable rare difficult to imitate andnon-substitutable can yield sustained competitive advantage (Barney 1991)Distinctive capabilities are ldquoa set of differentiable skills complementary assets androutines that provide the basis for a firmrsquos competitive capacities and sustainableadvantagesrdquo (Teece et al 1997)
From the perspective of a firmrsquos operations the resource and competence base isvital due to their influence on firm routines and resource acquisition A routine isthought of as ldquothe skill of an organizationrdquo Capabilities (competencies dynamiccapabilities higher-order organizing principles etc) are meta-routines that represent afirmrsquos capacity to sustain a coordinated deployment of routines in its businessoperations (Foss and Foss 2000) The process architecture then again is highlydependent on the acquisition of resources and capabilities in strategic factor markets
According to this perspective a firmrsquos managerial operations concentrate first onthe identification of strategic factor market imperfections and acquiring them to thefirmrsquos resource and competence base Strategic factor market decisions are typicallydichotomous Managerial decision making orbits around whether or not to acquiresome strategic factor of production through for example recruitment licensing orcorporate acquisition Second the firmrsquos routines need to be designed to utilize theresource and competence base in a way that creates sustainable competitive
Cognition actionand the business
model
799
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
800
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
advantage Thus another key aspect of the management of the resource andcompetence base deals with the factual deployment of the available resources
The management of a firmrsquos resource capability and competence base concentrateson the process of identifying factor market imperfections acquiring relevant resourcesdesigning routines that utilize the resource base and the factual implementation ofthese routines Routines embody both the influence of strategic resource managementas well as the everyday operational activities of the firm
Product and service offerings The offering of a firm consists of chosen set productsandor services designed to optimize and maximize the creation of customer value(Anderson and Narus 1999) The content of the offering varies across customersegments and the way in which the offering creates value for the customers and isbased on the opportunities provided by the current state of the resource base andprocess architecture
The evolution of product and especially service offerings has an intimate linkage tothe management of resources and process architecture (Gronroos 1990) The exchangecoordination and adaptation processes related to matching offerings with customerneeds are thus facilitated by changes in the operations of the firm
As the offering is constrained and facilitated by the organization of operationssignificant transitions in the structure of the offering eg shifting from project toproduct offering or from product to service offering require major changes in theresource base and process architecture
The speed at which contemporary customer needs change has been proposed toexceed firmsrsquo ability to adapt their entire resource base and process architecture tothese changes Consequently offerings as well as resource bases and processarchitectures have often taken a modular form (Sanchez 1999) The operations of thefirm are governed by the design of the firmrsquos offerings on the basis of customer valuecreation
Regarding the relationships between the belief system of the firm and its operationswe offer the following propositions
P6 The stronger the industry recipe the more uniform process architectures willbe across competing firms
P7 The narrower the firmrsquos beliefs in its operational boundaries the fewer are itsunique resources and competencies
P8 Managerial cognitions of current and future product ontologies is a majorconstraint and reinforcer in the evolution of productservice offerings
Finance and accountingCapital budgeting In the contemporary financial environment companies can acquirethe capital needed when making investments in real assets (capital budgetingdecisions) from many different sources (eg Berger and Udell 1998) In addition capitalcan be acquired in many forms including debt equity and mezzanine securities Debtinvestors only accept very low or moderate risk in their investments meaning thatthey require collaterals from the company On the other hand equity investors caninvest in high-risk companies but they require that the expected profitability of the
