Innovative 21st century business models contain many aspects that
differentiate them from business models that are more closely associated with
the pre-internet era.
Innovative organisations are able to utilise disruptive technologies and
approach business strategy from a different perspective to traditional
companies and use this to digitise their business and develop a business model
that enables them better respond to the increasing pace of change in
industries, and so create competitive advantage.
The ability to develop and utilise intangible assets such as knowledge,
organisational routines, and intellectual property to achieve competitive
advantage separates innovative businesses from physical asset focused
organisations but is not without its risk, and so absorbing change and dealing
with uncertainty become essential in maintaining competitive advantage.
Organisations with innovative business models are able to leverage the
advantages of network externalities to achieve cost efficiency, customer
lock-in, complementary value and first-mover advantage to hold a competitive
advantage over companies that fail to utilise network effects in their
Purpose and societal impact can be sources of competitive advantage for
organisations that contribute positively to environmental, societal, or human
All of these elements impact modern business models and contribute to an
organisation’s ability to achieve and maintain competitive advantage in the
technology and strategy
The 21st century has seen a huge increase in disruptive technologies
such as the internet, social media, artificial intelligence, blockchain,
robots, and IoT entering almost every market including the music industry,
banking and finance, engineering and manufacturing, and recruitment and HR.
Organisations that make use of these disruptive technologies can gain a
competitive advantage over competitors who are slower to appreciate the
benefits and undertake the digitisation of their business. Whilst
slower-to-adapt, traditional companies rely on functionality to beat
competitors, modern companies beat competitors with speed and customization
The increasing speed of change in the digitisation (Kurzweil, 2004) of
business places pressure on innovative organisations to be continually evolving
in order to keep pace with the change and remain competitive. As Porter noted
when describing how a competitive advantage is achieved through cost leadership
and differentiation, “The ability to be both low cost and differentiated
is a function of being the only firm with the new innovation”
(Porter, 1980: 3). This suggests that competitive advantage viewed in this way
is easily lost to companies that use the next newly available disruptive
technology to differentiate themselves. However, those companies that approach
innovation as a continual creative destruction (Schumpeter, 1934) of their own
practices, products and services, and even business model can successfully
utilise digital technologies in strategies that ensure they maintain a
This pressure to continually reinvent any and all aspect of a business
has driven a shift in how organisations approach innovation from closed
innovation in which businesses generated their own ideas and develop them
internally, to open innovation 1.0 in which companies combine internal and
external ideas to accelerate their innovation process (Chesbrough 2003) and
onto open innovation 2.0 in which ideas are developed within an ecosystem of
industry, universities, government and communities (Curley and Salmelin 2013).
“BMW Group faces many innovation challenges for which it doesn’t always
have immediate in-house solutions, so we choose to search globally for the
technology that we need, particularly among the innovators who are running
startup companies. That is why the BMW Group has, in conjunction with
StartupFest Europe 2017, challenged startups from across Europe, working in all
fields related to mobility products or services, to submit their pioneering
technology, product or service ideas for a competition that offers a chance to
become part of a pool that buy billions of dollars’ worth of products and
services every year.” (Gimmy, 2017). Companies, such as BMW, adopt an
innovation 2.0 approach in order to develop a broader range of ideas more
quickly and without the resource constraints of needing to employee experts in
all areas of development, and the company that does this better than their
competitors can achieve competitive advantage.
assets and absorbing change
Whilst Porter asserted that competitive advantage comes from providing
value to customers at a higher value than it costs to provide, Barney’s view
was that competitive advantage is achieved by “implementing a value
creating strategy different from the strategies of its competitors.”
(Talaja, 2012). This advantage can be achieved when a company possesses and
exploits valuable, rare, inimitable, and non-substitutable resources and
capabilities (Barney, 1991).
For modern innovative organisations using business models that rely on
intangible assets such as software, organisational routines and specialist
knowledge, using this resources-based view allows for an understanding that
excelling at creating and managing intangible assets is essential for
establishing and maintaining competitive advantage. As new models of open
innovation emerge that rely on developing eco-systems from partnerships across
industry boundaries rather than exclusively within a business (Curley and
Salmelin 2013), knowledge becomes more important and the challenge of retaining
that knowledge needs to become an essential part of an innovative
organisation’s strategy. Nonanka’s Dynamic Theory Of Organisational Knowledge
Creation describes how in learning organisations knowledge moves from tacit to
explicit in a continual dialogue where new knowledge is developed by
individuals and transferred to organizations (Nonaka, 1994). This knowledge
transfer is an essential part of companies ensuring they maintain the
competitive advantage gained from creating and retaining intellectual property.
Teece and Pisano argue that “the competitive advantage of firms
stems from dynamic capabilities rooted in high performance routines operating
inside the firm, embedded in the firm’s processes, and conditioned by its
history” (Teece & Pisano, 2003). However, there are risks to
businesses in relying solely on their organisational routines and unique
intellectual property to achieve competitive advantage. Over time,
organisational routines can become settled and need to be refreshed in order to
ensure they are indeed high performing given the constant change in today’s
markets, and specialist knowledge and intellectual property can become locked
in the minds of founders and employees which creates a risk to the business if
those people leave the company.
