How Do Entrepreneurs Develop Business Models in Small High-Tech Ventures? An Exploratory Model from Australian IT Firms

The Concept of Business Model in Entrepreneurship

Entrepreneurship is primarily concerned with the exploitation of opportunities through different means, such as establishing new ventures or developing new products and services (McMullen and Shepherd 2006; Shane and Venkataraman 2001). Opportunity exploitation takes place when entrepreneurs, individually or in a team, allocate resources to activities that convert a recognized opportunity into market-based outcomes (Burgelman and Hitt 2007; Zahra 2008; Dimov 2007; Schumpeter 1934, 1943). Entrepreneurs do not possess the total knowledge of the contextual circumstances of time and space surrounding the opportunities to fully calculate the risks and benefits associated with resource allocation choices (Hayek 1945). Therefore, to enhance their decision-making and structure their thoughts they need to develop a mental representation of the reality, as a theory of the business in their minds or venture ex ante (McMullen and Shepherd 2006). This mental model of the business is shaped in cognitively proximate areas where the entrepreneurs have the most confidence to act (Najmaei 2014a) and encompasses assumptions about the potential customers, what value the business delivers to them, and how it can create and deliver this value (Augier and Teece 2009; Drucker 1994). This ‘model’ of the business, have come to be known as the ‘business model’ (BM) of the firm (Augier and Teece 2009; Teece 2010).

As a model, a business model is not only a simplified representation of the reality in the mind of entrepreneurs (Najmaei 2012, 2013), but it also serves as a performative agent that guides and informs entrepreneurs’ resource management actions in the business environment (Perkmann and Spicer 2010). When this mental model is put into practice, a business model is implemented and translated into a system of activities through which a firm operates and performs its transactions with suppliers, buyers and other parties by developing and deploying boundary-spanning resources (Amit and Zott 2012; Zott and Amit 2010). As noted, this paper seeks to explore the dynamics of this phenomenon. Therefore, we proposed the following stylized fact:

Stylized fact: a business model is both a cognitive and an operationalized or reified entity. As a cognitive one, it shapes the mental picture of entrepreneurs; as a reified one, it shapes the structure of the resources of the firm that are used in performing boundary-spanning activities.

This stylized fact defines a business models in a comprehensive way that not only suits the purpose of this study but also blends key points from previous definitions (See Wirtz et al. 2015; for a review of the definitions of the business model concept) into a simpler one. This definition considers business models an essential component in the individual-opportunity nexus (Eckhardt 2013) without which entrepreneurial activities specifically at the firm level are incomplete. Development of a business model is, however, more than just a adding a new component to the individual-opportunity nexus. Because ‘whenever a firm is established it adopts a business model’ (Teece 2010, 172), business model development is essentially an entrepreneurial phenomenon closely related to the emergence and existence of the firm (Pitelis and Teece 2009).

Why Business Models Are Developed: Insights from Theories of the Firm

The question of why entrepreneurs develop/create new business models is fundamental to this research. One potential line of answer to this question originates from the literature on theories of the firm. In entrepreneurship and strategy theories of the firm refer to a class of theoretical frameworks that explain why firms exists, how they work compared to markets and why they differ (Foss, Lando and Thomsen 2000). As noted, every firm has a business models and whenever a new firm is established it adopt a business model that defines the logic of its business (Teece 2010). Thus, theories of the firm and development of the business model of the firm are inherently intertwined. There are different theories of the firm each providing different accounts for the emergence of the firm and by implication the development of its business model. Table 1 offers a summary of four major theories of the firm, which help us understand the logic of business model development. In what follows, I briefly explaining these theories to outline the theoretical foundation of the business model development.

The transaction cost theory (Williamson 1981) suggests that firms and markets are two alternative modes of governing business activities. Firms emerge because they are superior to markets in performing certain activities. A firm in this sense is a bundle of activities that are governed through contracts between employees, employers and business partners (Foss et al. 2000). Business activities perform transactions that are essentially exchanges of good, services, information and material between parties across the boundaries of the firm and between the firm and its ecosystem (i. e. market). The transaction costs theory does not explicitly discuss the notion of business model and it is particularly silent about the development of business models. However, Zott and Amit (2010) argued that business models represent the content, structure and governance of transactions performed by a firm. Drawing on this conceptualization, we argue that business models are developed to enable the firm to design and perform its transactions. In conclusion, superiority of a firm to market is a function of its business model’s design and capabilities.

