Business Model Design: A Dynamic Capability Perspective
Raphael Amit
The Wharton School
University of Pennsylvania
3620 Locust walk
Philadelphia, PA 19104-6370
Telephone: (215) 898-7731
Fax: (215) 573-7189
E-Mail: [email protected]
Christoph Zott
IESE Business School
Av. Pearson, 21
08034 Barcelona
Spain
Telephone: +34 932 534 200
Fax: +34 932 534 343
E-mail: [email protected]
December 23, 2014
Acknowledgments: Raffi Amit is grateful to the Robert B. Goergen Chair for financial support of
his research. Christoph Zott gratefully acknowledges the support of IESE in sponsoring this
research, and the financial support of the Spanish Ministry of Economy and Competitiveness
(Project ref: ECO2012-38131).
Business Model Design: A Dynamic Capability Perspective
Abstract
The rapidly changing economic landscape, coupled with transformational advances in
information and communication technologies, presents many challenges to managers of large
and small enterprises alike. They need to adopt a holistic approach to continuously renew and
innovate their organizations’ capabilities, their product and service mix, their product-market
strategies, their activity systems, and more. In response to such challenges, two perspectives
have emerged in the strategic management literature in the last two decades: the dynamic
capabilities paradigm and the business model perspective. With few exceptions, these viewpoints
have been kept separate. In this chapter, we explore the rich links between these two perspectives
and suggest that business model design, when viewed through a process lens, is in fact a dynamic
capability. Our contribution is to elaborate on the mechanisms of this capability.
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INTRODUCTION
The rapidly changing economic landscape, coupled with transformational advances in
information and communication technologies, presents many challenges to managers of large
and small enterprises alike. They need to adopt a holistic approach to continuously renew and
innovate their organizations’ capabilities, their product and service mix, their product-market
strategies, their activity systems, and more. In response to such challenges, two perspectives
have emerged in the strategic management literature in the last two decades: the dynamic
capabilities (DC) paradigm (Teece, Pisano, and Shuen, 1997), and the business model (BM)
perspective (Amit and Zott, 2001). With few exceptions (e.g., Teece, 2007), these viewpoints
have been kept separate. Our contribution in this chapter is to explore the rich links between
these two strategic management perspectives. The key insight that we offer is that business
model design, when viewed through a process lens, can be considered a dynamic capability.
The business model can be defined as an activity system that is designed and enabled by
a focal firm in order to meet perceived market needs (Zott and Amit, 2010). It encompasses
interconnected, potentially interdependent activities that are either conducted by the focal firm or
by other stakeholders, thus spanning firm and possibly industry boundaries. The building blocks
of a business model (BM) are organizational activities (BM “content”), links and coordination
mechanisms that weave these activities together into a system (BM “structure”), and governance
mechanisms that make the system work (BM “governance”). While nuancing the concept of
business model is important to advance the study of business models (see Zott, Amit, and Massa,
2011 for various alternative conceptualizations), the question of how to design a business model
is just as important. However, only a few articles have begun to address the issue of business
model design process (e.g., Frankenberger, Weiblen, Csik, and Gassmann, 2013; Zott and Amit,
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2014). Zott and Amit (2007, 2008) have introduced the idea of “design themes” to characterize
business models. But despite these valuable early contributions, we do not know much about the
how of business models design. Yet, every entrepreneur and CEO needs to design a valuecreating business model—in addition to developing their products/services, crafting a productmarket strategy, and building an organization capable of executing the strategy. As well, every
senior executive needs to periodically rethink and adapt the design of their current business
model as the competitive environment changes, as new technologies are introduced, and as
customers’ preferences evolve.
The dynamic capabilities paradigm in strategic management, which emerged during the
1990s with the seminal contribution of Teece, Pisano, and Shuen (1997), and which has been
further explicated by Teece (2007), can provide a conceptual anchoring to a more dynamic
perspective on business model design. Teece (this volume), points out that dynamic capability
explains how an organization extends its strengths "by developing new business models" and
how it "synchronizes business models with the business environment."
