Business models as part of entry strategy

As mentioned initially, we will focus on business model as to which degree the new market will require a change in the business model and to which extent the company should

physically move into the new market. We will also briefly introduce some important considerations as to managing emerging business models.

The business model (BM) of a company is argued to be considered independently to other strategic concepts and theories. It grasps the essence of how a company creates value. In recent literature it has been discussed in the context of paths and how the businesses are able to develop new ways to earn profit over time (Brunninge and Wramsby, 2013).

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The shipping industry is characterized by standardized products and intense price

competition, which have translated into an industry dominated by a focus on cost-cutting and efficiency (Borch and Batalden, 2013). This “may mean less emphasis on experimentation, innovation, and alternative business configurations for meeting challenges or opportunities in complex, volatile environments,” according to Borch and Batalden (2013 p. 6). The complex, volatile environments mentioned here is with regards to the High Arctic. In these areas, the business model must be realigned to allow for innovation, in addition to the regular cost-efficiency efforts, even though this balance is difficult to achieve. The survival of a company in highly volatile environments is directly threatened by the focus on “business as usual”, and one should consider re-configuration of the business model to adapt to a new market. This could include a revision of the entire value chain, to develop the firm’s internal and external innovative resources (Borch and Batalden, 2013).

Similar to the reasoning of Borch and Batalden (2013), Pehrsson (2002) argue that the successfulness in a new market is based on how the firm’s resources and capabilities can be applied there. A high relatedness between the business and the core competence will make the process of entering a new market less dependent of organizational change. Johnson et al.

(2011) support this theory, by arguing that the breadth of the company’s advantages decide which changes are necessary for the organization with regards to cooperation and value chain modification, and accordingly changes in the business model. In this respect, changes might be necessary in a new market where the competitive advantages are not directly applicable.

Based on the allegations of Borch and Bataldsen (2013), who argue that the new market requires reconfiguration of the business model, we will introduce ways to adapt the business model to meet the new demands.

Business model innovation

According to Massa and Tucci (2013, p.2) the role of BM in innovation is twofold:

1. The BM represents an important vehicle for innovation.

2. BM may also be a source of innovation in and out of itself

According to Giesen et al. (2007) findings, the firm’s performance can be increased through developing new business models. They also discovered that older companies will have greater benefit from external collaboration and partnerships to innovate the enterprise model,

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compared to younger ones. The authors describe enterprise model innovation as changes in the networks with employees, suppliers, customers and others, including configuration of the resource base.

As for creating or integrating a new business model, Massa and Tucci (2013) introduces an aspect related to how one can cope with more than one BM within a company. For example if a company which mainly is targeting a premium market, introduces a branch for the low cost market. This might affect their existing businesses negatively, by “(…)cannibalizing existing sales and customer bases, destroying or undermining the existing distributor network,

compromising the quality of services offered to customers, or simply defocusing the organization by trying to do everything.”(Massa and Tucci, 2013, p.27) According to the authors researchers have traditionally divided such businesses into two distinct business models, but Massa and Tucci (2013) refer to Markides and Charitou (2004) who present a framework to evaluate the degree of conflict between the BMs and how different the markets are to be perceived strategically. Based on this the BMs can be separated or integrated, or start a process of aligning or divorcing (Massa and Tucci, 2013).

Alliances

As mentioned in the entry strategy chapter, alliances might be a viable tool to close the resource gap. This enables firms to cooperate and share experiences and competence across company borders, for example by gaining knowledge of the local environment through an alliance with a local actor.

“A strategic alliance exists whenever two or more independent organizations cooperate in the development, manufacture, or sale of products or services” (Barney, 2010, p.363).

20 Figure 4: Strategic alliances. (Barney, 2010, p.364)

The main driver for the alliances described above is to create synergy effects, which means that two or more companies together can generate a premium above what they would have achieved individually (Barney, 2010).

The authors further explain that alliances can be motivated in regard of:

 Exploiting economies of scale

 Learning from competitors

 Managing risk and sharing costs

 Facilitating tacit collusion

 Low-cost entry into new markets

 Low-cost entry into new industries and new industry segments

 Low-cost exit from industries and industry segment

Barney (2010) points out three potential pitfalls of entering an alliance. The first one is adverse selection, which means that one of the partners entering the alliance has

misrepresented their ability to fulfill their obligations in a sufficient manner. Second, the moral hazard, that a company in an alliance does not do their best to utilize their abilities and skills. At last, what the authors call “holdup”, which means that one of the partners would benefit more from a specific investment related to the alliance than the other(s).

Strategic alliances

Nonequity Alliances Cooperation between firms is managed directly through contracts,

without cross-equity holdings or an independent firm being created

Equity Alliances Cooperative contracts are supplemented by equity investments

by one partner in the other partner.

Sometimes these investments are reciporacted

Joint Ventures Cooperating firms form an independent firm in which they invest.

Profits from this independent firm compensate partners for this

investment

21 Benefits of a dynamic business model

All companies are affected by external and internal change. Brunninge and Wramsby (2013) emphasized the importance of preventing a locked in path, which could either make the company blind to new opportunities, or force it to perform a costly “unlocking”. The popular saying “never change a winning team” do not apply in this context. The authors further argue that a dynamic business model under constant consideration would benefit a company, not only in the terms of enabling change, but also by encouraging exploration of new threats and opportunities. To be able to shift quickly can also trigger first movers advantages, which consequently also make the model harder to copy. New organizations is considered to be more dynamic regarding creating new business models, and is therefore more likely than incumbent companies to enjoy first mover advantages (Brunninge and Wramsby, 2013). On the opposite side, new organizations may meet other issues regarding “considerable

technological uncertainty, lack of legitimacy, lack of resources and, in general, liability of newness, which do influence the design and validation of new BMs”(Massa and Tucci, 2013, p. 9)

The following two chapters will address characteristics and how to approach high technology demands, and further introduce tools to assess the competitive forces in the market. As for the regulatory demands, we will elaborate the most relevant laws and regulations which ship owner companies encounter in the High North in chapter 4.4.