1 Managing Complexity in a Multi-Business-Model Organization Yuliya Snihur Toulouse University, Toulouse Business School 20, Boulevard Lascrosses 31068 Toulouse, France Tel.: +33 752 29 01 01 E-mail: [email protected]Jorge Tarzijan Pontificia Universidad Catolica de Chile Vicuña Mackena 4860 Santiago-Chile Tl.: +56 9684 39082 E-mail: [email protected]Accepted for publication in Long Range Planning Acknowledgments: We would like to thank Thomas Ritter and Christopher Lettl, two anonymous reviewers, our colleagues Tim Folta, Tomi Laamanen, and Steve Tallman, as well as session attendants during the SMS Conference in St. Gallen. Yuliya Snihur acknowledges the financial support from the « IDEX-nouveaux entrants » scholarship provided by the Université Fédérale Toulouse Midi-Pyrénées.
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Managing Complexity in a Multi-Business-Model Organization · 2 Managing Complexity in a Multi-Business-Model Organization Abstract Many organizations operate multiple business models
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Managing Complexity in a Multi-Business-Model Organization
Corporate strategy has traditionally focused on the main strategic choices faced by multi-
business organizations that seek to create competitive and corporate advantages. These strategic
choices are the determination of the firm scope (i.e., the selection of specific business units or
product domains) and the management of individual domains (Eisenhardt and Piezunka, 2011;
Porter, 1987). With the advent of the business model (BM) as a new and different unit of
analysis (Casadesus-Masanell and Zhu, 2013; Zott et al., 2011), the role of corporate strategy can
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be also conceptualized as focused on the strategic decisions faced by multi-BM organizations.
These decisions particularly concern the choice of specific BMs to operate and the management
of several BMs within the firm’s BM portfolio.
We posit that complexity is an important factor to consider for firms managing a multi-BM
portfolio. Complexity is generated by the number of activities and partners in such a portfolio
and the number of interdependencies between them (Kauffman, 1993; Simon, 1962). A growing
number of interdependencies increases the coordination requirements among activities and
partners and the complexity of a system, whereas a higher number of activities and partners also
raises the complexity because it increases the likelihood of interactions among them (Larsen et
al., 2013). The lack of academic analysis of complexity in a multi-BM setting is surprising, given
that complexity has long been part of the research tradition in strategic management (Nickerson
and Zenger, 2004; Williamson, 1975). It is important and timely to examine the challenges of
managing BM portfolios because firms have been actively adding BMs—such as online retail,
discount, or sponsor-based—to improve performance in a variety of industries (Kim and Min,
2015; Sabatier et al., 2010; Santos et al., 2015).
To fill this gap, we analyze the dimensions and consequences of complexity in multi-BM
organizations using three relevant theoretical lenses. To define complexity at the BM portfolio
level we draw on the theory of complex adaptive systems (Anderson, 1999; Kauffman, 1993;
Rivkin, 2000). To analyze the dimensions of complexity we extend the insights from corporate
strategy on strategic similarity, sharing, and redeployment (Capron et al., 2001; Helfat and
Eisenhardt, 2004; Sakhartov and Folta, 2014) to the BM level. Finally, to theorize about the
consequences of complexity we incorporate insights from organizational design theory
(Galbraith, 1973; Fjeldstad et al., 2012; Zhou, 2011).
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We explain that the relevant complexity type in an autonomous BM portfolio (with no
interdependencies between the different BMs of the same organization) is the within complexity,
inherent in individual BMs of the portfolio, while in an integrated BM portfolio (when there are
interdependencies between activities and partners of different BMs) the relevant complexity type
is the between complexity, stemming from interdependencies between the elements of the
different BMs. We argue that sharing of similar activities and partners and redeployment of
activities and partners across the BMs in an integrated portfolio limit the increase in between
complexity in cases of integrated management.
Our analysis of BM portfolio complexity seeks to add to the business model, corporate
strategy, and organizational design literatures. We enrich corporate strategy research by
comparing and contrasting business unit (BU)-based and BM-based organizations. We also
discuss how the level and type of BM portfolio complexity have to be aligned with
organizational design and identify the positive effect of BM portfolio complexity on building
imitation barriers. The detailed conceptualization of complexity in a multi-BM organization
enables us to provide specific guidelines for managers, direct future research, and suggest how to
operationalize the proposed constructs.
To begin, we define the BM as an activity system and discuss multi-BM organizations from
this perspective. Then, we discuss the implications of using the concept of BM as a new unit of
analysis for multi-BM organizations and differentiate it from a more traditional BU-based
analysis. Next, we formalize the concept of complexity and disentangle its dimensions in multi-
BM organizations. The analysis then turns to the consequences of complexity for the design of
organizational structure and the likelihood of imitation by competitors. Finally, we draw
attention to the theoretical and managerial implications of considering complexity in multi-BM
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organizations and suggest avenues for future research. To illustrate our arguments, we use LAN
Airlines as our primary example.