MD436
800
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
company is high as a compensation for the high risk This is due to the fact that equityinvestors yield return on their investments only if the value of the company increases
Equity capital has become an increasingly important source of capital for manycompanies This is to a large extent due to the fact that the importance of intangibleassets in companiesrsquo business models has increased Equity investors can take the riskrelated to financing such assets (eg Nakamura 2003) This has forced companies toreconsider the requirements of equity capital investors in various decision-makingcontexts including the profitability of the capital budgeting projects the profitabilityof customer segments or even individual customers or product development andpricing decisions Projects that increase the value of the firm should be preferred incapital budgeting decisions
Capital budgeting methods should meet the requirements set by the financialenvironment The appropriate measurement of the cost of capital and especially that ofequity capital should be recognized in capital budgeting techniques that are based onnet present values Equity investorsrsquo requirement for an increase in firm value will notbe realized if the company underestimates its true cost of equity capital As aconsequence the company may lose possibilities to acquire equity capital Thereforethe cost of capital should be measured in accordance with such theories as the CapitalAsset Pricing Model (CAPM) of Sharpe (1963) and the weighted average cost of capital(WACC) of Modigliani and Miller (1963) The use of these methods ensures that thecompany will make capital budgeting decisions that are acceptable from the investorsrsquopoint of view This in turn ensures that the company will get the funds needed incapital budgeting
Financial reporting Financial accounting produces information needed by variousstakeholder groups of the company Management accounting is needed to provideinformation to managers inside the company As a result of the increased importanceof equity capital as a source of funds for companies and the increased importance ofintangible assets financial and management accounting systems are getting closer toeach other Equity investors require that companies disclose extensive informationregarding their economic conditions To illustrate international IAS (IFRS) accountingstandards require among other things the company to disclose detailed informationon its profitability and invested capital across various business segments A frequentlyapplied performance evaluation method EVA (Stern et al 1995) is also based on theidea of taking into account the investorsrsquo point of view
Management accounting information systems produce information on the currentand expected profitability of the firm and the capital intensity of alternative investmentprojects Activity-based cost accounting and the balanced scorecard of Kaplan andNorton (1992) are examples of current management accounting models that are neededto fulfill the information needs required by investors
Regarding the relationships between the belief system of the firm and its financeand accounting system we offer the following propositions
P9 The stronger the cognition of reputational rankings the more uniform thecapital budgeting and financial reporting practices of competing firms
P10 The firmrsquos cognition of its boundaries constrains its use of managementaccounting practices and financial instruments
Cognition actionand the business
model
801
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
DiscussionIntuitively managers and researchers tend to believe that a firmrsquos business model iscontrollable through specific managerial interventions For example the entirecorporate turnaround literature is devoted to offer practical tools on how suchpervasive changes can be managed over short periods of time Although we accept thatmanagerial actions shape business models in time we do not continue the mechanisticlogic in turnaround process re-engineering and strategic planning literature