A dynamic capability is a higher order capacity which helps a firm integrate, build, and
reconfigure internal and external resources to address and shape rapidly changing business
environments (Teece et al., 1997). It refers to the “capacity of an organization to purposefully
create, extend, or modify its resource base” (Helfat et al., 2007: 4). Developing a new, adaptive
business model has been considerd one of the microfoundations of dynamic capability (Teece,
2007). Indeed, as Teece (2007: 1330) puts it: "The capacity an enterprise has to create, adjust,
hone, and, if necessary, replace business models is foundational to dynamic capabilities."
In this chapter, we build on this view and suggest that the business model design process
is in fact a dynamic capability. Our contribution is to elaborate on the mechanisms of this
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capability by examining business model design through a process lens. This has interesting
theoretical implications for the dynamic capability perspective. For example, the business model
design-related dynamic capability may not be firm-specific but firm-centric: it might be anchored
on a focal firm, but also involve its partners and even its customers.
Our attempt to link the business model and dynamic capabilities perspectives also
enriches the business model literature. For the most part a firm’s business model has been
depicted mainly as a static concept, undergirded by largely "static" theories, including the
resource-based view of the firm (Amit and Schoemaker, 1993), transaction cost economics
(Williamson, 1985), or strategic networks (Gulati, 1998). This chapter provide a more dynamic
account of business model design, and highlights that it is not just a one-shot, haphazard process
which happens every now and then, but needs to occur on an ongoing basis, embedded in
routines, as important parameters in the focal firm’s environment keep shifting and changing.
CONCEPT DEFINITIONS
Business Model
There are many definitions of the business model, and the vast majority of them depict it
as a static concept (Zott, Amit, and Massa, 2011). In one research stream, for example,
Chesbrough and Rosenbloom (2002: 529) link the business model to technology management
and define it as the “heuristic logic that connects technical potential with the realization of
economic value,” emphasizing its role in linking technology to market outcomes. Consistent with
this perspective, Casadesus-Masanell and Ricart (2010) posit that one important component of
business models is the set of managerial choices about how the organization operates, such as
compensation practices, procurement contracts, location of facilities, or assets employed.
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Indeed, one can conceptualize a firm’s business model as a system comprised of activities
that are performed by the firm and by its partners, together with the ways that these activities are
linked to each other through transactions in factor and product markets (Zott and Amit, 2010).
The overall objective of a focal firm’s business model is to exploit its business opportunities in a
way that creates value for all the parties involved: that is, to fulfill customers’ needs and create
consumer surplus while generating a profit for the focal firm and its partners (Amit and Zott,
2001). An activity in a focal firm’s business model can be viewed as the engagement of human,
physical, and/or capital resources of any business model stakeholder (e.g., the focal firm, end
customers, vendors, etc.) to serve a specific purpose toward the fulfillment of the overall
objective. An activity system is a set of interdependent organizational activities centered on a
focal firm and geared towards that objective. It encompasses activities that are conducted either
by the focal firm or by partners, customers, or vendors. In order to fully address the market
opportunities, the firm’s activity system may transcend the focal firm and span across the firm
and its industry boundaries; however, it remains firm-centric to enable the focal firm not only to
create value with its partners, but also to appropriate a share of the value created for it.
Interdependency among the business model activities is central to the view of the
business model as an activity system. Interdependencies provide insights into the processes that
enable the evolution of a focal firm’s activity system over time, as its competitive environment
changes (Siggelkow, 2001, 2002). Business models are created by entrepreneurs or managers
who shape and design organizational activities as well as the links (transactions) that weave these
activities together into a system. Such purposeful design—within and across firm boundaries—is
the essence of the business model (Zott and Amit, 2009). The resulting architecture of the firm’s
activity system—shaped by the choice of activities, how they are linked, and who performs
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them—captures how the focal firm is embedded in its environment of suppliers, partners,
customers, and competitors.
The firm’s revenue model also plays an important role in value appropriation. The
revenue model, akin to a pricing strategy for specific products or services, refers to the specific
modes in which a business model enables revenue generation (Amit and Zott, 2001). A revenue
model complements a business model design, just as a pricing strategy complements a product
design. Although the concepts of business and revenue model may be quite closely related and
sometimes even intertwined—for example, in the product world, Gillette uses its pricing strategy
of selling cheap razors to make customers buy its rather expensive blades—they are conceptually
distinct.
