Draft:Theories of business models

Introduction
Business models have garnered considerable interest from both industry professionals and scholars. Over the past decade, there has been an acceleration in research aimed at gaining a deeper understanding of this phenomenon. Pioneering business model innovators like Amazon, Skype, and Uber have reshaped their industries by challenging prevailing industry norms. This has opened up numerous avenues for scholars in management and innovation to explore. The initial surge in research was largely driven by public attention, with Chesbrough and Rosenbloom being among the early scholars to contribute significantly by introducing a concrete classification of a business model.

Absorptive Capacity Theory
Cohen and Levinthal define absorptive capacity as a firm's capability to recognize, assimilate, and apply new external information commercially. It's crucial for innovation, setting the limits on a firm's rate of absorbing technological information. The theory suggests that absorption of new knowledge is tied to a firm's existing knowledge, implying that greater internal knowledge increases the likelihood of innovative performance, but is influenced by history and path dependency.

Zahra and George introduce a conceptualization with four dimensions: identification, assimilation, transformation, and exploitation of external knowledge. Enkel and Mezger further explain that absorptive capacity is operationalized through exploratory, exploitative, and transformative learning processes.

Business models, seen as results of strategic decisions, benefit from a well-developed absorptive capacity, reducing uncertainties and constraints in strategic games. Despite its advantages, absorptive capacity might hinder Business Model Innovation (BMI). In the context of Gassmann, Frankenberger, and Csik's business model patterns, absorptive capacity involves absorbing new trends and learning from other industries. Cross-functional and interdisciplinary knowledge, as highlighted by Jansen, Bosch, and Volberda forms a crucial basis for absorptive capacity, enabling cross-industry BMIs through abstracting one's model and analogy building with business model patterns.

Adopting an absorptive capacity theory, per Zott and Amit aids in understanding how knowledge about design elements enhances the business model. For Chesbrough and Rosenbloom improved absorptive capacity can overcome cognitive limitations and biases in existing business models. Casadesus-Masanell and Ricart's view on business models aligns with absorptive exploration, using learning to sense environmental changes early and keep the business model updated.

Administrative Behavior Theory
The theory of administrative behavior posits that a firm's character is shaped by individual decision-making processes. In contrast to the classical economic notion of homo economicus, which assumes perfectly informed and rational decision-making, Herbert Simon's theory introduces the concept of the administrative man with limited rationality. Recognizing the practical nature of these limitations, Simon suggests designing the organizational environment to bring individuals closer to rational decision-making aligned with the organization's goals.

This theory implies that managers, influenced by limited rationality, may settle for adequate solutions rather than pursuing optimal ones. Applying the theory to business model innovation (BMI), managers might cease innovation once a model is deemed "good enough." However, BMI projects should aim for their maximum potential and continuous improvement. Analyzing managerial irrational behavior through the lens of administrative behavior theory can offer insights into implementing incentive systems that foster ongoing innovation in business models by accounting for rational decision-making.

Agency Theory (Principal–Agent Problem)
The principal-agent theory, rooted in new institutional economics, examines the relationship between a principal (e.g., employer) and an agent (e.g., employee), highlighting incomplete and asymmetric information distribution. In economic activities, an agent is typically hired by a principal, and a key insight is that the agent often possesses a knowledge advantage. Various mechanisms, such as piece rates/commissions, profit sharing, efficiency wages, bonds, or the fear of termination, may be employed to align the interests of the agent with those of the principal.

However, when it comes to delegating Business Model Innovation (BMI) projects (top-down) during implementation, failures are often observed. This empirical observation aligns with agency theory, attributing failures to information asymmetries between decision-making top management and middle management responsible for implementing the new business model.

Behavioral Decision Theory
Behavioral Decision Theory (BDT), akin to the theory of administrative behavior, seeks to elucidate how organizations can be understood in terms of their decision processes. Unlike administrative behavior theory, BDT is a descriptive theory of human decision-making, incorporating assumptions such as limited information processing capacities and a reluctance to engage in organizations. It takes a behavioral, empirical approach to decision-making processes, aiming to identify determinants and empirical evidence.

