RELEVANCE OF DYNAMIC CAPABILITIES TO BUSINESS MODEL. Apple Case Study BIBIANA KYSUCKA AALBORG UNIVERSITY. Author: University:

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1 RELEVANCE OF DYNAMIC CAPABILITIES TO BUSINESS MODEL Apple Case Study Author: University: BIBIANA KYSUCKA AALBORG UNIVERSITY 0

2 TITLE PAGE Aalborg University Top-up Economics and Business Administration 1 st Semester Bibiana Kysucka DELIVERY: January 16 th, 2014 NUMBER OF CHARACTERS (WITH SPACES): NUMBER OF PAGES: 66 FORMER GROUP NUMBER: Group 8 TITLE: Relevance of Dynamic Capabilities Framework to Business Model Apple Case Study Signature:. 1

3 Table of Contents 1. Introduction Problem Statement Data Limitations Methodology Research Purpose Exploratory Study Descriptive Study Explanatory Study Paradigm Methodological Approach Research Strategy Research Design Methodics Literature Review Resource Based View Division of Resources Core Competence and Distinctive Capability Identifying Sustainable Competitive Advantage Executing Sources of Sustainable Competitive Advantage Dynamic Capabilities Framework Foundation of Dynamic Capabilities Processes of Dynamic Capabilities Steps in Dynamic Capabilities Framework Synthesis of RBV and Dynamic Capabilities Business Model Apple Company Overview Apple s History Apple s Values Apple s Story of Success Apple s Failures Dynamic Capabilities Analysis

4 5.1 Sensing Overview of Sensing in Dynamic Capabilities Elements of an Ecosystem Framework for Sensing Seizing Overview of Seizing in Dynamic Capabilities Enterprise Structures, Procedures, Designs and Incentives for Seizing Opportunities Summary of Seizing Managing Threats & Transforming Decentralization and Near Decomposability Knowledge Management Cospecialization Governance The Business Model Analysis Past Reconfiguration of the Business Model The Business Model Canvas KEY PARTNERS KEY ACTIVITIES KEY RESOURCES COST STRUCTURE VALUE PROPOSITIONS CUSTOMER RELATIONSHIPS CHANNELS CUSTOMER SEGMENTS REVENUE STREAMS Conclusion References

5 1. Introduction Apple is a global company in field of innovation and electronics. Researches have chosen this company as a case study since it can be used as a general example for other companies within this particular industry. By using theoretical frameworks such as Resource Based View, Dynamic Capabilities and Business Model, there will be an analysis of the company provided. By applying these theories researchers opt to visualize the current state of the company and answer the questions mentioned in the following sub-chapter. 1.1 Problem Statement How does Apple reconfigure its Business Model in order to exploit opportunities and mitigate threats found in its external environment? What opportunities and threats can we identify using Dynamic Capabilities framework? Is it possible to investigate what Business Model is Apple using currently? If necessary, how can it be optimized? 1.2 Data Limitations Through data gathering, some limitations have arisen. The secondary sources used in the project are: Apple s report, various business journals and scientific articles. The models and frameworks found in the scientific articles, the facts about Apple found in different business journals and in the Apple s report give the paper a multi-angles perspective. It is believed that the sources are trustworthy. However, when only using secondary data, some problems could arise (Flick, 2011). One of the issues could be the compatibility of the sources with the report itself (Arbnor & Bjerke, 2009). The analyzed data is elaborated and processed already and it could be hard to understand. Moreover, Apple s report is a subjective statement and as a result, the knowledge about Apple might be biased. In addition DC model can be criticized for giving an ideal world, which may not always match the reality and firms ability to apply the model. According Decker (2013): The dynamic capability framework offers interesting perspectives for further research (including dissertations at the M.Sc. and B.Sc. level) because there is not a complete understanding on why intangible assets are so critical for sustained performance of firms. These questions are not or only partly answered by previously existing frameworks. Therefore it makes additional limitations to DC model application in real business world. 4