A business model is geared toward total value creation for all parties involved. It lays the
foundations for the focal firm’s value capture by co-defining (along with the firm’s products and
services) the overall “size of the value pie,” or the total value created, which is an upper limit to
the firm’s value capture. The business model also co-determines the focal firm’s bargaining
power. For example, design features that lock-in suppliers enhance the focal firm’s bargaining
power. The greater the total value created and the greater the focal firm’s bargaining power, the
greater the amount of value that the focal firm can appropriate (Zott and Amit, 2007).
The business model is conceptually distinct from organizational structure (Zott and Amit,
2007) and from product-market positioning strategy (Zott and Amit, 2008), although it must be
considered a fundamental aspect of a firm’s overall strategy. It defines how the focal firm is
embedded in its “ecology” (Adner and Kapoor, 2010), i.e., in the multiple layers and networks of
firms, institutions, and customers that surround it, thereby determining not only possible partners
that can help co-create value but also likely competitors. In other words, the business model
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determines the focal firm’s cooperative and competitive landscape. It is thus one of the most
fundamental strategic choices that entepreneurs, CEOs, and general managers need to make, in
addition to deciding, for example, which market needs in which specific customer segments to
address, in which geographic markets to compete, how and when to enter these markets, and on
the basis of which resources and capabilities.
Besides these mostly static perspectives on the business model, a few scholars have
begun to acknowledge its dynamic aspects. A focus on the business model as an activity
system—a “system that is made up of components, linkages among the components, and
dynamics” (Afuah and Tucci, 2001: 4; emphasis added)—already implicitly suggests that
dynamics can play an important role for the value creation and value capture enabled by the
activities. Casadesus-Masadnell and Ricart (2010) describe the virtuous cycles that certain
choices within a business model can engender. More recently, scholars have turned their
attention to the dynamics of business model creation, adaptation, and change, partly by drawing
on the design perspective (e.g., Zott and Amit, 2014). Design can be defined as the process of
changing existing situations into desired ones; it involves human beings using knowledge to
create things that do not yet exist but should (Simon, 1996).
The design process consists broadly of five stages that are linked iteratively (i.e., although
there is a natural sequence, they do not need to happen strictly sequentially): observing,
synthesizing, generating, refining, and implementing. These stages have received some attention
in academia (e.g., Bhavani and Sosa, 2008; Sutton and Hargadon, 1996), and also in the business
press (e.g., Brown, 2009). Taken together, they allow designers to generate new business models
(Zott and Amit, 2014). In this chapter, we use the five-stage-model of design to highlight the
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links between business model design as a process and the dynamic capabilities paradigm of
strategic management.
Dynamic Capabilities
Since Teece, Pisano, and Shuen’s (1997) seminal paper, dynamic capabilities have
attracted much research interest (e.g., Di Stefano, Peteraf, and Verona, 2010; Eisenhardt and
Martin, 2000; Zollo and Winter, 2002; Zott, 2003). However, important gaps in our knowledge
of their nature remain (Easterby-Smith, Lyles, and Peteraf, 2009; Kor and Mesko, 2013). What
are dynamic capabilities really? How can managers and firms develop and harness them in order
to achieve (and sustain) competitive advantage?
To better address these questions, scholars have recently begun to analyze the microfoundations of dynamic capabilities. Teece (2007) has disaggregated dynamic capabilities into
the capacity to (1) sense opportunities, (2) seize opportunities, and (3) transform (i.e., enhance,
combine, and reconfigure) the firm’s assets. These dimensions are undergirded by organizational
processes, systems, structures, and patterned managerial behaviors. Delineating the business
model has been associated in this framework with the capacity cluster around seizing
opportunities. This perspective is intuitively appealing especially when one thinks about the
business model as a static concept. However, when espousing a more dynamic view of business
model design as a process, then richer and more nuanced connections between the business
model and the dynamic capabilities paradigm begin to emerge, as we argue below. In fact,
business model design, in and of itself, can be viewed as a dynamic capability.
BUSINESS MODEL DESIGN AND DYNAMIC CAPABILITY
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The process of designing the business model can be broken down into five steps, which
are shown in Figure 1. In what follows, we describe these steps in more detail, and link them to
the dynamic capabilities framework (Teece, 2007).