In examining corporate business model transformation decisions at Nokia, Aspara, Lamberg, Laukia, and Tikkanen found that reputational rankings influenced selection decisions, determining which businesses were retained or divested. Business models associated with past failures were eliminated. BDT can be applied to explore various aspects of business model innovation (BMI) decisions, including determining which division should innovate its business model and when to initiate BMI. The business model selection process, an under-researched area, could benefit from BDT, addressing issues related to limited human information processing capacities or hesitance to engage in BMI.

Contingency Theory
Fiedler's contingency approach, an offshoot of behavioral theory, extends into domains like decision-making, exemplified by Vroom & Yetton. Contingency theory posits that managing situations or leading a company is contingent upon specific cases, influenced by internal and external factors. Leadership or organizational styles effective in one situation may not translate to success in another. In innovation management, Tidd suggests that external contingencies impact the degree, type, organization, and management of innovation, and aligning these factors enhances company performance.

Smith, Binns, and Tushman emphasize the pivotal role of senior leaders in managing complex business models characterized by contradictory tensions (e.g., global firms acting locally) and handling exploration and exploitation in Business Model Innovation (BMI) processes. Success factors include commitment building, conflict engagement, active learning at multiple levels, and dynamic decision-making. Additionally, Vroom & Yetton propose a methodology to identify contingencies for the evolution of a technology-driven firm's business model.

Theory of Dynamic Capabilities
The theory of dynamic capabilities draws inspiration from various lines of thought, including the Resource-Based View (RBV), organizational routines, and Porter's competitive forces. Unlike previous frameworks, it delves into the selection, development, and renewal of resources, going beyond the mere protection of a competitive advantage.

Connecting Business Model Innovation (BMI) to the concept of strategic flexibility, Bock et al explore how firms can achieve this flexibility, emphasizing its dependence on organizational structure and dynamic capabilities. The study finds that decentralized decision-making through delegation is positively linked to strategic flexibility, while consolidating to core functions is not. A creative organizational culture is associated with positive outcomes in strategic flexibility, whereas reliance on partners is not. Notably, the relative effort invested in BMI positively moderates the relationship between reconfiguration and strategic flexibility. In a broader sense, BMI itself can be viewed as a dynamic capability, as business models serve as constructs that span firm boundaries, integrating and evolving internal and external competencies.

Evolutionism
The evolutionary theory, as introduced by Darwin in 1858, provides insights into the development and transformation of organisms and species over time. According to this theory, species undergo random mutations, some of which may confer advantages for survival, a concept Darwin termed as natural selection and survival of the fittest. It's important to note that these mutations and new traits are not deliberate or intentional.

Evolutionary theory has found application across various disciplines, including organizational theory and change processes. Nelson and Winter, for example, have applied it at the firm level, observing how some companies thrive under competitive conditions while others falter. Romanelli identifies three main research clusters in the study of organizational evolution: organizational genetics, environmental conditioning, and emergent social systems.

In strategic management research, evolutionary theory is used to explain the success or failure of internal initiatives within organizations. Scholars often link this theory with network theory to explore how social networks influence the performance and survival of strategic initiatives. By leveraging Darwin's principles, researchers can analyze which business models endure at both organizational and industrial levels, as well as examine the dynamics of business model evolution.

Habtay suggests that evolutionary theory contributes to the development of effective strategies, technological capabilities, and profit models within established and successful firms. However, in the face of disruptive environmental changes, these fixed components may hinder an organization's ability to adapt effectively. Additionally, entrepreneurship literature suggests that imitating successful business models can facilitate the rapid internationalization of new ventures, thereby increasing their chances of survival.

Organizational Ambidexterity
In academia, organizational ambidexterity is primarily conceptualized as a firm's capability rather than a standalone theory. Ambidextrous organizations demonstrate adeptness in managing the tension between two seemingly opposing poles. While the concept of ambidexterity has been explored in various forms, such as centralization versus decentralization, the predominant focus among scholars is on balancing exploration and exploitation.

Exploitative initiatives involve refining existing capabilities, whereas exploratory initiatives entail discovering new capabilities. The underlying idea is that firms engaging in both exploitative (e.g., efficiency improvements) and explorative initiatives demonstrate ambidexterity. However, there remains disagreement among scholars and practitioners regarding the feasibility and effectiveness of simultaneously pursuing both directions.

The multi-armed bandit problem from probability theory serves as an illustrative example of the exploration/exploitation conflict. It depicts a scenario where a gambler faces a row of slot machines, aiming to maximize rewards. The gambler must decide between exploring to gather more information about other machines' outcomes or exploiting the known outcomes of the current machine.