6 2. Methodology The purpose of this chapter is to give an insight into the process of project formation, including data collection methods, research design, paradigms and assumptions underlying this project report. The theory of the methodology is mostly based on Arbnor and Bjerke (1997 & 2009) and is divided into the following parts: Research Purpose Paradigm Methodological Approach Research Strategy Research Design Methodics 2.1 Research Purpose In this part, the purposes of the research together with the desired objectives to be achieved are going to be described. In this way, the reader will understand how the research is going to be conducted and how the research question is going to be answered. The purpose of any study can be classified in three categories: exploratory, descriptive and explanatory. The research starts with the choice of paradigm that underlines how the reality is understood. The methodological approach chosen is the system approach. The research strategy and the research design are the master plans for connecting the research question and the problem statement with the empirical analysis. The research reveals what data is needed, what methods are used for data collection and how these are going to answer the research question Exploratory Study An exploratory study handles situations that not much is known about, like a new topic that there is no research or a little research about (Yin, 2003). It needs a lot of background research about the subject in order to gain knowledge and understanding (Sekaran, 1992). The most important part of this type of study is that a better understanding of the subject shall be the end result of this study. From this kind of study a better understanding will be generated upon the subject and it will also generate hypotheses and suggest direction and feasibility for further research. Usually, exploratory studies are vital in obtaining knowledge 5

7 about the subject of interest through a solid theory building (Sekaran, 1992). The exploratory study focuses on what the subject is about and not why the subject exists Descriptive Study Unlike the exploratory study, a descriptive study already has a certain amount of data from previous research. These studies are done to get a better view on the subject and it is done in a certain group, part of an organization. The aim of the study is to underline certain specific aspects of the subject (Sekaran, 1992). The descriptive study highlights how the subject is seen in real life Explanatory Study The explanatory study is used when observing the patterns of a discussed subject in order to answer the research question (Yin, 2003). Formulating hypotheses is a common approach in order to explain how relations between factors regarding the subject are made. This study focus is on the way that the subject exists, but it is in more depth than the previous types of studies. Regarding the research for Apple, the explanatory studies were used due to the complexity of data being available, but also because the focus was on the research question. 2.2 Paradigm The concept of paradigm is used to describe basic philosophical assumptions that influence research. According to Arbnor and Bjerke (1997) paradigms should be understood as a concept consisting of 4 components: Conception of Reality Conception of Science Scientific Ideals Ethics / Aesthetics Various take on these aspects leads to different paradigms. Conception of reality, or, What does Business reality looks like? gives an inside into philosophical ideas on the construction of the reality, whether it exists independently from human existence or not and what kind of relation between them can we distinguish. In this project the both cases are perceived as equal, as it is assumed that the reality consists of both subjective and objective facts. 6

8 Conception of science, or, How do we look at the Business as a science? stands for all the knowledge that allows us to investigate the subject of study that can be represented in models or interpretations. The framework consists of many components that are widely determined by the user and adds value to decisiveness system or its parts. Scientific ideals, or, What do we want from Business as a science? the purpose of the Business is to give a better insight of systems into business reality. As new models and understandings are approached the better various types of systems can be described, while influenced by different internal and external factors. Ethical and aesthetical aspects, or, What can and should Business creators do and what attitude should they take towards what is done? implications of these aspects are crucial in the enterprise and its environment relations, as everything is deeply connected with each other. In this paper the holistic view is provided, with intention of creating an illustrative and knowledgeable model that can aspire other as an analogy. Arbnor and Bjerke present 6 different paradigms that on the continuum from being extremely objective to being extremely subjective. An objective reality is believed to be filled with facts independent from what the actors in the reality are doing. On the other hand, a subjective reality is built on the actors and their assurance of creating reality themselves. Researchers conducting a project have to agree on how do they see the world and place themselves within this continuum. This project is based on the systems approach, what delimits the choice of paradigms: Figure 1: Ontological Considerations in the Systems Approach, Arbnor and Bjerke (1997) 7

9 We can emplace paradigms shown in the table above in the objective - subjective continuum as follows: paradigm SO1 is on the second position of continuum, SO2 the third and SO3 the fourth one and at the same time represents the middle position of continuum indicating the combination of subjective and objective dimensions. Each of the paradigms considers some research issues, therefore the choice of paradigm determines research issues and with the order reversed. The paradigm followed in this project is: Reality as a world of symbolic discourse In this view, the researchers put a greater emphasis on language, labels, routines and culture, which are the elements that reality consists of. Research must be led relatively and with specification to the examined context, which results in this project in creating a highly individualized business model. Nevertheless, the particular cases may resemble one another that allow constructing generalized frameworks and models, for example, dynamic capabilities model that can be applied for the analysis of different firms. 2.3 Methodological Approach According to Arbnor and Bjerke (2009) there are three methodological approaches that the knowledge creators/researchers can use as a foundation for their study: Analytical Approach, Systems Approach and Actor s Approach. Analytical Approach is the most formal among the other approaches. In this approach it is assumed that the reality is factive - it means that this approach includes objective and subjective facts that are seen as being true. The analytical view is faced with the task of discovering the elements that are invariant despite the changes in the environment and perceptions among different individuals. In other words, researchers believe that the reality of events of all parts is summative. Thus, they identify each part separately and then add them together in order to create the explanation of the reality. The most common form of research is quantitative research, which can be used for statistical explanations, mathematical terms, calculations and measurements, resulting in conclusions (Arbnor & Bjerke, 2009). In this work the Systems Approach has been applied in order to identify, and afterwards, to try to find an explanation along with an understanding of the Apple's organizational problem so to come up with solution of overcoming threats and exploiting opportunities within Apple s Business Model (Arbnor & Bjerke, 2009). 8