The resource-based view (Barney 1991) suggests that firms are bundles of resources. A firm emerges when a single entrepreneur or a team of entrepreneurs acquire and assemble heterogeneous resources to enact opportunities (George and Bock 2011). These resources are not useful on their own but have to be organized based on a clear structure to perform different value-creating functions. Entrepreneurs need a logic or a blueprinting to structure and organize resources (Barney 1991). A business model represents this structure (George and Bock 2011). Because there are different business models, there are different configurations or structure of resources which in turn result in interfirm differences within and between industries. In conclusion, firms emerge because there are alternative structures of resources that can exploit opportunities in market. Similarly, business models are developed to enable entrepreneurs to structure resources in the form of firms.

The capability, competency or the evolutionary view (Teece et al. 1997) extends the RBV by arguing that firms are more than stock and flow of resources. A firm is a constellation of capabilities that are developed and adjusted over time in response to market changes. Business models here serve as the foundation of these capabilities by showing entrepreneurs (or managers) how resources can be used in various capacities to develop organizational capabilities (Teece 2010). To develop various capabilities a manager needs to understand what his firm does and how resources can be combined and configured to perform these activities better than competitors. The business model of the firm helps managers perform this task by defining the logic of their business’ capabilities. In conclusion, a firm emerges because it is capable of performing some activities which cannot be done otherwise or by other firms. These capabilities are firm specific and path-dependent (Teece 2010). Their firm-specificity and path-dependency are rooted in the business model of the firm because it determines how the firm should develop and use its capabilities (Teece 2007; Leih et al. 2015).

The cognitive view (Nooteboom 2006, 2007) builds on the cognitive assumptions of transaction-costs theory, evolutionary view and behavioural view. It suggests that a firm is a goal-oriented, cognitively focused set of coordinated activities that emerges to realize entrepreneurial ideas or visions. Having a clear cognitive model or a simplified representation of the business is essential to the formation and functioning of the firm (Nooteboom 2007). A business model offers this model. Accordingly, business models are developed to translate a cognitive view of the business into a realized one in the form of a new firm. Business models here represent business ideas and entrepreneurial visions in the mind of entrepreneurs and act as schemas or mental models that guide and shape entrepreneurial actions for converting their visions and ideas into market outcomes (Malmstrom et al. 2015).

Theories of the firm, as briefly outlined above, are not mutually exclusive. They rather offer complementary insights into the relationship between emergence of a firm and development of its business model. The concluding point is that, firms and business models cannot be separated. Creation and emergence of the firm is essentially an entrepreneurial process that involves creation and development of its business models. Having said that, although these theories offer a host of insights into why business models are developed, they fall short in providing a clear answer to how business models are actually developed.

The fit between the entrepreneurial knowledge of the entrepreneur and his initial resources endowments determines the process of business model development because according to the resource-based theory (Barney 1991; Barney, Ketchen, and Wright 2011), the skills, knowledge and abilities of the funders of the firm are the most important primary resource endowment of the venture. Acquisition and orchestration of other resources and the ability to assemble, bundle and deploy them in a competitively superior way (Sirmon, Hitt and Ireland 2007) hinge on the entrepreneur’s choice of the right business model (Augier and Teece 2009).

The entrepreneurial action theory (McMullen and Shepherd 2006) suggests that entrepreneurs have discretion, act on their will and obtain skills and knowledge necessary to exploit opportunities by developing business models that shape the structure of their ventures (Alvarez and Busenitz 2001). These actions occur at the meso-level where personal factors (i. e. entrepreneurial resources and skills) influence system-level factors (i. e. formation of a system of activities and structure of resources in the form of a business model). Entrepreneurs undertake these actions because they sense that there is an opportunity worthy of exploitation and there is a business model that can help them achieve this goal (Teece 2010). Therefore business model development is a process that unfolds as entrepreneurial resources are put in action and entrepreneurial actions are set in motion to develop a new venture.

An Overview of Prior Research on Business Model Development?

The existing literature offers only an incomplete picture of the dynamics of business model development. Table 2 shows a summary of a representative set of recent studies in this context.