More recently, Teece, Peteraf and Heaton have explored ideas around
“fostering the organizational agility necessary to address deep
uncertainty, such as that generated by innovation”. They point out the
differences between managing risk in a traditional way and dealing with the
deep uncertainty that is a characteristic of “interdependent economies
experiencing rapid technological change and financial disruption” (Teece,
Peteraf & Heaton, 2016). In order to maintain its competitive advantage an
organisation needs to ensure it’s dynamic capabilities provide it with the
means to absorb and respond to change quickly and use its response to change to
improve its dynamic capabilities.
externalities and cost efficiency
For organisations following Porter’s Cost Leadership strategy (Porter,
1985) and so concerned with reducing transaction costs in order to lead on
price within the market, digitisation enables cost savings (Lucking-Reiley &
Spulber, 2001). For internet-era ‘digital-first’ organisations with
digital-only products and services, transaction costs can be shrunk to near
zero. Innovative organisations can utilise network effects to increase their
customer base and so achieve scale faster and more cost-effectively than
businesses with lesser digital business models.
Network effects can be expressed as the value that a product provides
the customer, and so the business, increases as the number of users grows (Katz
and Shapiro, 1985). Two examples of utilising network effects are interaction,
where a product is only useful if a number of other people are also using the
product, and compatibility, where customers purchase and use software that is
compatible with other software that they are those they interact with are using
(Katz and Shapiro, 1985). A study by NFX of digital companies that went on to
become worth more than a $1 billion, estimated that network effects have
accounted for approximately 70%
of the value creation in tech.
These elements creates a lock-in effect where the cost (financial, but
mostly in loss of value from interacting with and being compatible with others)
of stopping use of the product is greater than the cost of continuing to use it
(Farrell & Klemperer, 2007). Organisations that successfully leverage
lock-in and so increase the switching costs for customers have the potential to
dominate a market and make it very difficult for new entrants to gain market
share, which becomes a key strategic advantage in maintaining competitiveness.
Utilising Internet technologies and network effects allows companies to
increase the value offered to their customers by providing bundles of
complementary products and services (Amit and Zott, 2001). These
complementarities “are present whenever having a bundle of goods together
provides more value than the total value of having each of the goods
separately”, and those bundles may be made up from products and services
owned by the business or by businesses offering services from other
organisations that complement their own product (Amit and Zott, 2001). Whereas
businesses that don’t leverage network effects may offer bundles in the form of
‘two for one’ or other such offers, companies with innovative business models
are able to offer complementariness in a way that becomes a distinct
competitive advantage. When customers recognise increased benefits they are
likely to get from purchasing from a business that offers products or services
with bundled complementariness in contrast to purchasing from business that
don’t, the increased adoption can contribute to the innovative business
increasing market share and maintaining competitive advantage.
Having already looked at three elements of Amit and Zott’s sources of
value creation in e-business, Novelty is the fourth aspect that drives value.
The “introduction of new products or services, new methods of production,
distribution, or marketing” and ways of doing business enables innovative
businesses to gain first-mover advantage (Amit and Zott, 2001). Where newness
and first-mover advantage drives value for a business it can be leveraged to be
a competitive advantage in conjunction with the other sources of value
and societal impact
Although the role of business in society changes over time, society is
expected to provide an environment that business can operate in whilst
businesses provide products and services for the members of society in exchange
for economic returns (Cannon, 1994). 21st century innovative businesses can
build upon this relationship by providing an environment and work that is
purposeful (Sgori, 2014) in order to help creative knowledge workers feel that
they are contributing to a positive impact on the world.
Etsy, the ecommerce marketplace company selling handmade and vintage
items, is an example of how a business can balance profit and purpose. Etsy holds
a B-Corp certification, showing it meets the highest standards of social and
environmental performance. It also runs a free entrepreneurship courses to underemployed
and unemployed residents in collaboration with the US government (Hakimi, 2015).
Having purpose also has a positive effect on employee morale. A report
by the Society for Human Resource Management revealed that companies with
strong sustainability programs had 55% better morale, 43% more efficient
businesses processes, 43% stronger public image, and 38% better employee
loyalty (SHRM, 2018). These reports all contribute to the idea that a business
that has a positive societal impact can achieve attract and retain employees
that have greater commitment and contribution to the company.
An article on the Moving Worlds blog lists nine innovative companies
with a social purpose and includes lessons from them such as “customers
seek out brands that align with their morals” from Patagonia, Salesforce’s
donating of “1% of revenue, products, and employee time towards charitable
work”, and Social Capital’s use of “data techniques to evaluate
investments that contribute to social good by covering sectors including
education and healthcare” (Barbu, 2018) as purpose-driven business models
that demonstrate commercially success. These and a multitude of other examples
show how having a purpose is more than just good public relations, it can be a
source of differentiated competitive advantage for any kind of business.
Many varied things are involved in making the business models of
innovators in the 21st century competitive. There are many theories that
contribute a partial understanding to these various aspects of innovation and
business but clearly there is no single dominant model or intellectual
framework that provides an accurate lens for understanding what it takes to be
a successful, innovative businesses in the 21st century. Disruptive
technologies and the digitisation of every kind of business and industry have
widened the gap between those innovative organisations that are able to respond
to the increasing pace of change and those that are being left behind.
Organisations that are able to utilise technology also need to be able to
successfully manage their capabilities, intellectual property and other
intangible assets such as employee knowledge in ways that create advantages
over competitors. Having a clear approach to value creation through efficiency,
complementarities, lock‐in, and novelty offers companies yet another aspect of
successful innovation, and having a positive impact on society, offer yet more
things for a business to consider as it invents its innovative business for
competitive success in the 21st century.
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