10 The systems view is seen as reality that consists of units which consist of systems structures in the objective reality and subjective viewpoints of structures, which have been seen as facts (Arbnor & Bjerke, 2009). In contrary, analytical view sees the reality of entrepreneurship as separated parts and admits that these structures cannot be seen as added and combined parts without influencing each other (Arbnor & Bjerke, 2009). Therefore systems view has a certain presumptions of reality: The reality consists of units and each unit has its own components, which create their own system. These units are seen as open systems, because each unit has its connections. What is more, in reality they have relations to one another and since they make open system there are no boundaries in between them (Arbnor & Bjerke, 2009). It is seen in business context and activities, for instance, as network systems and relationships between facilities within a firm (Arbnor & Bjerke, 2009). Moreover, in practice, systems creator s knowledge, interests and goals will influence how the company s problem is formulated and how it will progress. Under these circumstances knowledge creator is encouraged to be resourceful, adaptable and creative. According to Arbnor & Bjerke (2009:274): The operative paradigm for systems creator of knowledge is relatively fixed in forms, but has a highly varied content. All in all, researchers look at the reality as not fully objective but subjectively accessible to the observer. Researchers believe that the sum of the parts does not equal the whole reality, because when these parts get combined, they create synergistic effects. In addition, these effects can be positive or negative. It means that the knowledge creation is dependent on the specific systems structure (Arbnor & Bjerke, 2009). In the Actors View Approach, knowledge creators assume that the reality is a social construction, which consists of chaos and uniqueness. In other words, it is a world where the knowledge creator takes part itself and creates those social constructions. These researchers believe that the actors design the reality with the purpose and results differ from each study in the way that they cannot be generalized. The most often-used research strategy is qualitative research, which can clarify passion and feelings towards a certain subject by doing experimentations and informal interviews. Namely, the actors want to come up with the most artistic descriptions and explanations (Arbnor & Bjerke, 2009). 9

11 Researchers of this project believe that the most suitable methodology approach is system approach, because it is explaining how are different parts working together and if they can create a synergy effect while analysing Apple Inc. by using Dynamic Capability Framework. 2.4 Research Strategy When analysing research strategy, three terms need to be discussed - Deductive, Inductive, and Iterative Research. Inductive Research is the research that composes of surveys or observations and develops theory based on the results. Iterative Research is a mixture of both deductive and inductive research where the researcher shifts between theory and practice. The deductive research is theory based research and, meanwhile, the researcher is proving it in practice. It is a specific way of creating knowledge based on a logical analysis of what general theory says about a specific event in the future (Arbnor & Bjerke, 2009). The research done for the project is in a deductive way, being focused on finding knowledge about Apple through different channels. The researcher goes through a learning process, without involving the company or the company s actors in any way in the learning process (Kuada slides). The research strategy of the project is secondary research, focused on secondary sources. A sum of various theories gathered in the same source is a secondary sources. It can also give insight on research of a certain field (Flick, 2011). A secondary source is made out of summarized primary sources that have been put together, elaborated, rechecked and reworked by other authors (Flick, 2011). The advantage of collecting secondary data over primary data is that is requires less time to be found and it fits answering the research question better (Arbnor & Bjerke, 2009). Official documents, like Apple s report, allow conclusion about what their authors intend in future (Flick, 2011). In this way, the knowledge gathered about Apple comes from a secure source. Other secondary data collected are from journals, articles, books, official online websites, economical newspapers and databases. Using these sources, Apple knowledge was achieved from different angled perspectives. The articles, journals and books gave the theoretical knowledge to theoretically place Apple on the market and in the consumer s mind. Moreover, the official websites, economical newspapers and databases provided the market s knowledge about Apple and a more realistic consumer s needs regarding Apple products. After the data collection, it was filtered and imitated to answering the problem formulation. Moreover, it is highlighted in words and relevant tables. 10