[INSERT FIGURE 1 ABOUT HERE]
Observing
The first stage in the process of business model design, observing, involves close
examination of how business model stakeholders—not only end-users but also suppliers,
partners, and the focal firm itself—interact in meeting customer needs. That is, observation
should be about how stakeholders play their respective roles within a given business model, not
(only) on how customers use any particular product or service delivered as part of it. So the
observation stage for the design of new business models requires the designer(s) to gain a deep
understanding of the design drivers of the new business model.
Gaining such deep understanding relies on going to the source, not to market research
experts (Kelley, Littman, and Peters, 2001). The goal at this stage is for the designer (an
individual or a team) to develop a deep understanding of the stakeholder experience, for
example, of the problems customers face when buying and consuming products and services.
This is because “effective design begins with a clear understanding of the problem to be solved”
(Boland and Collopy, 2004: 189), and for that designers need to be “first-class noticers”
(Martins, 2009: 30). This also increases the chances of sensing truly novel opportunities, which
are more likely to be discovered or created "by observing the odd practices of an amateur
carpenter or the incongruous detail in a mechanic’s shop than by hiring expert consultants or
asking ‘statistically average’ people to respond to a survey or fill out a questionnaire” (Brown,
2009: 41).
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Specific analytical systems and capacities that according to Teece (2007: Figure 1) lie at
the heart of this deep learning and sensing about new opportunities involve processes and
techniques to identify new target market segments, changing customer needs, and customer
innovation. These include techniques such as the use of interdisciplinary teams (e.g., teams
including anthropologists, economists, psychologists, engineers, and sociologists); journey
mapping (i.e., the graphic representation of how customers interact with business model
stakeholders in receiving its product or service—see Liedtka and Ogilvie, 2011); “shadowing”
customers, that is, following them closely and observing their real-time use of products and
services; and the use of visual techniques such as photographing consumers, or asking them to
document their own experience with stories, photos, and videos (see Beckman and Barry, 2007;
Bhavani and Sosa, 2008). They also include processes to tap supplier and complementor
innovation, and processes to tap developments in science and technology (Teece 2007), which
could be linked to, or give rise to, new demand from customers, or new ways to produce and
deliver existing products and services to them.
As explained here, the "observing" stage of the business model design process captures
the essence of the sensing construct within the dynamic capability paradigm. As Teece states in
the introductory chapter: "Sensing is an inherently entrepreneurial set of competencies that
involves exploring technological opportunities, probing markets, and listening to customers,
along with sensing the other elements of the business ecosystem."
Synthesizing
The second stage of the business model design process, synthesizing, requires that the
designers gain a comprehensive, holistic understanding of the business model design challenges
and questions that the focal firm faces, such as: What customers are/should we be serving? What
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are their needs/goals? What are their problems? Where are we currently falling short in helping
customers solve their problems? What could we do better? To what extent do we rely on partners
to conduct activities for us? And so on. That is, the business model designer needs to develop a
strong sense of the market gap(s) that the focal firm addresses; of the problems that it solves for
its various stakeholders; and of the forces that will shape the design solution. As in the preceding
“observing” stage, these synthesizing activities, viewed through the lens of the dynamic
capabilities paradigm (Teece, 2007), are embedded in the "sensing" cluster of higher-order
capabilities.
Synthesizing requires the business model designer to take stock, share, and make sense of
all that has been learned during the observation stage. It also involves the ordering of data, search
for patterns, and identification of recurring themes and issues that have become salient during the
observation stage (Brown, 2009). Beckman and Barry (2007) refer to this step as building
“frameworks.” They note that the essence of this step requires the designers to identify
“interesting nuggets or stories from all of the data collected, to find patterns of behavior across
the many instances of behavior that were observed, and to see what is missing within the system
of use, usability, and meaning that forms the innovation or solution” (Beckman and Barry, 2007:
36). Extracting meaningful patterns from masses of raw data collected (i.e., synthesis) is a
“fundamentally creative act” (Brown, 2009: 70), although there are techniques such as mind
mapping (see Liedtka and Ogilvie, 2011) to support it. Therefore, given the creativity and insight
required, this aspect of opportunity sensing is likely to be anchored in both managerial skills as
well as organizational processes (and not just in the latter). Or, as Teece (introductory chapter)
puts, "it is unlikely that all dynamic capabilities are embedded in routines;" managers are "a key
12
element of the routinized aspects of sensing, seizing, and transforming: sourcing knowledge
inside and outside the organization, developing new ideas and insights."
