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What causes managers to change their business model?

November 27, 2016 • Global Business, Strategic Spotlight, STRATEGY & MANAGEMENT, Transformation

By Tina Saebi, Lasse Lien and Nicolai Foss

Business models define how companies create, deliver and capture value. But business models are not static – they need to be adapted to changing conditions. This article discusses what causes managers to change their existing business models.

 

The Idea in Brief

Business models define how companies create, deliver and capture value. They specify the company’s value proposition, target customers, and mechanisms for value delivery and value capture (see Figure 1 below).

But business models are not static – they need to be adapted to changing conditions. So what causes managers to change their existing business models? Are they more likely to adapt business models under conditions of perceived threat or under perceived opportunity? In other words, is the carrot or the stick more likely to induce business model change and adaptation? Using the financial crisis as a natural experiment that simultaneously created both threats and opportunities, we attempted to find out more about this question.

 

managerschangebm_figure1

 

A Bit of Theory: Two Opposing Views

How do you react under conditions of threat? Imagine that you are confronted with numbers showing declining margins or a diminishing customer base. Does this spell “stick to what you know best, now is not the time to experiment” (risk-averse) or does it spell “we surely must try something new, the old ways are no longer working” (risk-seeking)?

What about an unexpected growth of your customer base, or surprisingly high margins in some part of your business? Would such surprises indicate that you may need to change something to fully capitalise on the opportunity (risk-seeking), or does it tell you that the status-quo is working really well and should not be tampered with (risk averse?)

But business models are not static – they need to be adapted to changing conditions. So what causes managers to change their existing business models?

Proponents of threat-rigidity theory predict that managers are more likely to be risk-averse under conditions of perceived threat, but to engage in more risk-taking behaviour when facing an opportunity. In contrast, proponents of prospect theory predict the exact opposite: managers are more risk seeking under conditions of threat than under conditions of opportunity.

We wanted to figure out which of these opposing predictions hold true when it comes to business model adaptation. Changing an existing business model is in most cases costly, with an uncertain outcome. Therefore, it seems reasonable to consider business model adaptation a risky undertaking. Figure 2 summarises our hypotheses.



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