12 2.5 Research Design The research design could comprise of one of the five alternatives (Arbnor and Bjerke, 1997): Experimental, characterized by intensive primary data collection Cross sectional, characterized by qualitative and quantitative data collection Longitudinal, characterized by data from several studies which is collected repeatedly in set time intervals over a specific time period to detect differences between single points in time Case study, characterized by concentrated analysis of a single unit Comparative, characterized by comparison of two or more cases with focus on various key factors The Research Design of this project is a case study, focused on only one single unit of study Apple. The project is though as a three-step project. The first step comprises of analysing the relevant literature, also known as literature discussion or a literature review. The second step is scanning the company, Apple, with the Dynamic Capabilities framework and concluding upon it. The third step is focused on the conclusions of the second step, putting them in a Business Model with further adaptation to Apple. 2.6 Methodics In this chapter information about collected data for the project, the methods used to access it and its form of application will be provided. The goal for this project is to scan the Apple Company using the Dynamic Capabilities framework and using the captured data reconfigure the Business Model in accordance to findings. Collected data is classified as secondary. This type of data is chosen because the project needs accurate theoretical foundations and considering the difficulties with providing data concerning innovations and technology of Apple. In that sense, researchers use literature widely accepted in the economics profession and Apple report from 2013, form 10-K. It consists of initial ideas and vision, risks that the company may face and its general condition. At the same time, as being the official released document, it imposes on Apple to serve truthful data within the document. Especially while describing the threats of the company, the additional sources to Apple s annual report were used due to many general statements 11

13 regarding possible risks. Furthermore, the annual report contains a lot of threats, which are affecting every company and are not threats for Apple in particular. The data is analyzed by what researches found to be relevant in terms of analysis and Business Model creation. These finding are about to help to find the omission in existing Business Model and suggest an applicable solution. 3. Literature Review This particular chapter constructs of literature discussion on previous work of academic on topics as follows: Resource Based View, Dynamic Capabilities and Business Models. Furthermore, there is the alignment of RBV along DC shown, and visualisation of the essence of Business Models that is used in Chapter Resource Based View Resource Based View (RBV) identifies the internal capabilities of an organization in formulating strategy to attain a sustainable competitive advantage in an industry (Henry, 2008). An organization is built from resources and capabilities, which can be managed and reconstructed to provide the firm with competitive advantage. Furthermore its internal capabilities determine the strategic choices, through these strategic choices the organization is able to compete successfully in the markets. In some cases the organization's ability to perform allow some companies to create new markets and add value for customers. In addition, if an organization's capabilities are seen to be of primary importance in the development of competitive advantage it will reshape its value chain activities (Henry, 2008). According Barney (1991) firms attain sustained competitive advantage by employing strategies that exploit their internal strengths, trough responding to environmental opportunities, while neutralizing external threats and avoiding internal weakness. This approach suggests understanding sources of sustained competitive advantage, which can be found by analysing firms opportunities and threats in its competitive environment. Porter (1990) attributes by environmental models, like SWOT and Porter's 5 Forces, which help to identify company s competitive advantage, assumes that firms have identical terms of the strategically relevant resources they control and the strategies they follow. In addition these models assume that resource heterogeneity is highly mobile (Barney, 1896a; Hirshleifer, 1980). 12

14 Therefore RBV is built on the resources>conduct>performance paradigm, meaning that the organization's success depends on the organization's own set of resources and capabilities as determinant to the competitive advantage. That is RBV of competitive advantage examines the link between a firms internal characteristics and performance. The Resource Based View model assumes that firms within an industry may be heterogeneous with respect to the strategic resources they control. Moreover RBV model assumes that resources are not perfectly mobile across firms, therefore heterogeneity can be lasting for a longer time (Decker, 2013). Henry (2008:130) indicates this example Toyota s value chain activities and it s linkages across them, and it s linkages with the value chain of it s suppliers are configured in a such a way that they provide Japanese competitor with the core competence or distinctive capability. This is the capability which provides it with competitive advantage and which its competitors have found difficult to match Division of Resources Resources are all assets, firm attributes, information, know-how controlled by a firm that enable to implement strategies that improve its effectiveness and efficiency (Daft, 1983). In addition traditional strategies would define resources as strengths that firms can use to conceive the strategies (Learned et al., 1981). All in all, resources are organized as tangible and intangible. Tangible resources refer to the physical assets, which include manufacturing plants, geographical location, technology, and access to its raw materials. To add value to these physical resources the firm must be capable of responding with flexibility to changes in the market place. For instance, the organizations with the most up-to-date technology and processes will be in the better position, compared to competitors using old technology (Henry, 2008). Intangible resources comprise intellectual and technological resources and reputation. Where technological resources include the organization's ability to innovate, intellectual resources include patents and copyrights. Moreover human capital resources include training, judgment, intelligence, experience and relationships (Henry, 2008). Competencies can be defined as tools that firm requires in order ti being able to compete in the market place. In other words, long for the efficient resource configuration. That is organizational capital resources include reporting structure, planning, controlling, coordinating. However, only the organization capital resources do not offer any competitive 13

