Business model renewal and ambidexterity: structural alteration and strategy formation process during transition to a Cloud business modelby Saeed Khanagha, Henk Volberda, Ilan Oshri

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Business model renewal and ambidexterity: structural alteration and strategy formation process during transition to a

Cloud business model

Saeed Khanagha1, Henk Volberda1 and Ilan Oshri2 1Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands.; 2Loughborough School of Business and Economics, Loughborough University, Loughborough, UK.

This paper presents the findings of a longitudinal study of a large corporation’s transition to a new business model in the face of a major transformation in the ICT industry brought about by Cloud computing. We build theory on the process of business model innovation through a qualitative study that investigates how an established firm organizes for an emerging business model. Contrary to previous findings that presented spatial separation as the optimal structural approach for dealing with two competing business models, our findings indicate a need for recursive iterations between different modes of separated and integrated structures in line with the emergent nature of strategic intent toward the new business models. Our analyses reveal strategy formation to be a collective experimental learning process revolving around a number of alternative strategic intentions ranging from incremental evolution and transformation to complete replacement of the existing business model. Given the fundamental differences in the nature and requirements of those alternative intents, iterations between different structural modes and differing combinations proved to be crucial in enabling the organization to make transition to the new business model. . . . Somewhere in 2008, we started to get into

Cloud computing activities within [Telco]. I think the starting point for our team has been [. . . .] how you could utilize Cloud to improve the performance of the network. (Senior researcher, Telco; interviewed in December 2011) . . . [in 2011] We realized that Cloud cuts quite badly through the organization in many of the areas, of course some products fit[. . .], but very few I would say. (Manager, Telco; interviewed in December 2011) . . . . [as of 2013] I think the practical impact of Cloud on [Telco] will be smaller than what it looked before and we were assuming that everything will be changed. (Manager, Telco; interviewed in January 2013) bs_bs_banner 322 © 2014 RADMA and John Wiley & Sons Ltd 1. Introduction

In 2008, when a small group of researchers andtechnology analysts of Telco (a pseudonym) started to wonder how they could utilize Cloud computing to enhance the performance of their existing technologies, it was difficult to predict the various waves of changes that would affect the organization in the years that followed. As early as 2009, Cloud computing was indicated to be a potential source of disruption in the telecommunication sector, with an influence ranging from incremental enhancement of existing networks and possibility of new offerings to complete obsolescence of existing business models for a wide range of industry players. Analysts and managers in Telco realized quite early on the various possibilities that Cloud computing offered, but deciding which path to take and how to set the organization in line with that path was not as easy. In fact, figuring out whether it was wise to plan for harvesting the new Cloud opportunities or to consider burying the business model that the organization had used for more than 150 years took about 5 years of experimentation in different directions. During this period, devising an optimum structure for experimentation was a key question for managers.

The growing body of research on business model innovation addresses the issue of dealing with two fundamentally different business models. Discussing the need to facilitate resource allocation and foster a favorable environment for experimentation as crucial means of enabling organizations to deal with discontinuous change (Gilbert, 2005), research has emphasized the need for structural separation of the two business models (Gilbert, 2005; Izosimov, 2008;

Markides, 2008, 2013; Smith et al., 2010; Zott and

Amit, 2010; Bower and Christensen, 2011; Zook, 2011; Bock et al., 2012). Despite the benefits of spatially separated structures, it is not always feasible to use this approach, especially where another business model has the potential to replace the existing one (Markides, 2008, 2013). Business model disruptions have impacts on the whole organization, and therefore, providing human resources and other assets to a separated structure that deals with such an extensive scope seems to be quite challenging (Taylor and

Helfat, 2009). Committing to such risky investments becomes even more challenging when one considers the great uncertainty surrounding the nature, timing, and scale of the effects of fundamental changes in the business environment (Milliken, 1987). Therefore, as contended by Markides (2013), it is still a matter of debate as to when and how separating, integrating, or adopting a combination of these two structures might represent the optimal solution for business model innovation.

To address this gap, we look into the dynamic process through which an established firm adapts the organization in order to respond to an emerging business model with a disruptive potential. Our longitudinal case study on Telco’s transition toward a Cloud business model indicates that the firm introduced structural changes as enabler of a kind of learning process that then fed into strategy formation to move toward the new business model. As such, our empirical analysis suggests that, rather than adopting any particular structural form, iterating between different modes of separated and integrated structural forms offers the potential to experiment with the new business model and revise the strategy through a collective learning process. By studying the evolution of the firm’s strategic intent (Hamel and Prahalad, 1989; Branzei et al., 2004) toward Cloud, we postulate that structural changes are reflections of temporal intention in each stage of the process and at the same time enablers of learning that will feed the subsequent formulation of the strategy and design of the new business model. We provide further details on nature and implications of interrelationships among strategic intent, structure, and business model renewal.