The impact of customer ties and industry segment maturity on business model adaptation in an emerging industry

Abstract

Research Summary Why do some young firms change their business models while others do not? Why do some firms make small changes, while others make more substantial changes? And does industry context matter? Drawing on organizational learning theory and utilizing a unique database tracking 187 young firms through the first decade of the mobile health industry, we examine the role of customers in young firms' business model adaptation. We find a positive impact of customer portfolio breadth (capturing the number and diversity of customers) on both the likelihood and degree of business model change. Importantly, industry segment maturity moderates this relation: customer effects are strongest in the earliest, most uncertain stages. Our study provides a rare view into how a new industry and its young ventures co‐evolve. Managerial Summary Customers have been viewed as critical in a start‐up venture's search for an initial business model, but their role in young firms' business model adaptation has not been examined. In this study, we show that a young firm's customer portfolio breadth is an important driver of business model change, especially at the earliest, most uncertain stages of an industry. Our results highlight the value of customers as sources of knowledge in emerging industries, and suggest that when making decisions about establishing and fostering customer ties, entrepreneurs should consider the number and diversity of those ties in the context of the maturity of the young firm's industry segment.

The Lean Startup Framework: Closing the Academic–Practitioner Divide

“…Although it is easier to imagine a real options reasoning approach in established firms engaged in the process of starting up new ventures (de alio), it is important to consider the notion of a portfolio of opportunities (requiring hypothesis testing) for independent startups (de novo). For example, Denoo et al (2018) found that startups with broader portfolios of customers engage in more business-model changes and changes of a greater degree. Generally, future research can explore the extent to which independent startups have portfolios of potential opportunities; what form the hypotheses take to test these potential opportunities; and how the different hypotheses relate to each other in terms of their formation, information gathered, and analyses of findings.…”

“…From the perspective of business models as a firm attribute (Massa et al, 2017), the focus is on existing firms-not the creation of a new independent firm. Although we have a good understanding of firms that are strategically oriented toward entrepreneurship (Covin & Slevin, 1991;Lumpkin & Dess, 1996;Wiklund & Shepherd, 2005) and why some firms are better at creating corporate new ventures (de alio) than others (Covin et al, 2018), there is an insufficient understanding of the activities associated with the different business-model attributes (Massa et al, 2017; for an exception, see business-model change by Denoo et al, 2018). Indeed, applying the practice term-namely, focusing on what people do-of strategy (McDonald & Eisenhardt, 2014;Snihur & Zott, 2019;Whittington, 2006) and social theory (Brown & Duguid, 2001;Orlikowski, 2002) to firms' business models will make an important contribution to entrepreneurship.…”

“…What leads to business-model innovation? Future research can build on the literature on learning and experimentation (Achtenhagen et al, 2013;Denoo et al, 2018;Foss & Saebi, 2017;McGrath, 2010) and structural and cognitive imprints (Snihur & Zott, 2019) to gain a deeper understanding of the antecedents of business-model innovation. Although we delve deeper into the issues of experimentation and learning in the sections that follow, future research can explore the mechanisms of these relationships as they relate specifically to business-model innovation.…”

“…With increasing psychological ownership over their startup's business model, founders generally become less willing to accept information indicating the need to pivot. In one of the few empirical studies on pivots, Denoo et al (2018) found that less than 40% of young firms changed their business model over a 10-year period. Overcoming this reluctance to pivot appears to require the reappraisal of psychological ownership, idea work, and identity work (Grimes, 2018).…”

A Lean Framework for Starting a New Venture

“…This approach can facilitate adaptation to the external environment. For example, startups with broader portfolios of customers engage in more business-model changes and changes of a greater degree (Denoo et al, 2018). These business-model changes are often critical for startup performance in highly uncertain environments.…”