15 advantage to the organization. Because of the reason that competencies are the bundle of specific resources and capabilities that an organization possess ( Barney, 1991). From this perspective resources are unequally distributed which leads to heterogeneity of firms. RBV emphasizes the unique combination or mix of resources and capabilities, that each organization possess (Decker, 2013). But not all firms resources are strategically relevant sources for reaching firm s performance, because some of them might prevent a firm from conceiving of and implementing new strategies ( Barney, 1986) Core Competence and Distinctive Capability It is recognized that core competence or distinctive capability is important in contributing an organization with competitive advantage. These elements resolve from three areas of an organization: architecture, reputation and level of innovation. Core competences derive from collective learning of employees within the organization and their ability to work across organizational boundaries (Henry, 2008). Defining Core Competence: A core competence ensures assets to a wide variety of markets and of an industry (Henry, 2008). A core competence should make a significant input into the recognized added value and customer benefits of the end product (Henry, 2008). A core competence should be difficult to copy for the competitors. In addition, a core competence must be sustainable. Moreover a core competence is enhanced as it is applied and shared across the organization (Henry, 2008). Core competencies, for instance, can be reached through first mover advantage. It is when one firm, as first in an industry implements a strategy and so obtains a sustainable competitive advantage over another firms. First mover advantage can be in these fields access to the distribution channels, reputation, goodwill etc. But to be a first mover by implementing strategy before others, a single firm must recognize the opportunities by implementing a strategy that is not obtained by any other firm (Lieberman & Montgomery, 1988). In other words, this information about the opportunity is firm s resource. In order to become a first mover, firms in an industry must be heterogeneous in terms of the resource they control. Moreover first mover advantage can create entry barriers, but it is only possible when rival 14

16 firms are heterogeneous in their resources they control and these resources should be immobile (Barney et al., 1989). All in all, entry barriers can become a source of sustainable competitive advantage when firm resources are not perfectly mobile and homogeneously distributed across the rivalry firms. The Resource Based View of the firm simply emphasizes the logic of value chain, by executing the attributes that resources isolated by value chain analysis (Porter, 1990). Defining Distinctive Capabilities Distinctive capabilities derive from three areas: architecture, reputation and innovation. However, organization's capabilities are distinctive when they rise from a characteristic, which other firms do not have. In addition, distinctive capabilities are linked with relationship between an organization and its employees. This relationship provides an organization s resources with its distinctive capabilities through the management of its architecture, reputation and innovation (Henry, 2008). Organization's Architecture That a distinctive architecture can be sustainable the relational contracts must be difficult for its competitors to identify and copy. Then architecture refers to the ability of the organization to create organizational knowledge. With the meaning to react quickly and effectively to changes taking place in its external environment, information exchange within the organization and as well outside it (Henry, 2008). Organization's Reputation Reputation is important especially in markets where the quality of a product is essential, such as an architecture firm. An organization's reputation is built through its reliable relationships, which ensures the trust in the organization and through that distinctive capability might be reached. When an organization has a good quality on providing their product and service, this can ensure the organization with a competitive advantage (Henry, 2008). Organization's Ability to Innovate It is the organization's competence to innovate new products and optimize or develop processes, which are routed within the routines of the organization and therefore hard to copy or imitate for the competitor. Thus, can lead an organization to obtain competitive advantage. In this characteristic distinctive capabilities are patents, copyrights, strong brand image, patters of supplier or customer relationships, skills. These distinctive capabilities are basis of sustainable competitive advantage (Henry, 2008). 15

17 All in all, as it is showed in the picture resources are inputs into the production process. Thus resources can be capital equipment, the skills of employees, patents, brands and financial capital. But as itself these resources are rarely productive, therefore cooperation and coordination of bundles of resources are required. These resources are the source of an organization's capabilities to manage them. As well the main source of competitive advantage, which lead in new product creation (Henry, 2008). Figure 2: Organization s Resources and Capabilities Co-existence, Own development + Moreover competitive advantage will barely last forever and may be lost within a short time span when competitors accomplish to copy the resource (e.g. machine capacity), which gives the company a unique value proposition. If a resource of a company becomes elastic in supply it loses its competitive advantage as this enables all firms access to the resource. However a company that profits from a first mover advantage is likely to have a long lasting competitive advantage. As the pioneer it has the opportunity to install certain rules and barriers, which are hard to overcome for its competitors. Thus competitive advantage can rapidly be lost but also persist for long-time spans (Decker, 2013) Identifying Sustainable Competitive Advantage Of course not all resources can sustain sustainable competitive advantages. To have this potential, a firm resource must contain 4 attributes such as be valuable, rare, non-imitable and it cannot have substitute. These attributes explain how heterogeneous and immobile firm resources are and how with these resources firms can achieve sustainable competitive advantage. These attributes become resources when these attributes exploit environmental opportunities or neutralize threats. In this section RBV model suggest what additional characteristics these resources must possess for sustainable competitive advantage. n Valuable resources are those who can set up and implement strategies that enchase firm s performance and capability (Barney, 1991). An organization based in a unique location will be able to add value to its products, which allows generating superior 16