As suggested above, the synthesizing stage of the business model design process relates
to the sensing construct within the dynamic capability paradigm. "It requires managers to build
and ‘test’ hypotheses about market and technological evolution, including the recognition of
‘latent’ demand....sensing requires managerial insight and vision" (Teece, introductory chapter).
In short, synthesizing is “an attempt to move forward and create a response to the problem—the
generation of solutions” (Lawson, 2006: 37).
Generating
The third stage of the design process, generating, involves the creation (though not yet
the implementation) of potential business model design solutions. It involves either making
modifications to an existing business model (in terms of business model content and/or structure
and/or governance—see Amit and Zott, 2012), or creating an entirely new activity system from
scratch. This can be achieved, for example, by engaging in a disciplined brainstorming exercise
(a structured technique for unleashing creativity) during which, inspired by the previous
synthesis stage, ideas for new business models are generated.
Beckman and Barry note that this part of the design process “is, perhaps, the best
documented and exercised in practice” (2007: 43) because of the wide array of techniques
available for concept generation, ranging from logical (such as morphological analysis) to
intuitive (such as brainstorming). Each of these techniques, in return, comes in many forms (e.g.,
group vs. individual brainstorming). IDEO’s use of group brainstorming, for example, relies on a
given set of rules, such as “defer judgment,” “build on the ideas of others,” “one conversation at
a time,” “stay focused on the topic,” and “encourage wild ideas” (see Kelley, Littman, and
13
Peters, 2001; Sutton and Hargadon, 1996). “Brainstorming is the goal-oriented cousin of
daydreaming … it is fundamental to how we think about innovation” (Liedtka and Ogilvie, 2011:
102). Kelley, Littman, and Peters (2001: 55) note that “you can deliver more value, create more
energy, and foster more innovation through better brainstorming.” Brown (2009: 79), however,
cautions that “brainstorming cannot be built into the structure of every organization.”
The activities involved in this step in the design process, viewed through the lens of the
dynamic capabilities paradigm, correspond to the "seizing" cluster of higher-order capabilities.
According to Teece (2007: Figure 2) this involves designing enterprise structures and
procedures, including the business model. "Seizing capabilities include the design of the business
model to satisfy customers and capture value." (Teece, introductory chapter).
Refining
The fourth stage of the business model design process, refining involves (a) consolidating
the various business model designs generated in the previous stage into classes of alternatives;
(b) evaluating these alternatives according to relevant criteria (e.g., feasibility, viability, and
desirability—see Brown, 2009); and (c) prototyping them, by experimenting on a small scale and
narrow scope to collect stakeholder and market feedback. These activities viewed through the
lens of the dynamic capabilities paradigm, correspond to the "sensing" (prototyping) and
"seizing" (consolidating, evaluating, prototyping) clusters of higher-order capabilities. By
combining and repeating these steps in an iterative manner, the goal in this phase of the design
process is to narrow down the alternatives for business model designs, and to achieve focus and
clarity on the details of the emerging designs. This, as has been stated in the previous section, is
a central aspect of opportunity seizing.
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The main purpose, then, at this stage is to narrow down the large number of design
possibilities to a few. Liedtka and Ogilvie (2011) refer to this process as “concept
development”—the act of choosing the best ideas, assembling them into detailed solutions, and
evaluating them using focal firm and stakeholder criteria. Beckman and Barry (2007: 43) note
that although there are a number of formal evaluation techniques, such as scorecards or multivoting, the evaluation of alternative design solutions is performed “in very informal and ad hoc
ways in most organizations.” And Liedkta and Ogilvie (2011: 113) suggest that “whereas
brainstorming is best done by a diverse group that includes people outside the innovation project,
concept development requires a dedicated core team.” That team also needs to consider, as part
of a holistic design solution, the products and technologies that support them, the revenue model,
target customers, and mechanisms to create and capture value, which Teece (2007:1334) has
identified as further micro-foundations of opportunity seizing.