This problem mirrors the challenges faced in Business Model Innovation (BMI), where managers must choose between exploiting the firm's existing market with its current business model or exploring new potential through BMI. Structural separation is often proposed as a method to achieve organizational ambidexterity, although ambidexterity literature also highlights temporal separation of domains and contextual ambidexterity as additional forms.

Despite the well-established literature on ambidexterity in academia, there is a lack of comprehensive research on all four modes of ambidexterity within the context of BMI. Limited understanding exists regarding which mechanisms companies employ to implement dual business models and the factors influencing their choices. Moreover, aside from a few notable exceptions, such as Markides (2013), Winterhalter (2015), and Zott and Amit incorporating exploration/exploitation perspectives, the business model has not been thoroughly analyzed as a unit of analysis when examining ambidextrous firm behavior.

General Systems Theory
The roots of General Systems Theory trace back to the early twentieth century, with biologist Ludwig von Bertalanffy being a key figure in its development. This theory finds application across various academic disciplines, and over time, a diverse range of definitions and concepts have emerged. Despite this diversity, the common thread among all approaches is the exploration of complex entities and the development of models to describe them.

Systems, as conceptualized within General Systems Theory, are typically characterized as open, dynamic, and purposeful entities that interact with their environment and undergo continual evolution. At the heart of this concept lies the holistic examination of the organization, relationships, and structure of the constituent elements of systems. These elements may include inputs and outputs, system-environment boundaries, processes, states, hierarchical arrangements, goal orientation, and information flows.

System theoretical frameworks have been applied to the understanding of business models, notably by Zott and Amit. Their focus lies on activity systems, encompassing the focal firm along with its partners and stakeholders within the ecosystem, with the aim of creating and capturing value.

Path Dependency Theory (Historical Institutionalism)
Path dependency refers to the idea that an institution's historical trajectory shapes current and future decisions and events in a way that creates a self-reinforcing cycle. Essentially, the actions, decisions, and policies of institutions set the course for future developments. However, historical institutionalism introduces the concept of critical junctures, which suggests that path dependency doesn't necessarily mean that an institution is bound to follow a predetermined fate with no room for deviation. Instead, times of crisis or significant change can create critical junctures, leading to a shift in the institution's trajectory, even if such a change seemed inconceivable or irrelevant before.

If path dependency explains how a company's past decisions influence future ones, Business Model Innovation (BMI) represents a deliberate effort by managers to create a critical juncture and break free from the self-reinforcing cycle. In a study conducted by Bohnsack, Pinkse, and Kolk on electric vehicle manufacturers, both incumbent companies and entrepreneurial new entrants approached BMI in distinct ways. The research highlights that while established business models tend to persist, significant external shocks are often required to disrupt path dependency and prompt meaningful change

Institutional Theory
This theory seeks to elucidate how institutions shape the characteristics of organizational structures through authoritative guidelines. Institutions typically establish rules, norms, or schemas that influence the overall social behavior within an organization. By adhering to these institutional frameworks, interactions become more predictable, fostering reliability and stability. The theory delves into the creation, adaptation, or eventual obsolescence of these institutional mechanisms over time.

Institutions, akin to routines, rules, and norms, are widely recognized as legitimate within an industry. Consequently, organizations often find it challenging to deviate from established rules and norms within their respective sectors. However, for firms to successfully innovate their business models, they must challenge prevailing thinking paradigms and instigate change and conflict. It's worth noting that the term "business model" or "BMI" may not be entrenched within the institutional framework of a firm, potentially posing additional hurdles to innovation efforts.

Knowledge-Based View of The Firm
The Knowledge-Based View of the firm (KBV) is often regarded as a refinement of the Resource-Based View (RBV) of the firm. Unlike the RBV, which treats knowledge as one among several resources, the KBV positions knowledge as the most strategically significant factor, characterized by unique attributes. Notably, knowledge is deemed the most difficult to imitate and the most socially complex resource. A primary objective of KBV scholars is to investigate how effective knowledge management can lead to competitive advantages for a firm, with Grant being a prominent figure driving theory building and development in this area.