Business models and multi-business-model organizations
The business model as an activity system
We follow the activity system perspective, based on the work of Zott and Amit (2010: 216), who
define the BM as “a system of interdependent activities that transcends the focal firm and spans
its boundaries. The activity system enables the firm, in concert with its partners, to create value
and also to appropriate a share of that value.” This perspective analyzes activities as the building
blocks managers (or entrepreneurs) use to design BMs, or particular activity systems. Managers
can choose which activities the firm performs, how they are linked, and who performs them (i.e.,
the firm or its partners). This perspective also echoes Porter’s discussion of the firm as composed
of a set of activities (Porter, 1987; Porter and Siggelkow, 2008).
Several authors agree that activities are an important building block of a BM (Casadesus-
Masanell and Ricart, 2010; Gambardella and McGahan, 2010; McGrath, 2010) and that the firm
can perform different sets of activities alone or together with partners (Amit and Zott, 2001;
Chesbrough, 2010; Desyllas and Sako, 2013). We develop our understanding of issues facing
companies that manage several distinct activity systems, or BMs, from the activity system
perspective.
The business model as a new unit of analysis for corporate strategy
After an important effort to define the BM concept, scholars have begun to study the
implications of using the BM as a new unit and level of analysis in different contexts. Studies
have looked at the drivers of BM design and innovation (Amit and Zott, 2015; Hienerth et al.,
2011; Osiyevskyy and Dewald, 2015; Sanchez and Ricart, 2010; Sosna et al., 2010), competition
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and replication of BMs (Casadesus-Masanell and Zhu, 2013; Winter and Szulanski, 2001), and
their performance consequences (Brea-Solis et al., 2015; Visnjic et al., 2016; Zott and Amit,
2007). However, relatively few studies have considered the BM as a new and potentially useful
unit of analysis for corporate, rather than business, strategy issues (Ahuja and Novelli, 2016;
Aversa et al., 2015; Casadesus-Masanell and Tarzijan, 2012). These studies usually observe that
incumbent firms in various industries add BMs to improve performance and to compete more
effectively with rivals (e.g., Markides and Oyon, 2010; Santos et al., 2015).
A firm’s choice to manage multiple BMs can be a response to the inadequacy of existing
BMs to exploit new opportunities (Berends et al., 2016; Markides, 2015) or a reaction to
competitors introducing new BMs (Ahuja and Novelli, 2016). In such cases, firms incorporate
distinct BMs into what we call a BM portfolio, or a set of different BMs operated by the same
organization. Several authors study firms that compete simultaneously with multiple BMs:
Aversa et al. (2015) discuss how firms involved in Formula One racing operate two BMs
concurrently, selling technology to competitors, and developing and trading human resources
with competitors; Osiyevskiyy and Dewald (2015) describe how some Canadian real estate
brokers combine discount real estate brokerage with their traditional BMs; and Kim and Min
(2015) comment on several retailers that add an online retailing BM to their BM portfolio.
Despite the fact that the addition of a BM to the firm’s BM portfolio might have significant
performance consequences for the focal firm (Aversa et al., 2015; Kim and Min, 2015), the
challenges of managing multiple BMs have not been studied in the detail they deserve. We argue
that the complexity of the BM portfolio is an important factor to consider when managing
multiple BMs.
The case of LAN Airlines
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To illustrate our conceptual analysis (Siggelkow, 2007), we consider the case of LAN Airlines as
a primary example (Casadesus-Masanell and Tarzijan, 2012). This company successfully
operates three BMs: a full-service passenger BM for international long-haul flights, a no-frills
discount passenger BM for domestic operations, and a cargo BM. As part of a pilot study to
understand the management of complexity in multi-BM organizations, one of the authors
conducted five interviews, lasting 13 hours in total, with LAN’s CEO and top managers in
charge of LAN’s cargo and passenger BMs during the period 2010–15. The executives
interviewed provided valuable information that complemented our own field research on LAN’s
BM portfolio management practices. Given the nature of the pilot study, we use the data
exclusively to illustrate the relevance of managing BM portfolio complexity and the particular
practices followed in a multi-BM organization1 (Siggelkow, 2007).
LAN operates the full-service international passenger BM in much the same way as other
airlines operate global passenger BMs. It offers frequent flights to major destinations through its
own hubs and alliances with other airlines, and it has two classes of service, coach and business.