The literature on business model development is more descriptive than explanatory with few exceptions which only explain limited aspects of this phenomenon. On the descriptive side, Wirtz et al. (2010) address business model development in the context of Web 2.0 and describe the design of web 2.0 business models as being content, commerce, connection or context-based. Dahan et al. (2010) highlight the importance of NGOs to the process of business model development in multinational firms. They argue that NGOs offer complementary assets that multinational firms can leverage to expand their offerings in emerging economies via new business models. London (2010) describes the strategy of MNCs for developing new business models when entering underdeveloped markets. He argues that MNCs use structural protection, financial support, wide performance metrics and a boundary-spanning problem solving approach to develop new business models for bottom-of-the-pyramid countries. More recently, Jokela et al. (2014) argue that international companies use product-based or service-based approaches to develop multiple business models for different markets to reduce risk and increase market exposure in international market. Dmitriev et al. (2014) describe the process of business model development as a dynamic non-linear one in which entrepreneurs continuously adjust the components of their business model to fit the market. Finally, Spiegel et al. (in press) argue and empirically show that professional social networks are critically important factors for entrepreneurs when they develop new business models.

On the explanatory side, Andries et al. (2013) sought to explain how new ventures deal with uncertainty and optimize their growth by developing new business models. They found that new ventures use two approaches to develop new business models: 1) focused commitment in which one core business model is developed and 2) simultaneous experimentation in which a range of models are experimented with. They also found that the former approach significantly enhances initial growth but lacks variety. As a result, it compromises long-term growth. The latter one decreases initial growth but enhances long-term survival. Palo and Tähtinen (2013) explain the development process of service-based business models. They argue that developing a service-based business model involves a service-development phase, then a pilot and finally a market phase in which the final service is commercialized. Ojala (in press) explains the process of business model development in a single company. He suggests that entrepreneurs develop simple models, evaluate them in markets and adjust them by abandoning their unnecessary components to make them more competitive. Finally, Kranz et al. (in press) explore how established software companies develop new business models when their existing business models are disrupted by the cloud computing technology. They argue that absorptive capacity and ambidexterity are necessary components for a successful development of competitive business models in response to disruptions caused by cloud computing.

Two important observations are noticeable here. First, the body of knowledge on the process of business model development is in its infancy justifying the extensive use of case methodology and the absence of a unified coherent model of how business models are actually developed. Second, business model development becomes more relevant and worthy of study in high-technology industries where markets collapse and collide rapidly, new markets emerge, new technologies are constantly introduced and the boundaries of firms and industries become blurred by environmental instabilities (Günzel and Wilker 2012; Hills and Bartkus 2007).

IT is undoubtedly a true representative of such an empirical context. Advances in digital technologies have not only opened up new opportunities for the design of various business models (Zott and Amit 2015), but also created a kind of ‘high velocity environment’ in which successful business models need to be frequently developed to tackle new opportunities and deal with new technological and market challenges (Wirtz et al. 2010). As Wirtz et al. (2010) note: “one of the most influential environmental changes within the last two decades, the introduction and proliferation of the Internet provides an ideal setting for studying business model development” (p. 273). As a result, IT has been the primary context for studying different facets of business model development reflected in the studies of Wirtz et al. (2010), Spiegel et al. (in press), Palo and Tähtinen (2013), Ojala (in press), Andries et al. (2013) and Dmitriev et al. (2014) and Kranz et al. (in press). The clean-tech was the only high-technology sector outside the IT ecosystem which was studied by Jokela et al. (2014).

We are mindful of the fact case studies are context-specific and using a single context such as IT raises questions about the contextual limitations of the research specially with respect to complex entities such as business models’ ^[1]. However, prior studies (Amit and Zott 2001; Lubik and Garnsey 2015; Zott and Amit 2011, 2013) suggest that models induced from specific contexts can be used in other contexts as long as they are not specific to the technological aspects of the context. For instance, the typology of web 2.0 business models developed by Wirtz et al. (2010) could not be applicable to other contexts but the business model designs typology of e-commerce companies developed by Amit and Zott (2001) have been applied to other contexts including banking (Zott and Amit 2013). Considering this point, the next section explains the methodological approach used in this paper to develop a general model for the dynamic of business model development in high-tech ventures.

Choice of research method and methodological fit

Choice of methodology is informed by theory. Accordingly, adopted a case study approach as a qualitative exploratory research because when the theoretical field is nascent this approach is the most appropriate method of investigation (Edmondson and McManus 2007).

Selection of cases

A multiple case study technique follows a theoretical and purposeful sampling approach (Eisenhardt 1989; Eisenhardt and Graebner 2007). We focused on a specific context – the Australian cloud-computing innovation ecosystem – composed of young ventures whose business models are to commercialize opportunities emerged from the cloud-computing technology.