18 returns. It is very hard to imitate this resource because it involves the climate, soil and geographic section. For instance Spanish wines are known as one of the best in the world by handing over knowledge from one generation to the other one (Henry, 2008). n Rare resources can create sustainable competitive advantage when firm applies bundles of rare and valuable resources. In other words, some firms require a particular combination of resource attributes (Barney, 1991). n However, sources of sustainable competitive advantage can be only valuable and rare if, competing firms cannot copy them. In general, firm resources can be imperfectly copyable, firstly when the firm resource has unique historical condition, secondly when the link between firm resource and sustained competitive advantage is causally ambiguous and development of firm resources is socially complex (Barney, 1991). Therefore each of these sources of the imperfect imitability are listed below: n Path dependency is a unique experience a firm has acquired to date as a result of doing business right. Therefore it is very hard for the competitors to acquire this knowledge on the market and imitate the organizations value-creating strategy (Henry, 2008). n Relationship between causal ambiguity and imperfectly imitable resources occur when the relationship between the resources controlled by the firm and sustained competitive advantage is not understood. For example, it is challenging for competing firms to attempt to replicate resources of successful firm. Because of this reason it is not clear that resources of successful firm are the same and exactly these resources generate sustainable competitive advantage. In case the firm with sustainable competitive advantage understands the relationship between resources it manages and between its competitive advantages, it means that competing firms can learn about this relationship and therefore compete it away. In this case firms competitive advantage is not sustained and can be competed away (Barney, 1991). n Social complexity is one of the reasons that firms resources are not imitable, because they are very complex and interdependent. For instance, interpersonal relationships between management members in the firm, customer relationships and supplier relationships (Barney, 1991). It includes as well organizations culture, and a company s reputation with its suppliers and customers. Therefore organizations 17

19 resources may be difficult to imitate because they are based on these complex interactions (Henry, 2008). n Substitutability is the last requirement for a firm resource in oder to be sustainable competitive advantage. In other words, there must be no other equivalent valuable, rare or imitable resource. Otherwise firms with similar resources will be able to implement the same strategies, but with different resources, thus these strategies will not lead to sustainable competitive advantage (Barney, 1991). RBV indicate that firms are essentially historical and social entities, but their capability to acquire and explore some resources depends from the time and space where they are. And when this unique time and space passes, the firms who are dependent on these resources cannot have sustainable competitive advantage, thus these resources are not imitable. In addition these firms will be able to implement value-creating strategies that cannot be replicated by rivalry firms (Barney, 1991). Executing Sources of Sustainable Competitive Advantage Particularly, this RBV model shows relationships between all attributes, namely resource heterogeneity and immobility, value, rareness, imitability, substitutability and sustained competitive advantage (Barney, 1991). Figure 3: The relationship between attributes (Barney, 1991). Firm resource Heterogeneity Firm resource Immobility Value Rareness Imperfect Imitability: - History Dependent - Causal Ambiguity - Social Complexity Substitutability Sustained Competitive Advantage Basically this framework helps firms to identify their resources, which could be the main source of sustained competitive advantage. This framework suggests as well that the formal and informal strategic planning might be helpful for some firms to identify and exposure their resources in order to create sustainable competitive advantage. Application in Figure 2 18