The company has received awards for the high level of service of its international operations on
numerous occasions.2 The no-frills discount BM for domestic short-haul routes is a lower-cost,
lower-overhead model characterized by fewer amenities, Internet ticketing, shorter turnaround
times, and a uniform fleet of single-aisle planes from which the kitchens have been removed to
increase seating capacity. LAN adopted a no-frills BM for domestic flights to stimulate demand
in price-sensitive segments and increase capacity utilization. The cargo BM has an extensive
international route network and offers a high level of service. LAN carries about two-thirds of its
1 Due to data limitations and the objectives of the study, we did not conduct grounded theory development. 2 Examples of these awards include Best Business Class in Latin America by Business Traveler magazine, Best
airline in South America by the official Airline Guide, Best Latin American airline by Global Finance Magazine,
and the best A-340 operator in the world by Airbus.
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cargo shipments in specialized freighters and one-third in the belly of passenger airplanes. The
company’s international cargo operations are based on facilities located at different international
airports. Its storage capacity, equipment, and extensive refrigeration units have made LAN the
largest Latin American airline with dedicated cargo assets on U.S. soil. Whereas the premium
long-haul passenger and cargo BMs drive significant willingness to pay from less price-elastic
passenger and corporate clients, the no-frills short-haul BM is based on low prices, aimed at
more price-sensitive customers.
The international passenger and cargo BMs present high levels of integration. This has
allowed LAN, unusually among passenger carriers, to rely on cargo revenue, which accounts for
approximately 35% of its total revenues. The combination of cargo and passengers in the same
aircraft decreases the break-even load factor for passengers on each flight, promoting the
operation of more routes and more flights per route. Without the international passenger BM,
LAN would not be as strong in cargo as it currently is because the bulk of its cargo operates on
the same route network as its international passenger BM. Similarly, because of the cargo
contribution, passengers can enjoy more routes.
However, LAN cannot benefit from integrating passenger and cargo businesses on domestic
routes given the competition from trucks, trains, and boats, and low local demand for the
perishables that LAN transports farther abroad. As a result, the no-frills BM is managed
autonomously and separately from the international passenger and cargo BMs. The objective of
the no-frill BM is to exploit economies of scale by filling planes to the maximum possible extent,
while the integrated cargo and long-haul passenger BMs exploit economies of scope.
Despite the advantages, the simultaneous operation of these three BMs creates a number of
challenges for LAN´s management. How can LAN manage, and possibly reduce, the complexity
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of its BM portfolio? With this objective in mind, what dimensions of complexity should be
considered? How should an adequate organizational structure (e.g., centralized or decentralized)
be designed for its BM portfolio? What are the effects of its BM portfolio complexity on barriers
to imitation and the sustainability of its competitive advantage? Before answering these
questions, we first examine the differences between multi-BM organizations like LAN and
multi-BU organizations like Procter & Gamble.
Multi-business-model and multi-business-unit organizations
The analysis based on multi-BM firms is not always coincident with the analysis based on multi-
BU firms. BUs represent individual components of firm organization, differentiated through
responsibility for one or several product markets, and often characterized by a unique address
(Chandler, 1962; Karim et al., 2016; Martin and Eisenhardt, 2010). For instance, Procter &
Gamble is divided into several BUs, such as skin and personal care, fabric care, or baby care,
responsible for its various product lines, and often located at different headquarter addresses
(P&G annual report, 2015). A profuse body of literature has analyzed the effects of the firm’s
BU characteristics (e.g., BU needs, competitive strategy, technology, size, investment prospects,
maturity, etc.) on the organization of the firm. A relevant part of this literature focuses on the
need for alignment between the specific characteristics of the BUs managed by the firm, the role
of corporate oversight, and the integrating mechanisms (Campbell et al., 1995; Semadeni and
Cannella Jr., 2011).
While BUs are usually based on a particular product market served in an often well-
delineated geographical area, BMs reflect how particular products or services are provided
through a specific activity system. In the case of Procter & Gamble, several BUs are operated
with one BM; however, a BU can be also operated with more than one BM. LAN operates two
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BMs in the passenger BU: a discount model for domestic short-haul routes and a full-service
model for long-haul routes. These two BMs represent two different logics of value creation and
capture even though they belong to the same BU. The recent announcement of the German giant
GEA Group, an important worldwide supplier to the food processing industry, similarly
demonstrates that a BM is not equivalent to a BU: GEA reorganized from four original BUs
(farming technologies, mechanical equipment, process engineering, and refrigeration
technologies) into two BMs (equipment and solutions) (GEA, 2014).