One critical component of the refinement stage is concept testing, often done through
“rapid prototyping,” which entails the production of “mock-ups” or working models that
visualize the design solution, make it tangible, and so facilitate evaluation and decision-making
(Ulrich and Eppinger, 2004). For example, in the context of an internet-enabled business model
rapid prototying might entail the production of mock-up screenshots that illustrate how the focal
firm provides its services in conjunction with its partners. However, “the goal of prototyping is
not to create a working model. It is to give form to an idea, to learn about its strengths and
weaknesses, and to identify new directions” (Brown, 2009:91). Rapid prototyping, in particular,
“is an iterative set of activities, done quickly,” aimed at giving the concepts “detail, form, and
nuance—you bring them to life” (Liedtka and Ogilvie, 2011: 23). It helps “people experience a
possible future in tangible ways,” and “allows a very low-risk way of quickly exploring multiple
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directions before committing resources to the best one” (Boland and Collopy, 2004: 191).
Stakeholder (especially, customer) involvement at this stage is crucial. Designers present
prototypes to customers and other stakeholders, and observe their reactions and feedback, in
order to “iterate [their] way to an improved offering” (Liedtka and Ogilvie, 2011: 159). In other
words, at this stage in the business model design process, based on the dynamic capabilities
paradigm, the "sensing" cluster of capabilities becomes critical again, this time as part of (and
not as a prelude to) opportunity seizing. The feedback from stakeholders “is based in the reality
of an experience, rather than in an interpretation of a description of that same experience”
(Boland and Collopy, 2004: 191). This is what makes prototyping—a technique for interlinked
opportunity seizing and sensing—so valuable for refining a design solution.
Implementing
The last stage of the business model design process, implementing, requires putting in
place all the elements envisioned by the new design. This includes design elements that refer to
the content (i.e., activities), structure (i.e., sequencing and linkages among activities), and
governance (i.e., partnerships) of the business model. The demarcation with the previous stage
(especially the idea of “prototyping”) could be rather fuzzy, insofar as it may be neither easy nor
desirable to say where trial-and-error experimentation stops and full-blown implementation
begins. This is especially the case when implementation is guided by the learning-based
principles of discovery-driven planning (McGrath and MacMillan, 2000) or effectuation
(Sarasvarthy, 2001). In any case, attention must be paid in this stage to the focal firm’s
organization, and how it fits with the new business model. Organizational redesign may be
required as part of implementation of the new busines model in order to make the new design
work.
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Concretely, the business model is implemented by selecting a specific design, and
making the requisite organizational and strategic adaptations. These activities, viewed through
the lens of the dynamic capabilities paradigm, refer to the "seizing" cluster of higher-order
capabilities. "Seizing capabilities ... include securing access to capital and the necessary human
resources" (Teece, introductory chapter). The firm’s existing stock of resources and capabilities
will have to be modified to fit the requirements of the new design; that is, some existing
resources and capabilities will have to be shed, others redeployed, and new resources and
capabilities will have to be created or acquired (Sirmon, Hitt, and Ireland, 2007). In addition,
core processes will likely have to be changed. A great deal of leadership is involved at this stage:
managers need to build loyalty and commitment to the new business model (Teece, 2007),
increase its legitimacy (Snihur and Zott, 2014), and also communicate it effectively, while
remaining sensitive to the focal firm's values and culture.
Therefore, before engaging in a full-scale launch, the focal firm may decide to perform
what Liedtka and Ogilvie (2011: 23) call a “learning launch: creating an affordable experiment
that lets customers experience the new solution over an extended period of time, to test key
assumptions with market data.” For example, before Apple broadly launched its retail stores, it
learned about key parameters in its first location (Tysons Corner Center, Virginia) in 2001. In
that sense, viewed through the lens of the dynamic capabilities paradigm, the "sensing" cluster of
capabilities becomes important again as part of (and not as a prelude to) opportunity seizing.
As well, if the business model design process is embedded into a process of continuous
renewal of the firm that aims at strategically realigning the firm's assets vis-à-vis its ecosystem,
then this part of the business model design corresponds to the "transforming" cluster of dynamic
capabilities. "Transforming competences ... are needed periodically to soften the rigidities that
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develop over time from asset accumulation, standard operating procedures, and insider
misappropriation of rent streams" (Teece, 2007: 1316). Such transformational capabilities
become particularly powerful when they shape, and are not just shaped by, the ecosystem of the
focal firm in order to augment the evolutionary fitness of the focal firm's business model.