20 indicates that information process systems in close link with top management can be socially complex, rare and valuable resource, which could lead the firm to achieve competitive advantage. Thus be imperfectly imitable. Moreover positive reputation of the firm can be sustainable competitive advantage, which depends on specific historical settings. Therefore it is rare resource (Barney, 1991). 3.2 Dynamic Capabilities Framework Foundation of Dynamic Capabilities Dynamic Capabilities (DC) explains how firms can stay alive and how they develop uniqueness and competitive advantage in environments where competition is vigorous in both input and component markets (Teece, 2008). To do that firms are building and creating a set of microfoundations, which serve as the base for building intangible assets. These microfoundations are skills of employees, architecture of the organization's structure, decisions rules and disciplines as a cross boundary fields. In addition these microfoundations help to build enterprise level capabilities (Decker, 2013). In this way sustainable competitive advantage might be reached where firms can create and protect intangible assets over time (Teece, 2008). Moreover, these microfoundations are requirements for the firms in order to complete to achieve Dynamic Capabilities: sensing, seizing and ability to maintain competitiveness from the managerial position by being proactive in fast changing environment (Decker, 2013). So essence of Dynamic Capabilities is sensing new opportunities before others do, and executing where the situation allows and requires. Then capturing sufficient value to deliver superior long- term financial performance (Teece, 2008). A firms needs to be able to successfully orchestrates its tangible and intangible resources and adapt them to the external environment. Nevertheless Porter argues that firms select their industry where to compete according to secure higher profit margin. Therefore Porters 5 Forces model takes industry structure as given. Basically it means that firms do not have influence on their external environment. In contrast, Dynamic Capability framework assumes that firms can influence their external environment by conducting and reconfiguring their external environment when the conditions are given. This allows firms to stay competitive over time (Decker, 2013) Processes of Dynamic Capabilities Dynamic Capability framework classifies between managerial processes, procedures, systems, and structures. Teece (2008) describes in his article that Dynamic Capabilities are difficult to 19

21 recognize, because it is hard to identify microfoundations. The second purpose of DC is to explain the sources of enterprise - level competitive advantage over time and provide guidance to managers for avoiding zero profit condition that results when homogeneous firms compete in perfectly competitive markets ( Teece, 2008). According to Teece (2008) the success of firms is the ability to identify and take advantage of opportunities, creative combination of internal and external resources, which include technology transfer and protection of intellectual property (Decker, 2013). It s all about reinventing business processes and building entirely new markets that meet unmet customer demand (Teece, 2008). Essentially, successful firms, know how to create successful new business models as tool to align resources which allows them to capture the value of their business processes. This lets the firms to react and act in proactive way, too. Proactive means that a company is able to introduce its own product or service innovations to the market. Clearly, the firm who has the ability to manage its Dynamic Capabilities is able to create its own system with a structure of the external environment of the other firms, its suppliers, buyers, stakeholders. This means that it can take influence on the conditions of its environment. The positioning of Dynamic Capabilities is significant to its international environment, because of open economies, sources of invention and innovation and manufacturing (Decker, 2013) Steps in Dynamic Capabilities Framework Description of the steps in Dynamic Capabilities is sensing opportunities: this means that firms managers have to be able to identify scan and interpret signals from the environment (Decker, 2013). Foundations of enterprise success is being productive at R&D, achieving new product introductions, adopting best practice. It must also generate and implement the complementary organizational and managerial innovations needed to achieve and sustain competitiveness (Teece, 2008). When the opportunities are identified in the local and international markets, enterprises must understand customer needs, technological opportunities through R&D. The second step in Dynamic Capability framework is opportunity seizing. That is taking advantage of identified opportunity. This sensed opportunity must be addressed through new products, services or processes. For instance, firm makes specific investments into the technology or in markets. Addressing opportunities involves maintaining and improving technological competence and complementary assets, when the opportunity is matured invest heavily in the particular 20

22 technologies and designs most likely to achieve market place acceptance (Teece, 2008). In addition the firm to be able to make the right decision need to have as well the right business model. Therefore DC helps a firm to decide on the right moment to phase out existing products and services in order to take advantage of newer innovative products. In case the firm is not being able to do so exposes the firm to the risk of being left behind with outmoded products or services once they have gone through their life-cycle (Decker, 2013). Thirdly the firm need to develop the skills on the managerial level, like to develop skills that help the firms managers to discover new technology combinations in robust markets and come up with new solutions (Decker, 2013). In addition committee decision-making structures almost always tent toward balancing and compromise. Many enterprises makes single decisions viewing each opportunity as unique. Very much risk averse, therefore it leads to investment in low or negative return projects. Therefore risk aversion leads to biased decisions making and limits the probability that binding firms will explore risky radical innovations. The new opportunity capturing is likely dependent on importantly on the quality of enterprise routines, decision rules, strategies and leadership around evaluating new investment opportunities. That is critical for enterprise performance (Teece, 2008). Selecting the right entrepreneurial architecture for a business requires not only understanding the choices available, it also require assembling the evidence about costs, customers, competitors, complementary, distributors and suppliers. To reduce biased decision making strategies such as increase in divisional authority is used (Teece, 2008). In marketing strategy, cannibalization refers to a reduction in sales volume, sales revenue, or market share of one product as a result of the introduction of a new product by the same producer. While this may seem naturally negative, in the context of a carefully planned strategy, it can be effective, by ultimately growing the market, or better meeting consumer demands. Cannibalization is a key consideration in product portfolio analysis. For example, when Apple introduced ipad, this took sales away from the original Macintosh, but ultimately led to an expanded market for consumer computing hardware (Teece, 2008). 3.3 Synthesis of RBV and Dynamic Capabilities Both the Resource Based View and the Dynamic Capabilities Framework are part of the strategy management research field and disclose how firms differ due to their performance and why some competitors are more profitable than others (Decker, 2013). 21

