Designing dynamically “signature business model” that support durable competitive advantage

A brief review on the dynamic capabilities framework

Strategy is about building dynamic capabilities aimed at responding efficiency to future and existing contingencies (Ambrosini and Bowman 2009). The dynamic capabilities view (DCV) has arguably become the theoretical centrepieces of efforts to understand how firms can successfully compete in changing environment. David Teece has introduced the concept of dynamic capabilities, by which he means an organization’s ability to renew and recreate its strategic capabilities to meet the needs of changing environments. Teece et al. (1997) define dynamic capabilities as “the ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments”. Thus, sources for competitive advantage lies in companies’ ability to alter the resource base: create, integrate, recombine, and release resources. “Dynamic capabilities are the subset of competence/capabilities which allow the firm to create new products and processes, and respond to changing market circumstances” (Teece et al. 1997, p. 510). Lee et al. (2002) (p.734) suggest that “dynamic capabilities are conceived as a source of sustainable advantage in Schumpeterian regimes of rapid change”. As noted by Cepeda and Vera (2007) (p. 427), quoting a similar arguments to Priem and Butler (2001), “if the firm has a dynamic capability, it must perform well, and if the firm is performing well, it should have a dynamic capability”. “For long-term growth and survival of the enterprise, they must be cleverly managed, or orchestrated, by a dynamically capable management team pursuing a good strategy” (Teece 2014, pp. 340–341). “The theoretical and practical importance of developing and applying dynamic capabilities to sustain a firm’s competitive advantage in complex and volatile external environments has catapulted this issue to the forefront of the research agendas of many scholars” (Zahra et al. 2006, p. 917). Thus, research on dynamic capabilities has been described as a promising perspective of scholarship in strategic management (Stefano et al. 2014; Helfat and Winter 2011; Teece 2014). Furthermore, the majority of the work on dynamic capabilities and the original work of Teece et al. (1997) assert that dynamic capabilities were necessary to deal with rapidly changing environments. In this paper, we examine dynamic capabilities in Information and Communication technology industry in which innovations are developing with astonishing speed.

Dynamic capabilities can usefully be thought of as belonging to three clusters of activities and adjustments: identification and assessment of an opportunity (sensing); mobilization of resources to address an opportunity and to capture value from doing so (seizing); and continued renewal of core competences (transforming) (Teece 2009). Sensing implies that organization must constantly scan, recognize and appraise opportunities and threats across various markets and technologies. Investigating customer needs are typical sensing activities. One opportunity is sensed it must be seized and addressed through new services, process activities to the opportunities and threats that have been identified. To seize an opportunity may require renewal and reconfiguration of organizational capabilities and investment in technologies, equipments, markets. Thus transforming is how to organize new and old resources for organization’s value maximization. One key implication of the dynamic capabilities concept is that firms are not only competing on their ability to exploit their existing resources and organizational capabilities, firms are also competing on their ability to explore, renew and develop their organizational capabilities (Eisenhardt and Martin 2000). What is more, Teece wrote “…first, I reject the notion that dynamic capabilities reside only in high-level routines. I have endeavoured to make clear that, in my view; dynamic capabilities involve a combination of organizational routines and entrepreneurial leadership/management (Teece 2014, p. 338).

During the last two decades, research in dynamic capabilities has promised to unlock understanding of how competitive advantage arises in dynamic markets. However to date, empirical work has by and large focused on what dynamic capabilities are. There has been little work demonstrating how they actually operate and contribute to competitive advantage other than at the conceptual level (Armstrong et al. 2012). Stefano et al. argue “Despite the exceptional rise in interest in and influence of dynamic capabilities, criticisms of the dynamic capabilities perspective continue to mount. Common concerns are related to lack of consensus on basic theoretical elements and limited empirical progress” (Stefano et al. 2014). Specific capabilities that have been identified and studied involve research and development (Helfat 1997), mergers and acquisitions (Karim and Mitchell 2000), and ambidextrous organizational structures (O’Reilly and Tushman 2013), network responsiveness (Kleinbaum and Stuart 2014); human capital management (Chatterij and Patro 2014). However, our analysis has been centred on DC by investigating how strategic decision making on new technologies and new products that can be underpinned by developing DC to create sustained advantages. To demonstrate, at a fine-grained, corporate strategic and operational levels decision making, we examine illustrative empirical examples at firm, which we refer to Samsung Group. Hence, the paper aim is to add the understanding of dynamic capabilities as a sources of competitive advantage by demonstrating that dynamic capabilities (DC) development unfolds in three clusters of activities and adjustments: identification and assessment of an opportunity (sensing); mobilization of resources to address an opportunity and to capture value from doing so (seizing); and continued renewal of core competences (transforming) as well as inventing and implementing new business model (Teece 2007, 2009).