From an evolutionary perspective the essential question is to understand why andhow new business models emerge and mutate from the existing stock of businessmodel components (eg Durandt 2001) Romanelli (1991) recognized three clusters ofresearch addressing the evolution of organizations in general The ldquoorganizationalgeneticsrdquo view sees the evolution of organizational forms as a product of randomvariation The ldquoenvironmental conditioningrdquo perspective emphasizes entrepreneurialaction environmental imprinting or organizational speciation as key evolutionarymechanisms Finally the ldquoemergent social systemrdquo view sees evolution as arisingdynamically ldquothrough the cumulative interactions of entrepreneurs and organizationstoward the establishment of a new industry systemrdquo (Romanelli 1991) In the presentpaper we come closest to the third cluster as we define an evolutionary mechanism asa process of imitation and mutation In this process existing firms produce newbusiness models in interaction with their social context including the societycompetitors and customers
Following the co-evolutionary logic we also see that some components of a firmrsquosbusiness model change as a consequence of changes in the resource base Thisldquoorganizational speciationrdquo view can be complemented with a dialectic logic thatexplains changes in resources and information as a product of interaction betweenmultiple levels of analysis As an example of such an approach North (1990)demonstrated how firms both follow existing norms and belief systems as well as alterthem thus occasionally contributing to the emergence of new business models Wepropose that new business models mutate from the existing stock of business modelcomponents as a consequence of long-term co-evolutionary relationship between thebusiness model of the firm and the context in which it operates In the case of newlyfounded firms the challenges of developing a business model are even greater sinceeach component needs to be built from scratch
Conceptualizing business model evolution is an especially daunting challenge as thecognitive belief system hierarchy essentially determines firmsrsquo actions and businessperformance As we have proposed each material component is linked to the differentlayers of the belief hierarchy The higher order beliefs are more inert and changeslower than the lower order beliefs The challenge derives from the fact that inertbeliefs such as reputational rankings instigate intentional interventions and changeslowly as the evolutionary process develops in time From the business modelperspective this means that managers must evaluate their interventions to specificmaterial components in the light of the possible alternative consequences to the beliefsystem as well as to the other material components Thus the entire business model isa complex web of both material and cognitive components that changes throughincremental mutations ndash whether intentional or purely evolutionary
Table I presents our propositions about the relationships between the four-levelbelief system and the material components of the business model of the firm
MD436
802
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
Rep
uta
tion
alra
nk
ing
sIn
du
stry
reci
pe
Bou
nd
ary
bel
iefs
Pro
du
cton
tolo
gie
s
Str
ateg
yan
dst
ruct
ure
Th
elo
ng
erth
ein
du
stry
life
-cy
cle
and
the
mor
est
able
the
rela
ted
ind
ust
ryre
cip
eth
em
ore
nar
row
the
alte
rnat
ives
for
stru
ctu
ral
chan
ge
Th
ele
ssam
big
uou
sth
eli
nk
bet
wee
nfo
rmst
rate
gy
and
the
tota
lity
ofth
efi
rmrsquos
bel
ief
syst
emt
he
mor
ecr
yst
alli
zed
the
stra
teg
icin
ten
tof
aco
mp
any
and
the
mor
eco
nsi
sten
tit
sac
tion
s
Net
wor
kT
he
hig
her
the
cog
nit
ion
ofa
firm
rsquosow
nre
pu
tati
onal
ran
kin
g
the
hig
her
rep
uta
tion
alra
nk
ing
sth
efi
rmse
eks
from
its
cust
omer
san
dsu
pp
lier
s
Th
eta
rget
sof
afi
rmrsquos
mar
ket
ing
effo
rst
are
con
stra
ined
by
the
firm
rsquosb
oun
dar
yb
elie
fsab
out
wh
oit
can
pu
rsu
eas
acu
stom
eror
serv
eas
asu
pp
lier
Th
em
ore
focu
sed
the
pro
du
cton
tolo
gy
th
em
ore
stru
ctu
red
and
goa
l-or
ien
ted
the
man
agem
ent
ofth
ep
rod
uct
dev
elop
men
tp
roje
ctp
ortf
olio
Op
erat
ion
sT
he
stro
ng
erth
ein
du
stry
reci
pe
the
mor
eu
nif
orm
pro
cess
arch
itec
ture
sw
ill
be
acro
ssco
mp
etin
gfi
rms
Th
en
arro
wer
the
firm
rsquosb
elie
fsin
its
oper
atio
nal
bou
nd
arie
sth
efe
wer
are
its
un
iqu
ere
sou
rces
and
com
pet
enci
es
Man
ager
ialc
ogn
itio
ns
ofcu
rren
tan
dfu
ture
pro
du
cton
tolo
gie
sis
am
ajor
con
stra
int
and
rein
forc
erof
inth
eev
olu
tion
ofp
rod
uct
ser
vic
eof
feri
ng