Conversely, the same BM can serve different product markets, and the same product market
can be served by different BMs. For instance, Easy Group applies the same discount BM to
markets such as airlines, car rental, or Internet cafes, while ING uses both discount (through the
ING Direct brand) and traditional (through the ING brand) BMs to serve its customers’ banking
needs. Firms with international operations usually have separate BUs in different countries, but
these BUs typically apply the same BM. For instance, retailers like Walmart, Carrefour, and
Auchan expand into other countries by exploiting the same traditional retailing BM, but they
might do so through separate BUs (Berg and Roberts, 2012). Table 1 illustrates the various
As the firm can manage a BU with different BMs or operate different BUs with the same
BM, there is no direct correspondence between the BU and the BM unit of analysis. What is
more, some companies choose to organize their operations based on BMs rather than BUs (i.e.,
GEA, the recent reorganization of Google as Alphabet3).
3 As discussed in Google’s press release: https://investor.google.com/releases/2015/0810.html
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The distinction between BMs and BUs implies that the analysis of corporate strategy issues
cannot be performed comprehensively while ignoring the BM unit of analysis. Shifting the object
of study from the BU to the BM has interesting implications for corporate strategy, particularly it
relates to the complexity generated by adding a new BM to the firm’s BM portfolio, the design
of organizational structure to cope with this complexity, and the effects on the durability of the
firm’s competitive advantage through the creation of imitation barriers. Before analyzing these
issues, we first discuss the types of complexity that arise in a multi-BM organization.
Complexity in a multi-business-model organization
Simon (1962: 468) defines complexity in a system as “a large number of parts that interact in a
non-simple way.” A growing number of interdependent parts increases coordination
requirements and raises the total number of interfaces within the system (Larsen et al., 2013).
Our conceptualization of complexity borrows from Kauffman’s (1993) theory of complex
adaptive systems, in which the complexity of a system positively depends on the number of
interdependencies between the elements within the system (K). The number of elements or
agents in a system (N) also affects complexity, because a higher N generally implies a higher K.
Following Kauffman’s (1993) notation, a BM can be associated with a subsystem in which N is
related to the activities and partners in charge of specific activities within the BM, and K relates
to the interdependencies among them. Thus, a portfolio of BMs can be analyzed as a system
composed of different subsystems with a varying number of activities and partners and varying
levels of interdependencies between them.4
To simplify the analysis of complexity in a multi-BM organization, we define two types of
BM portfolios: autonomous and integrated. While in an autonomous BM portfolio there are no
4 A caveat to consider here is that the degree of complexity could be affected by variability and variety more than by
the simple number of interdependencies. For instance, it might be harder for a focal firm to cooperate with partners
when there are important differences in size or identity (e.g., family firm, non-profit organization).
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interdependencies between the sets of activities employed in the different BMs the firm operates
(although there are interdependencies within each BM), in an integrated BM portfolio there are
interdependencies between the activity systems of the different BMs operated by the focal firm.
Authors examining complexity in organizations distinguish complexity within functional
departments or components, and complexity across departments or interfaces (e.g., Claussen et
al., 2015; Levinthal and Posen, 2007). Extending this literature to the BM level of analysis, we
term the complexity contained within a particular BM as within complexity and the complexity
associated with the interdependencies between the BMs as between complexity. In an
autonomous BM portfolio, complexity is equivalent to the sum of within complexities of
individual BMs, whereas in an integrated BM portfolio, complexity also depends on between
complexity (Ethiraj and Levinthal, 2004).5 Given that in practice the BM portfolio operated by
the firm is usually neither completely autonomous nor fully integrated, we can observe different
levels of between complexity, from very low to very high.
Firms can manage multiple BMs either within a single BU or in separate BUs, and different
BUs with a single BM. If different BUs, based on distinct product markets or geographies,
operate the same BM (e.g., Walmart’s discount BM, Brea-Solis et al., 2015), then the issue of
between complexity at the BM level will be irrelevant.6 Managing between complexity becomes
relevant when the firm operates multiple BMs within one or several BUs. For instance, managing
between complexity is an important issue for LAN Airlines. Given that the discount BM for
domestic passengers and the full-service BM for international flyers are “hosted” in the
passenger BU, the analysis of complexity at the BM level is different from the analysis of
complexity at the BU level.
5 Although we consider within complexity, we mainly focus our attention on between complexity because of its
relevance to any integrated management of a BM portfolio. 6 Although complexity might still exist in such a firm due, for instance, to a high number of different products.
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Based on the corporate strategy literature, we derive two important dimensions determining
BM portfolio complexity: the sharing and the redeployment of activities and partners across BMs
within the same organization. It is relevant to analyze these two dimensions because they can be
affected by the firm’s decision-making: multi-BM firms may choose to share more activities and
partners across the BMs and may add BMs with activities and partners that have a higher or
lower capacity for redeployment across the BMs. Later, we analyze the consequences of BM
portfolio complexity for the firm’s organizational structure and the sustainability of its
competitive advantage. Our conceptual model is summarized in Figure 1.