Business model and customer value proposition

“No consensus exists yet regarding the definition, structure, and evolution of a business model. The manner in which firms create and capture value is a popular research topic” (Han and Cho 2015, p.2). A business model is defined by Weill et al. as a system of “suppliers, distributors, commerce service providers, infrastructure providers, and customers “how a firm makes money; some go beyond this and discuss creating value” (2005: 4). Business models outline the core of the business and provide a clear understanding of its business logic. In essence, a business model embodies nothing less than the organizational and financial “architecture” of a business. The selection/design of business models is a key micro foundation of dynamic capabilities - the sensing, seizing, and reconfiguring skills that the business enterprise needs if it is to stay in synch with changing market. However, there are few examples how successful ICT industry players design dynamically their “signature business model” by Teece (2014) that can support durable competitive advantage: valuable, rare, imperfectly imitable, and non-substitutable (VRIN). “We use signature to describe how these processes embody a company’s character and signify their idiosyncratic nature … Signature processes are rooted in a company’s history and values” (Gratton and Ghoshal 2005, p.2). According to Gratton and Ghoshal (2005) signature processes are not the same as best practice, signature processes have the potential to advance the company’s competitive position beyond just a level playing field. Gratton and Ghoshal (2005) argue that signature processes develop from the heritage and values of the company and are shaped by the philosophy and wisdom of the executive team. Thus, we seek in our research to illustrate how to dynamically design signature business model that support durable competitive advantage. It is also important to consider the difference between business models and a company’s strategy. Magretta (2002) states that business models do not deal with competition as his is the mission of strategic planning; however, a business model can become a strategy, when a newly designed business model is hard to imitate and turns into a source of sustained competitive advantage. According to Osterwalder and Pigneur (2009) a business model can be used as a detailed description of the way the elaborated strategy will be followed. From the point of view of Johnson et al. (2008) a business model consists of four main elements, the synthesis of which delivers value: the CVP; the profit formula, key resources and key processes. The first and most important element is the CVP. The CVP holds such a high degree of importance for the rest of the business model components, without which a company has no reason to exist (Lambert 2008). Another component of a business model, outlined by Johnson et al. (2008), is the profit formula. This element is described by Johnson et al. as “…the blueprint that defines how a company creates value for itself providing value to the customers” (2008, p. 60). The next element of a business model is key resources. Lambert argues that key resources include “…information technology hardware and software, intellectual property, financial, physical and human resources, cultural resources …” (2008, p. 285). These resources give the company an opportunity to build a CVP, reach market segments, maintain relationships with stakeholders and gain profits (Osterwalder and Pigneur 2009). The last component of a business model is key processes. Johnson et al. (2008) state that key processes are operational and managerial activities, which allow the company to deliver value in a way it can successfully repeat and increase in scale. To conclude, these four components are the foundation of any business model. The CVP and profit formula explain the value for the customers and the company, and key resources and processes show how the company delivers value to the customers and to itself. Having understood the concept of a business model and its four main elements, it is necessary to get further insight into the most important component of a business models, the CVP. In order to have a more in-depth understanding of the CVP concept, it is useful to look at a number of other reflections on the term. Gitomer (2005) is convinced that CVP is a very important concept in business as a well-built value proposition will engage the customer, gain the interest of the marketplace, eliminate competition and may even double sales. Value has to be based specifically on customers’ needs and is an action that is carried out exceptionally in favour of the customer (Gitomer 2005). Lindic and Silva support this idea, saying “…value is created, when product attributes, e.g., design or service support, match specific customer needs…” (2011, p. 1695). Customer value is defined as a trade-off between what the customer may obtain in terms of quality, benefits or worth, and the costs of acquiring it (Perrey et al. 2004). What is more, it is absolutely crucial to be aware of the presentation of the offering or value in a compelling manner. Perrey et al. (2004) state that a product or service, which is highly valuable for the customer in terms of exact benefit, may not be purchased if it is not presented in an acceptable and compelling way. Camlek offers an apt definition, which summarise all of the above contemplations: “Essentially, a value proposition will state the measurable value or tangible customer benefits that a product or service will provide to its customers and will illustrate the return on the investment or other tangible positive outcomes of choosing a particular service provider over its competitors” (2010, p.119).

A recent study carried out by Lindic and Silva (2011) has come up with a new PERFA (Performance, Ease of Use, Reliability, Flexibility, and Affectivity) framework, which outlines five components of CVP generated by innovations. According to Lindic and Silva (2011) this framework can assist both academics and practitioners in understanding the value proposition concept, its structure and its role in the innovation process and strategic planning. Osterwalder and Pigneur (2009) strongly believes that an analysis of CVP performed on the basis of CVP decomposition, not only may assist the company in the evaluation of its CVP, but can aslo help it to compare the value proposition with the competitors’ offerings in a qualitative way. Engle (2012) suggests that since CVP should be based on customers’ needs, it is reasonable to interact with the target customers through surveys, focus groups, one-to-one interviews, discussions and observations. Engle (2012) also suggect that observation of competitors’ may provide some insights into market trends and changing customer preferences. Hence, it becomes clear that the CVP development process should include both internal and external information gathering and analysis. The concept of CVP is sometimes confused with concept of unique selling proposition (USP). Simister (2009) discusses this issue and claims that CVP and USP imply two very defferent things. Simister (2009) states that the main difference between CVP and USP is that CVP focuses on competitive strategy and thus on competitive advantages, whereas USP sounds more like a Marketing message to the customer. Thus, it can be concluded that the concept of CVP and USP definitely fit together, but may not be regarded as identical.

Overview

The environmental dynamism is related to the rapid change and instability of environment (Simerly and Li 2000). According to the case study research data, ICT is an activity which is subject to the influence of many internal and external factors in areas such as economy, open innovation, financing, law, safety, security and even geopolitics landscape of ICT. They generate dynamics that will continue to shape and reshape the landscape of the ICT industry. Developing an understanding of the dynamics affecting the ICT industry is crucial in enabling ICT companies to make the necessary strategic moves by sensing the challenges and seizing the opportunities presented by the changes. Moreover, the transformation and re-orchestration of idiosyncratic resources and core competences are important micro foundations of dynamic capability of ICT companies. ICT companies are competing in a global marketplace, with relatively low entrance barriers, requiring huge investments in intangible assets and extremely capacity of specific knowledge and experience. In such complex external settings there is a strong call for dynamic capabilities of the ICT industry players.

Illustrative case study: Samsung group