s
Fin
ance
and
acco
un
tin
gT
he
stro
ng
erth
eco
gn
itio
nof
rep
uta
tion
alra
nk
ing
sth
em
ore
un
ifor
mth
eca
pit
alb
ud
get
ing
and
fin
anci
alre
por
tin
gp
ract
ices
ofco
mp
etin
gfi
rms
Th
efi
rmrsquos
cog
nit
ion
ofit
sb
oun
dar
ies
con
stra
ins
its
use
ofm
anag
emen
tac
cou
nti
ng
pra
ctic
esan
dfi
nan
cial
inst
rum
ents
Table ITen propositions about
the business model of thefirm relationships
between material aspectsand the belief system
Cognition actionand the business
model
803
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
In our conceptualization of the business model the interrelationship betweenorganizational culture and the cognitive belief system of the firm is strongOrganizational culture seems to be defined by the different levels of the belief systemAs corporate culture literature acknowledges firms can be conceptualized according towhether they emphasize reputation identity membership in a group or the substanceof their actions The culture in organizations thus creates structures routines andhierarchies that facilitate their systemic functioning and motivates organizationalactors to for example embrace the strategic intent of the firm (Schein 1985 Pettigrew1979)
There are however clear aspects of culture that can be measured objectively andshould thus be related to the belief system For example the extent to which managersexercise strategic foresight andor the level of intrapreneurship in a firm can beassessed It would be necessary to study the relationships between the more ldquomaterialrdquoaspects of corporate culture and managersrsquo perception of the firm in a similar way inwhich other material aspects have been dealt with in this paper Given the broad fieldof corporate culture research it is not easy to put forward propositions about theselinkages without structuring our approach to the corporate culture discourse
Researchers may weigh the importance of individual components or their interplayin the evolution of business models in different historical situations and contexts Thisresearch work may in turn lead to more simplified presentations of key successfactors or drivers of failure in different industry and company contexts On the basis offurther field studies it remains to be seen whether our broad conceptualization can bereduced to a more simplified form still capable of addressing the key issues in theevolution of the business model of a firm
Implications for practitionersDespite the evident ambiguity of the business model concept it has been widely usedto refer to the logic and functioning of a firm Earlier research has often reduced theconcept to a limited number of components (eg economic logic routines resources)argued to explain most of the success or failure of individual business models (Winterand Szulanski 2001 Amit and Zott 2001)
In this paper in contrast to these reductionist tendencies we have provided awide-ranging conceptualization of the material cognitive and evolutionary aspects ofthe business model of a firm Consequently our main contribution is the enrichmentextending and redefinition of the business model concept Moreover we argue that theframework and the related propositions also possess value for managerialinterpretation and reflection
The proposed framework is simplistic and may not include some potentiallyrelevant issues in the evolution of firmsrsquo business models Nevertheless we believe theconstructed framework sufficiently identifies the ldquohigh priorityrdquo elements of thebusiness model of a firm pegging them to research in the distinct specialisms ofmanagement from strategy to accounting and finance Disregarding the issue ofpotential theoretical incommensurability arising from such an eclectic effort we arguethat in real-life business models the identified elements are inherently interconnected
The business model framework has tangible benefits to practitioners Through the business model framework practitioners can investigate the
evolution of their business models The business model framework provides a
MD436
804
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
conceptual tool for firm-level management that also addresses operational issuesThe link between operative decisions and issues regarding the business modelcomponents build a bridge between strategic and operative management andarguably between middle and top management