The Australian computer society’s 2013 report on the status of the Australia’s ICT industry reveals that the ICT is one of the fastest growing sector of the economy with a growth rate of 34 % between 2007 and 2013. In 2013, the year of at which data for this research were collected, the ICT sector employed over 600,000 people and was forecast to contribute over $100B to the economy. The cloud computing refers broadly to the provision of both software and hardware as a service (Marston et al. 2011). It is a fast-growing sector in the global and Australia is IT industry (Hayward 2010) in which businesses use cloud-based technologies to develop new business models (Berman et al. 2012) or transform traditional ones via phenomena such as cloud-based manufacturing (Xu 2012). The cloud-computing ecosystem has been argued to yield numerous opportunities for new business models because of its potential to revolutionize the use of IT as a service rather than a commodity (Berman et al. 2012). Hence, focusing on a specific context in line with the recognition that a contextual perspective offers a situated and deeper understanding of the management phenomena of interest (Özbilgin 2011) allows us to develop grounded theories that could have far-reaching theoretical implications across contexts (Özbilgin 2011).

Sample cases are chosen based on their richness and theoretical relevance (Eisenhardt and Graebner 2007). To judge richness, we examined each case and assessed the availability of information as well as the ease of access to the relevant complementary materials about the case. These materials include information about the history of the venture in the company’s website, managers’ willingness to share their stories, number of executives agreed to be interviewed and the record of archival data. Theoretical relevance, on the other hand, is about the relevance of the case to the theoretical questions in mind. A case that explicitly represents the theoretical phenomenon under investigation (i. e. development of a business model in a high-tech industry) (Eisenhardt 1989).

These two criteria are used to identify and record sample cases. Then cases are added to the study until the analysis reaches a theoretically saturated point where adding a new case does not generate new insights (Eisenhardt 1989). Having this logic in mind, in order to access sample firms, we used alumni networks of an esteemed business school to find executives who lead ventures in the cloud-computing ecosystem. Then, we asked executives to introduce us to their networks. After three months of networking, we obtained consent from 15 executives from five ventures. (A summary of the description of cases is given in Table 3). The analysis began with the first venture and we reached theoretical saturation when we added the 13th executive.

Data and Data Collection

Consistent with prior studies (Eisenhardt 1989; Eisenhardt and Graebner 2007) we used different types of data, including archival reports, minutes of meetings, interviews with executives and a small questionnaire. However, the main source of data was semi-structured interviews with CEOs, as they provided rich and in-depth explanations of the underlying aspect of the phenomenon of interest (Eisenhardt 1989).

An interview protocol was developed and pilot-tested (the interview protocol is available in Appendix A). Each interview took on average 30–45 minutes and was recorded and transcribed for further analysis. The critical incident technique (Ronan and Latham 1974) was used to encourage executives to explain the foundation of their venture, activities that they have undertaken and that have led them to successfully establish the venture and offer products and services to their target market. Using probes and prompts, we focused on salient activities surrounding the formation of business models informed by our review of the literature. After each interview, the executive was also asked to complete a short questionnaire about various aspects of their venturing activities and structure of resources (the questionnaire is available in Appendix B). Executives were also asked to supply other relevant materials, such as notes and minutes of meetings that reflect how they developed a business model for their venture.

Having different complementary types and sources of data not only enables the study to achieve high construct validity but also lays the foundation of grounded theory development (Eisenhardt 1989; Eisenhardt and Graebner 2007). Data for each case (venture) were recorded in a folder to enable within and between case analyses. To sort, sift through and analyse data we used Nvivo 10 software for qualitative analysis (Bazeley and Richards 2000). A summary of data collected during this phase is shown in Table 4.

Analytic Approach

When engaging in a multiple case study, the use of key concepts is important in developing a systematic approach to understanding the phenomenon of interest (Eisenhardt 1989). Therefore, we specified a number of key concepts including ‘business models,’ ‘opportunities,’ and ‘resources’ using definitions in the literature. For example, we defined the business model both as a mental representation of the business that encapsulates assumptions about customers, profit and cost and production, and as a structure of resources to enact opportunities. We also considered resources interchangeable with capabilities and competencies and defined them as any asset controlled or owned by the firm that is used by managers to develop and execute value-creating strategies (Barney 1991). In addition, opportunities were defined as any situation where new combinations of resources in the form of new ventures can yield profit (Shane and Venkataraman 2000). We also ascribed to the view that opportunities can be discovered by alert entrepreneurs or be created (Alvarez and Barney 2007).

