Business Models and Technological Innovation - how they interact

Business models are fundamentally linked with technological innovation, yet the business model construct is essentially separable from technology. We define the business model as a system that solves the problem of sensing customer needs, engaging with those needs, delivering satisfaction and monetising the value.

The business model construct has become attractive to many academics. Yet the construct has also attracted criticism for lacking a widely accepted language that would allow researchers to draw effectively on the work of others. Instead there appears to be a diverse set of business model definitions and a diverse set of approaches to classification. This has taken energy away from proper dialogue on key questions: what are the components of a business model, and how does business model innovation occur?

In this piece, we explore one clear emerging view of the business model construct and examine where this view takes us in terms of understanding the relationship between business model innovation and technical innovation. While some researchers have argued that the business model concept lies within the traditional strategy lexicon of competitive advantage, we argue that the business model is a stand-alone concept in its own right. We also explain how this view accords with the widespread recognition in the literature that a business model should be able to link two dimensions of firm activity: value creation and value capture.

This research looks at how technology and business models interact? Technology development can facilitate new business models - the most obvious historical example is how the development of steam power facilitated the mass production business model. Yet business model innovation can also occur without technology development. We saw in the 1980s how the Japanese pioneered the 'just in time' production system. In fact, business models and technologies regularly interact. For example, when Amazon was founded in 1995, they applied new technology to the traditional mail-order business model pioneered by Sears Roebuck. Amazon did not invent a new business model. Nor did Easy- Jet when it copied the business model pioneered by Southwest Airlines. Both Amazon and Easy-Jet applied well-known business model constructs and developed them in new contexts.

In contrast, Google's two sided dynamic search engine developed with Adwords in 2003 was not just a technological leap, it was also a business model leap. Google used Adwords to provide an interface with advertisers whose choices directly influenced the search experience of users on the other side of the platform. The novelty of their approach lay in linking the two sides in a constantly changing manner that allowed greater consumer satisfaction and greater revenues for any given set of users on each side of the platform.

Discussions of the effects of business models on performance do not always separate the effects of business model innovation from technological innovations. We know that technological innovation influences performance. To improve our understanding however, we need a more precise appreciation of how innovation links to performance through the business model and how changes in the business model influence technological innovation. The fact that positive effects of technological innovation on business performance are easily observed has diverted attention from questions about how business models change in the wake of innovation. At the same time, management theory requires more precision concerning the means by which business model changes enable and foster innovation.

This piece first explores key relationships that are embedded in the business model construct, and then reviews what we know about these relationships with a view to building a research agenda for the future. We begin by exploring what a novel business model is and how new business models are related to new technologies. We note that this approach of seeing the business model as a model is similar to the logic of reasoning and understanding that exists in economics, biology and physics. This allows us to assert that it is intellectually robust to ask "is business model innovation potentially separate from technological innovation" even though business model possibilities often rely on technology.

The full draft research paper is available for download below. It will appear in Long Range Planning later this year. This work was developed by CENTIVE: the Centre for New Technologies, Innovation and Entreprise