DISCUSSION & CONCLUSION
In this chapter, we have linked the business model concept with the dynamic capabilities
framework. Viewed through a process lens, we suggest that designing a business model, if
performed repeatedly, in patterned ways, and embedded at least partly in organizational
processes, can be considered a dynamic capability. Indeed, business model design could be
defined as a higher-order capability that characterizes how a focal firm develops a new business
model, synchronizes the business model with its business environment, and/or shapes the
business environment in its favor. This definition is very similar to the defintion of dynamic
capability given by Teece in the introductory chapter to this volume. Since the dynamic
capabilities framework, as convincingly argued by Teece, is helpful with the “big-picture
issues,” the discussion below touches upon some of these issues, and explains how business
model design as dynamic capability can help illuminate them.
As a starting point, we note that the decreasing importance of scale and scope economies
in today’s highly networked business environment, in conjunction with ever lower transaction
costs (direct and indirect ones—think, for example, about the exponentially falling costs over
time of information processing and telecommunications), have not only shifted the balance
between tangible and intangible resources in favor of the latter, but they have also tremendously
increased the possibilities for entrepreneurial managers to conceive of and realize new business
models. Since focal firms can now outsource almost anything to anyone, the combinatorial
possibilities for constructing systems that combine in-house activities (i.e, those performed
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within focal firm bounadries) with those performed by third parties have exploded. In other
words, the number of possible combinations of activities enabled by different tangible and
intangible resources owned and controlled by different economic actors has multiplied
dramatically.
As a result, entrepreneurs and senior managers of focal firms have an increasing number
of alternatives for how to structure what used to be called their “value” and “supply chains”
(Porter, 1985). By designing their firm’s boundary-spanning exchanges and activities, these top
executives create a networked structure of interdependent activities, which we term the business
model. The business model has become an important lever for enhancing the focal firm’s
“ecological fitness,” i.e., for improving the firm’s fit with a shifting environment, for example,
by connecting previously unconnected parties, linking transaction participants in new ways, or
introducing new transaction mechanisms.
To navigate successfully through this ocean of possibilities, managers intent on shaping
their activity system need three types of know-how: (a) business model design know-how, in
order to conceive of a business model that creates value for all involved stakeholders, and
ensures profit for the focal firm (e.g., Apple); (b) business model implementation know-how that
helps successfully introduce the new business model into the marketplace; and (c) business
model management know-how, which is needed to provide for the ongoing orchestration and
coordination of activities performed by the various stakeholders, as well as for the continuous
adaptation of the entire system to its evolving environment, in order to ensure the business
model’s sustainability.
Our discussion in the previous section has shown that these skills, taken together, map
broadly onto the sensing-seizing-transforming dynamic capabilities framework developed by
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Teece (2007). As summarized in Figure 2, business model design (especially its observing,
synthesizing and refining steps) requires “sensing”; business model generation and
implementation involve “seizing”; and business model management (on which there is
surprisingly little research) includes the “transforming” dimension of dynamic capability.
[INSERT FIGURE 2 ABOUT HERE]
Considering the business model not only as a design artifact, but also as a crucial
intangible asset for the focal firm (a point made by Teece in the introductory chapter), its
conception, introduction into the marketplace, and ongoing management should not be left to
chance, but shaped by dynamic capability, which could be anchored, as our arguments in this
chapter suggest, in a rigorous design process that combines organizational pracitices (e.g.,
regular brainstorming sessions) with creative insight at the individual level (e.g., insight required
for synthesizing the lessons learned from intense and comprehensive observation of customer
behavior).
Managerial insight, vision, and leadership thus play an important role in the business
model design process, which is consistent with the dynamic capabilities view. To paraphrase
Teece (introductory chapter, this volume): Management is needed to orchestrate intangible assets
and other resources within the business model to realize potential complementarities and tap into
further possible sources of value such as novelty, efficiency or lock-in (Amit and Zott, 2001).
The distinctive function of entrepreneurial managers lies in recognizing, realizing, and sustaining
these sources of value through astute business model design, implementation, and management.
This comes on top of the demands placed on managers by traditional management tasks such as
organization design or product management, and the requirements imposed on them to manage
the interactions between their firm’s business model and the ecosystem in which it is embedded.