Using the core concepts, we developed an initial codebook to initiate the process of coding data (Eisenhardt 1989, Yin 2013). The Weber protocol (Weber 1990) was employed to code qualitative data (Appendix C). This protocol is a set of eight steps widely used by qualitative researchers (Duriau, Reger and Pfarrer 2007) to formulate and administer the coding procedure and minimize the researcher’s bias in interpreting and analysing qualitative data (Duriau et al. 2007).

The protocol was applied to each case individually. This process resulted in both the modification of existing codes and inclusion of several new codes to the codebook. Then, all interviews were openly coded using the final codebook (Appendix D). Coded data were then grouped into higher-order themes using a selective or axial coding approach similar to the grounded theory approach (Glaser and Strauss 1967). Because “reliability problems usually grow out of the ambiguity of word meanings, category definitions, or other coding rules” (Weber 1990, 15), the Cohen’s Kappa coefficient as the measure of inter-coder agreement was used (Appendix E). Two independent coders checked the coded cases for both open and selective codes. The Kappa was 0.78, indicating substantial consistency and agreement on codes and the coding procedure (Stemler 2001). In addition to this test, some additional measures consistent with the guideline of Gibbert, Ruigrok, and Wicki (2008) were taken to ensure reliability and validity of the findings. Table 5 presents a summary of this guideline and techniques employed to ensure reliability and three forms of validity.

Then, we documented key emergent themes that represent meaningful, coherent and replicable concepts for capturing the totality of the phenomenon of interest (i. e. emergence of business models in new ventures). Using replication logic (Yin 2013), themes from one case were tested in other cases to reach within and between case validity. We excluded inconsistent patterns and themes to maximize commonalities and similarities between cases. This approach increases the analytic generalizability of the study and improves the validity of findings (Eisenhardt 1989; Eisenhardt and Graebner 2007).

Through a number of iterations, we extracted three major themes and developed a grounded view of the process of business model development in high-technology ventures. We finalized analysis when additional analysis did not generate new themes and all coders agreed upon a theoretically saturated phase (Yin 2013). This inductively developed integrated model shows dynamics of business model development in new ventures in parsimonious way that is consistent across all cases.

Following the suggestions of Wilson and Post (2013) Eisenhardt and Graebner (2007) we maintained an appropriate balance between telling a ‘rich story’ that met the primary objectives of the research and presenting a credible and well-grounded set of theoretical propositions supported by empirical evidence by offerings two sets of quotes. First, ‘power quotes’ offer main support for the finding. Second, ‘proof quotes’ show additional support to further substantiate the finding (Wilson and Post 2013).

Phase 1: Business Model Ideation

Entrepreneurs develop ideas for new business models from different sources that primarily relate to the marketing and technological side of the venture (Zott and Amit 2001; George and Bock 2011). Hence, they may conceptualize a new business model as a new combination of resources for a market problem, customer solution or market-cantered issue, such as a market inefficiency that can be addressed by a technological solution. We called this ‘the market-oriented business model ideation’ or MOI. For instance, the CEO of firm A stated that:

... We had developed a vigorous new business model based on a unique understanding of our clients’ needs within the context of our core technology...

The founder of firm B also supported the idea by stating the following:

... Our business model is basically based on the idea that there is a market waiting for a technology. With our eyes on the market, we developed the technology to serve the market. This is how we came up with our business model...

They may also consider the need for a new business model from a technological standpoint (Chesbrough et al. 2006). This is particularly important in the context of newly developed technologies that can be commercialized by new ventures (Chesbrough and Rosenbloom 2002). We can hence call this the ‘technology-oriented business model ideation’ or TOI. As the founder of firm C states:

.... I personally believe that, the competence to mix market intelligence and technological know-how is the key to develop a game-changing business....

Similarly, one of the founder of firm E mentioned that:

..... We started this venture when we sat together and thought.... Hey we have a technology... we know who needs it so why not make a business out of it... we had a pretty clear idea what we lacked was a business model that blends everything... here we are now, we found our missing piece...

It is explicit in the quotes that, to become an idea worthy of a new venture, the business model must integrate both technological and market aspects. The literature in the resource-based view (Song et al. 2005; Stieglitz and Heine 2007), suggests that market and technological strategic issues are complementary and the knowledge structure for a business model builds on this complementarity (Najmaei et al. 2014). Our finding shows that this complementarity is utilized in a set of ideas that offers various combinations of TOI and MOI possibilities. We labelled this theme the mixed-idea for business models (MI). Since venture creation involves an information processing and filtering phase through which different opportunities are assessed (Baron 2007), developing mixed-ideas represents a funnel within which various market- and technological-oriented ideas are fused to form alternative possibilities for business model development (Figure 1) in a phase called business model ideation (BMI). Therefore, we propose the following:

Figure 1:

Business model ideation.