The business model framework is systemic It demonstrates that firm processesemerge from each other and their coordination is key to maintaining competitiveadvantage The major implication to management is that strongly developingone component of the business model always has network effects to othercomponents For example the developing of management accounting nearlyalways has implications on operations management Likewise strategicrealignment that does not fit the other components is doomed to fail
The business model is a cognitive mechanism This implies that managing thebusiness model in practice always has a link to human resource managementand the management of perceptions Despite the fact that the business modelframework is an abstract conceptualisation it essentially deals with pragmaticldquosense-makingrdquo issues This offers practitioners an alternative tool toconventional prescriptive ldquoorganizational designrdquo thinking
Finally the business model framework has proven to be a useful tool in businesseducation It encapsulates the key areas of management and contextualizes themin the realm of managerial action
References
Achrol RS and Kotler P (1999) ldquoMarketing in the network economyrdquo Journal of MarketingVol 63 Special Issue pp 146-64
Amit R and Zott C (2001) ldquoValue creation in e-businessrdquo Strategic Management Journal Vol 22No 67 pp 493-520
Anderson JC and Narus J (1999) Business Market Management Understanding Creating andDelivering Value Prentice-Hall Englewood Cliffs NJ
Anderson JC Hakansson H and Johanson J (1994) ldquoDyadic business relationships within abusiness network contextrdquo Journal of Marketing Vol 58 October pp 1-15
Andrews KR (1980) The Concept of Corporate Strategy 2nd ed Dow-Jones Irwin HomewoodIL
Ansoff HI (1965) Corporate Strategy An Analytic Approach to Business Policy for Growth andExpansion McGraw-Hill New York NY
Archer R and Bowker P (1995) ldquoBPR consulting an evaluation of the methods employedrdquoBusiness Process Re-engineering and Management Journal Vol 1 No 2 pp 28-46
Barley SR and Tolbert PS (1997) ldquoInstitutionalization and structuration studying the linksbetween action and institutionrdquo Organization Studies Vol 18 No 1 pp 93-117
Barney J (1991) ldquoFirm resources and sustained competitive advantagerdquo Journal ofManagement Vol 17 pp 99-120
Berger AN and Udell GF (1998) ldquoThe economies of small business finance the roles of privateequity and debt markets in the financial growth cyclerdquo Journal of Banking and FinanceVol 22 pp 613-73
Burgelman R (2002) ldquoStrategy as vector and the inertia of coevolutionary lock-inrdquoAdministrative Science Quarterly Vol 47 No 2 pp 325-58
Cognition actionand the business
model
805
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
Campbell NCG (1985) ldquoAn interaction approach to organizational buying behaviorrdquo Journal ofBusiness Research Vol 13 No 2 pp 35-48
Davenport TH (1994) ldquoManaging in the world of processesrdquo Public Productivity ampManagement Review Vol 18 No 2 pp 133-47
Dierickx I and Cool K (1989) ldquoAsset stock accumulation and the sustainability of competitiveadvantagerdquo Management Science Vol 35 No 12 pp 1504-11
Durandt R (2001) ldquoFirm selection an integrative perspectiverdquo Organization Studies Vol 22pp 393-418
Eden C and Ackermann F (2000) ldquoMapping distinctive competencies a systemic approachrdquoJournal of Operations Research and Society Vol 51 No 1 pp 12-20
Feng HY Froud J and Johal S (2001) ldquoA new business model The capital market and thenew economyrdquo Economy and Society Vol 30 No 4 pp 467-503
Ford D (1980) ldquoThe development of buyer-seller relationships in industrial marketsrdquo EuropeanJournal of Marketing Vol 14 No 56 pp 339-54
Foss K and Foss NJ (2000) ldquoLearning in firms knowledge-based and property rightsperspectivesrdquo working paper Department of Industrial Economics and StrategyCopenhagen Business School Copenhagen
Foss NJ (1999) ldquoResearch in the strategic theory of the firm lsquoisolationismrsquo and lsquointegrationismrsquordquoJournal of Management Studies Vol 36 pp 725-55
Ghoshal S and Bartlett C (1995) ldquoChanging the role of top management beyond structure toprocessesrdquo Harvard Business Review JanuaryFebruary pp 86-96
Giddens A (1984) The Constitution of Society University of California Press Berkeley CA
Greenwood R and Hinings CR (1993) ldquoUnderstanding strategic change the contribution ofarchetypesrdquo Academy of Management Journal Vol 36 No 5 pp 1052-70