The KBV serves as a comprehensive theory to elucidate various aspects of business models. For instance, it can shed light on how firms can break free from their dominant logic, how knowledge should be shared across different organizational units, and how business model concepts evolve through collaborative learning processes. Malhotra underscores the necessity of updating the knowledge-based framework to address emerging business environments, such as the shift to the internet era. Consequently, the introduction of the first conceptual framework for knowledge management aimed to facilitate Business Model Innovation (BMI) processes.

Denicolai, Ramirez, and Tidd delve into the topic of external and internal knowledge sourcing for BMI through a quantitative study. They highlight the complementary interactions between internal and external knowledge for value creation and identify a curvilinear relationship (inverted U-shape) between the intensity of external knowledge sourcing and firm growth. This relationship is contingent upon varying degrees of knowledge intensity, with firms with low levels of internal knowledge benefiting the most from optimal investment in externally generated knowledge. Conversely, knowledge-intensive firms have greater flexibility in defining their knowledge sourcing strategy.

Organizational Learning Theory
Organizational learning theory, a component of organizational theories, focuses on the learning processes within decision-making frameworks. Argyris highlights the significance of learning in decision-making, emphasizing feedback loops that involve reflecting on actions in light of expected versus actual outcomes. This theory underscores the importance of firms adapting and engaging with their environment to maintain competitiveness. This adaptation entails acquiring, interpreting, and adjusting goals and actions based on data.

It's essential to recognize that knowledge becomes integrated into the organizational learning process when data is effectively communicated, shared, and stored within the company.

Business Model Innovation (BMI) can be viewed as an organizational learning process, and its antecedents and determinants are subject to analysis. For instance, Moingeon and Lehmann-Ortega delve into double-loop learning, which is crucial for creating a new business model. They also explore the challenges posed when both the old and new business models coexist in parallel.

Resource-Based View of The Firm
The Resource-Based View (RBV) stands as one of the most prominent theories for elucidating the origins of competitive advantages. It highlights the core resources pursued by a company, categorizing them as tangible and intangible assets available to the firm. According to the RBV, knowledge about rare and valuable resources, difficult to imitate, serves as a pivotal factor in strategy formulation and the attainment of long-term competitive advantages.

The RBV is frequently applied to elucidate the success factors of strategic initiatives, including Business Model Innovation (BMI), within the context of a company's own resources and competencies. Zott and Amit critically examine the theory and demonstrate that resources need not be exclusively internal; they can also be sourced from external partners. Additionally, the concept of resource flexibility, crucial for BMI success, is not adequately addressed in the RBV. Demil and Lecocq assert that a firm's sustainability hinges on its ability to anticipate and adapt to emerging changes, encapsulated in the notion of dynamic consistency. This perspective offers a dynamic approach to strategy, overcoming the limitations of sustainable competitive advantage approaches and hyper-competition theory.

The RBV primarily focuses on a firm's internal resources, necessitating an extension of the view to encompass business models. The relational view, as proposed by Dyer and Singh incorporates external resources into the analysis. By spanning a firm's boundaries and incorporating external knowledge, new avenues for enhanced competitive advantage emerge. Consequently, business models can be viewed as an evolution of the resource-based and relational views, amalgamating internal and external perspectives while delineating the interrelationships of components and modeling the relationship with customers more effectively.

Resource Dependency Theory
Resource Dependency Theory (RDT) examines how organizations are interconnected with their broader ecosystems to understand organizational behavior. It analyzes how firms are influenced by external resources and how actions related to the utilization of these resources can lead to competitive advantages. For instance, if a company lacks access to certain resources, it may seek partnerships to obtain them. Additionally, while striving for independence in accessing external resources, the company may also aim to increase the dependency of other organizations on its business, thereby enhancing its own power and success.

Given that the business model is a concept that spans organizational boundaries, RDT holds significant relevance for business model research. For example, RDT can shed light on the role of power dynamics within ecosystems, influencing the performance of focal firms. Moreover, within organizations, power dynamics play a crucial role in the successful implementation of pursued business models.

Sánchez and Ricart delve into how ecosystems in low-income markets influence Business Model Innovation (BMI). They distinguish between interactive and isolated business models, where interactive models foster ecosystems that evolve with inputs from global and local partners. This not only contributes to changing the socio-economic context but also creates value, thereby serving as a source of more sustainable competitive advantage.