20
Conceiving of business model design as a dynamic capability allows for insights from the
dynamic capabilities literature to be applied to the study of business models, and vice versa. We
wish to briefly highlight two specific insights here that could be fruitfully transposed. First,
scholars of dynamic capabilities have analyzed quite extensively the relationship between
dynamic capabilities and a focal firm’s competitive advantage. Some of these insights might
apply to business model design. For example, Zott (2003) models dynamic capability as an
evolutionary change process anchored in organizational sub-processes for variation, selection,
and retention. This evolutionary framework could also be used to characterize the business
model design process—its observing, synthesizing, and generating steps are geared towards
creating a variety of alternative business model solutions, from which one will be selected during
the refinement stage and retained through implementation. In other words, business model
design can be conceived of as an evolutionary process guided and inspired by managerial
creativity and insight. Zott (2003) posited an indirect relationship between dynamic capability
and firm performance, mediated by the firm’s resource position. Based on his model, three
characteristics of dynamic capabilities stand out that explain their (indirect) influence on firm
performance: the timing, learning, and cost of their deployment. Scholars might wish to pay
attention to these variables in the context of business model design, and its performance
implications. Properties of the resulting artifact (the business model as a static concept) may
influence performance as much as properties of the design process.
Conversely, insights from the literature on business models could also illuminate the
study of dynamic capabilities. Amit and Zott (2014) have identified four antecedents of business
model design: goals, templates, stakeholder activities, and environmental constraints. They link
these design drivers to design themes that are closely associated with distinct sources of value
21
creation (such as novelty or efficiency). These design drivers could be generally relevant for
dynamic capabilities. For example, Amit and Zott (2014) argue that mindful (as opposed to
mindless) consideration of templates from incumbent firms throughout the entire design process
likely fosters novelty-centered business model design. In other words, this specific type of
sensing drives business model innovation by requiring managers to remain constantly alert, to
have their “antennas out,” and to stay tuned to signals from their environment, not just during
opportunity sensing but also during the seizing phase of opportunity exploitation.
The business model literature thus points to specific managerial functions and behaviors
that can shape, and positively interact with, routine organizational processes to strengthen a
firm’s dynamic capabilities. This is also evident in the six key questions that top managers
interested in innovating their firms’ business models should ask themselves (Amit and Zott,
2012): First, what perceived needs can be satisfied through the new design? This question is
particularly important during the observing and synthesizing stages of the business model design
process. Second, what novel activities are needed to satisfy these perceived needs? Third, how
could the required activities be linked to each other in novel ways? Fourth, who should perform
each of the activities that are part of the business model? These three questions are especially
helpful for generating new business model designs. Fifth, how is value created through the novel
business model for each of the participants? This question aims at an evaluation of the design
alternatives during the refining stage of the design process. Lastly, what revenue model fits with
the company’s business model to appropriate part of the value it helps create? This question is
part of the managerial responsibilities while implementing the new model. Taken together, they
constitute a guiding framework that managers could use to build and/or support their firm’s
dynamic capability in designing a new business model.
22
To summarize our contributions, the discussion in this chapter has shown that:

The process of business model design can be conceived of as a dynamic capability and
complements the static notion of business model as a design artifact; it provides a rich
and nuanced account of the links between the business model and dynamic capabilities
concepts;

The sensing, seizing, and transforming competency clusters that constitute dynamic
capability according to Teece (2007) are closely interwoven in the dynamic process of
business model design. Using the business model design process as a conceptual lens
allows for a dynamic (i.e., process-based) account of dynamic capability;

Business model management is an important managerial function that has been largely
overlooked so far, as the received literature has focused more on business model design
and implementation (treating the latter mostly as a one-shot, non-recurring event); it
could be viewed as part of a firm’s ordinary capabilities (in terms of the day-to-day
performance of activities), but also requires dynamic adaptation and transformation, and
thus also links to the dynamic capabilities framework.
We hope that our reflections in this essay will spur further research on the rich links
between the business model and dynamic capability concepts, and that they will encourage
scholars to build further bridges between these two rapidly emerging bodies of literature.
23
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FIGURE 1: Process of Designing the Business Model
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FIGURE 2: Business Model Design Process: A Dynamic Capability
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