Gronroos C (1990) Service Management and Marketing Managing the Moments of Truth inService Competition Free PressLexington Books Lexington MA
Gronroos C (1994) ldquoFrom marketing mix to relationship marketing Towards a paradigm shiftin marketingrdquo Management Decision Vol 32 No 2 pp 4-20
Gummesson E (1999) Total Relationship Marketing Rethinking Marketing Management From4Ps to 30Rs Butterworth-Heinemann London
Hambrick DC and Fredrickson WC (2001) ldquoAre you sure you have a strategyrdquo Academy ofManagement Executive Vol 15 No 4 pp 48-60
Hamel G (1999) ldquoBringing Silicon Valley insiderdquo Harvard Business Review Vol 77 No 5pp 70-7
Hamel G and Prahalad CK (1990) ldquoThe core competence of the corporationrdquo Harvard BusinessReview Vol 68 No 3 pp 19-91
Hammer M (1990) ldquoRe-engineering work donrsquot automate obliteraterdquo Harvard Business ReviewJulyAugust pp 104-13
Hill RC and Levenhagen M (1995) ldquoMetaphors and mental models sensemaking andsensegiving in innovative and entrepreneurial activitiesrdquo Journal of Management Vol 21No 6 pp 1057-74
Hunt SD and Morgan RM (1995) ldquoThe comparative advantage theory of competitionrdquo Journalof Marketing Vol 59 April pp 53-70
Kaplan RS and Norton DP (1992) ldquoThe balanced scorecard and measures that driveperformancerdquo Harvard Business Review pp 71-9
MD436
806
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
Ketchen DJ Jr McDaniel TB and Reuben R Jr (1996) ldquoProcess content and contextsynergistic effects on organizational performancerdquo Journal of Management Vol 22 No 2pp 231-58
Ketchen DJ Combs JG Russell CJ Shook CL Dean MA and Runge J (1997)ldquoOrganizational configurations and performance a meta-analysisrdquo Academy ofManagement Journal Vol 40 No 1 pp 223-40
Kogut B and Zander U (1992) ldquoKnowledge of the firm combinative capabilities and thereplication of technologyrdquo Organization Science Vol 3 No 3 pp 383-7
Kohli AK and Jaworski BJ (1990) ldquoMarket orientation the construct research propositionsand managerial implicationsrdquo Journal of Marketing Vol 54 April pp 1-18
Lechner U and Hummel J (2002) ldquoBusiness models and system architectures of virtualcommunities from a sociological phenomenon to peer-to-peer architecturesrdquo InternationalJournal of Electronic Commerce Vol 6 No 3 pp 41-53
Madhok A (2002) ldquoReassessing the fundamentals and beyond Ronald Coase the transactioncost and resource-based theories of the firm and the institutional structure of productionrdquoStrategic Management Journal Vol 23 pp 535-50
Magretta J (2002) ldquoWhy business models matterrdquo Harvard Business Review Vol 80 No 5pp 86-92
Mahadevan B (2000) ldquoBusiness models for internet-based e-commerce an anatomyrdquo CaliforniaManagement Review Vol 42 No 4 pp 55-61
March JG and Olsen JP (1989) Rediscovering Institutions The Organizational Basis of PoliticsFree Press New York NY
March JG and Simon H (1963) Organizations 4th ed Wiley New York NY
Miles RE and Snow CC (1978) Organizational Strategy Structure and Process McGraw-HillNew York NY
Miller D (1986) ldquoConfigurations of strategy and structure towards a synthesisrdquo StrategicManagement Journal Vol 7 No 3 pp 233-50
Miller D and Friesen PH (1982) ldquoStructural change and performance quantum versuspiecemeal-incremental approachesrdquo Academy of Management Journal Vol 25 No 4pp 867-92
Mintzberg H (1987) ldquoCrafting strategyrdquo Harvard Business Review JulyAugust pp 66-75
Mintzberg H and Waters JA (1982) ldquoTracking strategy in an entrepreneurial firmrdquo Academyof Management Journal Vol 25 No 3 pp 465-99
Modigliani F and Miller M (1963) ldquoCorporate income taxes and the cost of capital acorrectionrdquo American Economic Review Vol 53 pp 433-43
Moller K and Wilson DT (1995) Business Marketing An Interaction and Network PerspectiveKluwer Boston MA
Nakamura L (2003) ldquoA trillion dollars a year in intangible investment and the new economyrdquo inHand J and Lev B (Eds) Intangible Assets Value Measures and Risks OxfordUniversity Press Oxford
Nelson RR (1991) ldquoWhy do firms differ and how does it matterrdquo Strategic ManagementJournal Vol 12 Special Issue pp 61-74
Nonaka I and Takeuchi H (1995) Knowledge-Creating Company How Japanese CompaniesCreate the Dynamics of Innovation Oxford University Press New York NY
North DC (1990) Institutions Institutional Change and Economic Performance CambridgeUniversity Press Cambridge
Cognition actionand the business
model
807
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