Social Capital Theory
Unlike the concept of human capital, which focuses on the value of individuals, social capital theory delves into the social relationships among individuals and within communities. Bourdieu's definition of social capital encompasses two key elements: first, the social connections through which individuals can access resources possessed by their associates, and second, the quantity and quality of these resources. In Bourdieu's framework, social capital is conceptualized at the individual level, and akin to physical and human capital, it facilitates productive activity. Purposefully establishing social relationships can generate competitive advantages.

Social capital theory offers insights into how the relational capabilities of individuals or groups can influence the transfer of business model-relevant knowledge between organizational units or among organizations. It elucidates how the strength and quality of social connections contribute to the flow of valuable resources and information within and across organizational boundaries.

Social Network Theory
In contrast to traditional sociological studies, social network theory places emphasis on analyzing the relationships or ties between actors rather than focusing solely on the attributes of individual units or actors. In this framework, individual actors are conceptualized as nodes, while the connections between them are represented as ties.

Empirical research in this field reveals that individual units tend to foster strong ties with only a limited number of other actors. Consequently, particularly in economic contexts, weak ties become significant as they serve to bridge different small network groups, facilitating the exchange of information across multiple strong networks.

Various methodologies exist for analyzing the structure of social entities in academia. Social network theory can provide insights into how different functions within an organization interact to design and implement cross-functional Business Model Innovation (BMI). Moreover, it can elucidate how a network between the focal firm and external partners should be configured to enhance the success of BMI initiatives. Key constructs for investigation may include tie strength, structural holes, network size and density, as well as the cognitive proximity of partnering firms.

Stakeholder Theory
Stakeholder theory has emerged as a valuable tool in management research, as argued by Donaldson and Preston who assert its descriptive accuracy, instrumental power, and normative validity. This theory focuses on analyzing the diverse parties involved in economic value creation, including customers, employees, investors, suppliers, and communities such as political groups or trade associations. Stakeholders are broadly categorized into two groups: a narrow definition encompasses those vital to the survival and success of the corporation, while a wider definition includes any group or individual that can affect or is affected by the corporation.

Mitchell, Agle, and Wood further categorize stakeholder groups based on three attributes: legitimacy of claim on the firm, power to influence firm behavior, and urgency of the degree to which stakeholders attract the immediate attention of the company. Their work aims to provide management with a tool to prioritize stakeholders in stakeholder management efforts effectively.

Harrison, Bosse, and Phillips propose that firms seeking to retain the willing participation of stakeholders and satisfy their needs will allocate additional resources to manage stakeholders, resulting in a deeper understanding of stakeholders' utility functions. Actively managing stakeholders and allocating resources to satisfying their needs can enhance a firm's competitive advantage and degree of innovation.

A stakeholder perspective on business models offers insights into the interplay among partners and the impact of different interests of involved actors in the ecosystem. This perspective is increasingly crucial in business model research, particularly as business models involve external partners in the value creation process. Researchers like Gnatzy and Moser explore how stakeholder theory can inform the development of business models, citing examples such as the health insurance market in rural India. They highlight the importance of integrating and collaborating with stakeholders to improve business model performance.

Hall and Wagner find a positive association between the integration of strategic and environmental issues and the economic and environmental performance of firms, demonstrating the influence of secondary stakeholders on the sustainability of Business Model Innovations (BMIs).

Furthermore, stakeholder theory can be applied to internal processes, particularly in the enforcement of radically new BMIs within firms. Managing internal stakeholders effectively is crucial to successfully implementing new business model ideas. Understanding which stakeholders to engage with and how to manage them is an important aspect of business model research, both practically and theoretically.

Transaction Cost Theory
Transaction cost theory, a cornerstone of new institutional economics, posits that institutions play a vital role in reducing transaction costs by establishing stable structures and reducing uncertainty. According to Williamson transaction costs are central to economic studies; if they were insignificant, any advantages one mode of organization appears to hold over another would be nullified by costless contracting.

Transaction costs encompass various expenses incurred during economic exchanges, including search and information costs, bargaining costs, and policing and enforcement costs. In light of transaction costs, companies face a choice between hierarchies (in-house production) and markets as governance structures.

This theory holds significance in selecting business model partners, as it sheds light on the specificity of new business models. A transaction cost perspective allows for the analysis of information asymmetry, a crucial aspect in transaction cost economics, which significantly influences bargaining power and asymmetry within the ecosystem. Business models should thus aim to create value by structuring new sources of efficiency, taking into account the dynamics of transaction costs and information asymmetry within the market.