23 For instance in fast changing markets Dynamic Capabilities are affected by competitive advantage and at the same time are unstable processes themselves which are challenging to maintain. Thus time is becoming a fundamental aspect of strategy; therewith RBV s focus on long-term competitive advantage becomes unrealistic in those dynamic markets. Where Dynamic Capabilities represent the source of sustained competitive advantage, to address rapidly changing environments. The assumption that an organization is a bundle of heterogeneous resources cannot be perceived to be true in the fast changing markets, where resources are added, recombined and dropped (Einsenhardt & Martin, 2000). This is where the Dynamic Capabilities framework can be applied as an addition to the Resource Based View. By illustrating how the development of the competitive advantage of a firm changes over time and how firms can attain high performance in the long run by deploying their intangible assets (Decker, 2013). \ 3.4 Business Model The particular theme of business models has caused vast discrepancies and dissonances between academics, which are also reflected in literature we dealt with. The research has been mainly inclined to journals and research papers found on Business Model Community, the Internet webpage (Business model community, 2013). Incorporating Zott, Amit and Massa (2011) who provided us with the valuable literature review, complementary insight of different approaches in journals ensured bridging of the gaps between various approaches of the so-called less cumulative literature. In respect to the differences between the vast amounts of academic literature on the subject, there is no one stable definition of what business model is. On the other hand its been clarified that the model seeks to explain how an organization creates, delivers and captures value from the customer. In alignment, the highlight is upon systemic and holistic understanding of how a firm orchestrates its system of activities for value creation (Teece, 2010). Dealing with strategic issues such as value creation, competitive advantage and firm s performance, the topic is centered mostly on innovation, knowledge and technology management. Zott, Amit & Massa (2011) have divided their literature review into three phenomena: e-business along the use of information technology; strategic issues; innovation and technology management. The concept emerged due to a drive for change in doing business during the 1990s or the socalled dot-com era. The Internet and technical advancements dispersed the rapid modification of information search, distribution channels and communication flow. An 22

24 extensive amount of opportunities opened up new ways of doing business (Arnim, 2013). However, Teece (2010) suggests that business models have been included in economic behavior since pre-classical times but have changed ever since. Because of more clients choices, firms were to make their businesses more customers oriented. In accordance to Chesbrough (2010) business model is used as a mechanism for value creation, identification of market segment and specification of revenue generation, definition of value chain and distribution, articulation of cost structure and profit potential, description of position of the focal firm within value network (suppliers, partners, distribution channels, and coalitions) and formulation of competitive strategy for further gain in competitive advantage. Moreover, in the essence of a business model there lies a reality that business model innovation might bring more significance to the firm than R&D and innovation in the very core of products. A mediocre technology pursued within a great business model may be more valuable than a great technology exploited via a mediocre business model (Chesbrough, 2010). In order for an organization to acquire status of competitive advantage it deploys orchestration of difficult-to-replicate dynamic capabilities where one of them is design and implementation of viable business models (Teece, 2009). In other words, the adoption of successful business model is crucial for an organization s further growth. Business models cause challenges to top managers and entrepreneurs. In our case the focus is on business model reconfiguration in incumbent corporations as this is the sense of our case study. Realizing that not only innovation of products, but also design innovation of business model itself and constant reorganization are highly important as a pathway to competitive advantage (Teece, 2010). Chesbrough (2010) suggests that, organizational processes should be altered through openness to business model experimentation of emerging and disruptive technologies. Therefore learning and customer focus is the key of business model adoption. However, concerning incumbent corporations where top managers tend to accept less risky situations than entrepreneurs in start-ups this philosophy is not so easily put to practice. Business model should be forever ongoing, ever changing and never static. Overcoming obstacles through constant testing of business models and realignment of strategic choices for accomplishment in marketplace (Shafer, Smith & Linder, 2005). The adoption of a well-developed business model is crucial in order to succeed. A hard to copy - differentiated, effective and efficient business model assures for competitive advantage (Teece, 2010). 23