Pettigrew A (1979) ldquoOn studying organizational culturesrdquo Administrative Science QuarterlyVol 24 pp 570-81
Pfeffer J and Salancik GR (1978) The External Control of Organizations A ResourceDependence Perspective Harper and Row New York NY
Porac J Ventresca M and Mishina Y (2002) ldquoInterorganizational cognition andinterpretationrdquo in Baum J (Ed) Companion to Organizations Blackwell Oxfordpp 579-98
Porter M (1980) Competitive Strategy Techniques for Analyzing Industries and CompetitorsThe Free PressMacmillan New York NY
Powell WW Koput KW and Smith-Doerr L (1996) ldquoInterorganizational collaboration and thelocus of innovation networks of learning in biotechnologyrdquo Administrative ScienceQuarterly Vol 41 No 1 pp 116-45
Ratliff J (2002) ldquoNTT DoCoMo and its i-mode success origins and implicationsrdquo CaliforniaManagement Review Vol 44 No 3 pp 55-63
Romanelli E (1991) ldquoThe evolution of new organizational formsrdquo Annual Review of SociologyVol 17 pp 79-103
Sanchez R (1999) ldquoModular architectures in the marketing processrdquo Journal of MarketingVol 63 Special Issue pp 92-112
Sanchez R and Heene A (1997) ldquoReinventing strategic management new theory and practicefor competence-based competitionrdquo European Management Journal Vol 15 No 3pp 303-17
Sauer C and Willcocks L (2003) ldquoEstablishing the business of the future the role oforganizational architecture and information technologyrdquo European Management JournalVol 21 pp 497-508
Schein EH (1985) Organizational Culture and Leadership Jossey-Bass San Francisco CA
Sharpe WF (1963) ldquoA simplified model for portfolio analysisrdquo Management Science Vol 9No 1 pp 277-93
Slater SF and Narver JC (1994) ldquoDoes competitive environment moderate the marketorientation-performance relationshiprdquo Journal of Marketing Vol 58 January pp 46-55
Spender JC (1990) Industry Recipes Basil Blackwell Oxford
Srivastava RK Shervani TA and Fahey L (1999) ldquoMarketing business processes andshareholder value an organizationally embedded view of marketing activities and thediscipline of marketingrdquo Journal of Marketing Vol 63 Special Issue pp 168-79
Stalk G and Hout TM (1990) Competing Against Time How Time-based Competition IsReshaping Global Markets The Free Press New York NY
Stern J Stewart GB and Chew D (1995) ldquoThe EVA financial management systemrdquo Bank ofAmerica Journal of Applied Corporate Finance Vol 8 pp 32-46
Stoddard DB Jarvenpaa SL and Littlejohn M (1996) ldquoThe reality of business processre-engineering Pacific Bellrsquos Centrex provisioning processrdquo California ManagementReview Vol 38 No 39 pp 57-76
Sweet P (2001) ldquoStrategic value configuration logics and the lsquonewrsquo economy a service economyrevolutionrdquo International Journal of Service Industry Management Vol 12 No 1pp 70-83
Teece D Pisano G and Shuen A (1997) ldquoDynamic capabilities and strategic managementrdquoStrategic Management Journal Vol 18 No 7 pp 509-33
MD436
808
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809
Tikkanen H and Alajoutsijarvi K (2001) Competence Strategies of Growth Firms METPublishing Helsinki
Venkatraman N (2000) ldquoFive steps to a dot-com strategy how to find your footing on the webrdquoSloan Management Review Vol 41 No 3 pp 15-21
Venkatraman N and Henderson JC (1998) ldquoReal strategies for virtual organizingrdquo SloanManagement Review Vol 40 No 1 pp 33-8
von Krogh G and Cusumano MA (2001) ldquoThree strategies for managing fast growthrdquo SloanManagement Review Vol 42 No 2 pp 53-9
Walsh J (1995) ldquoManagerial and organizational cognition notes from a trip down memorylanerdquo Organization Science Vol 6 MayJune pp 280-321
Wernerfelt B (1984) ldquoResource-based view of the firmrdquo Strategic Management Journal Vol 5No 2 pp 171-80
Williams K (2001) ldquoBusiness as usualrdquo Economy and Society Vol 30 No 4 pp 399-411
Williamson OE (1999) ldquoStrategy research governance and competence perspectivesrdquo StrategicManagement Journal Vol 20 pp 1087-108
Winter SG and Szulanski G (2001) ldquoReplication as strategyrdquo Organization Science Vol 12No 6 pp 730-43
Womack JP Jones DT and Roos D (1990) The Machine That Changed the World HarperNew York NY
Further reading
Schein EH (1996) ldquoCulture the missing concept in organization studiesrdquo AdministrativeScience Quarterly Vol 41 No 2 pp 229-41
Schumpeter J (1942) Capitalism Socialism and Democracy Harper Row New York NY
Cognition actionand the business
model
809