Phase 2: Business Model Strategic Commitment

Our case analysis reveals that business model ideation is followed by strategic actions aimed at converting the idea into organizational processes and routines. This finding is consistent with the view of the business model as a set of interrelated routines that are constantly reinforced and improved through the process of ‘learning by doing’ (Winter and Szulanski 2001).

... having a great idea is just 10% of the business, 90% is the ability to face the fear, take the leap of faith and start doing it... (founder of firm D)

.. Many things that we get to do now we did not know when we started our business... we constantly learn... this is how we roll... (Funder of firm E)

Because a business model is a complex entity and its performance is unknown in advance (Winter and Szulanski 2001), entrepreneurs use experimentation, trial and a discovery-driven approach to find the best orchestration of resources to turn the business idea into an efficient set of organizational activities, given the resources at hand (McGrath 2010). We found that executives of young ventures engage in acquisition, selection, development and allocation of resources to different aspects of the business model. Since the idea has marketing and technological aspects, the strategic actions are predominantly concerned with the allocation of resources to the marketing and technological sides of the business (Najmaei 2014a; Teece 2010; Zott et al. 2011). Marketing resources are utilized to get the business to succeed in the marketplace, whereas technological resources are deployed to enable the business to perform its daily operational activities.

Starting a business is hard, but even harder is to find a way to fuse technology and marketing... having just a technology but no clue how to sell it and whom to sell it equals no business.... Put is simply, a good business model is like a puzzle with pieces that are our marketing and technology assets... (Founder of firm B)

.... In the beginning, I mean in the first few month, we just knew that we have a core technology and there is a market for our technology, nothing more, but as we started to work more on our client interface and around what they need, we started to understand how everything comes together, we are still learning but we know, now, what we are doing... we are getting better is piecing together our core technology with our commercial potentialities (founder of firm C).

We could not pinpoint how marketing and technological resources are deployed and interact. Furthermore, implicit in our data was the fact that social and human capital was also categorized into market-related and technological-related assets. That is, entrepreneurs conceptualize and assess the use of human and social capital in terms of their respective contributions to the marketing or technological capabilities that a venture needs to turn its business model idea into successful organizational processes and activities.

At the heart of this process is the strategic commitment of executives (Ghemawat 1991; Rapert, Lynch, and Suter 1996). All the interviewed executives showed a high level of strategic commitment and engagement.

Getting everyone on board, fully dedicated to the venture is crucial to success in this business; honestly we struggled at the beginning to achieve a level of overall commitment we needed to make it work, but now, everyone happy and doing his job. (Founder of firm A)

.... but I would say, every business is unique, every business is different, what is common is a team that work to gather and support and reinforce each other’s work, at least in IT this is how it works (founder of firm E).

We labelled this phase ‘the business model strategic commitment’ (BMSC) because entrepreneurs showed a tendency to persist in the uncertain and complex actions required to enact their business model idea. We further postulated that this commitment is enacted through a belief in the potential value of the business model idea and subsequent personal investment in terms of time, effort and psychological costs that entrepreneurs have made in singling out and shaping the idea. Through this commitment, entrepreneurs ensure that adequate attention is given to the business model idea and resources are allocated and deployed in a coherent fashion. Therefore, strategic actions in this phase are carried out through various combinations of managerial, marketing and technological resources. The mechanisms of these combinations are largely unknown because different entrepreneurs have different skills and deploy resources in different ways (Figure 2). The founder of firm D clearly supported this fact by stating that:

... A key aspect of our success is how we commit ourselves to the venture, despite its challenges we stick to our gut feelings and make sure that everyone involved is fully dedicated to the tasks at hand.

The founder of firm A also corroborated the notion when he said:

Getting a business model right takes time, patience and dedication; we have to commit our time, skills and talent to the process. It is like a journey to a new land where many things are not known, so commitment to the process is the key...

In light of these observations, we propose:

We further explored the dynamics of this commitment to see what role, if any, market and technological resources play in this process. Although resource allocation requires executives’ commitment but some (Penrose 1959; Augier and Teece 2009) have clearly argued that combinative skills of executives is an essentially entrepreneurial task without which organization of capabilities is impossible. This was clearly reflected in our study:

... every time we make an offer to a client or every time we sign a new contract we allocate different task to specially designed teams who know our business model and its capacity... so we make sure that technical solutions are tailored to our market needs... this is the best way to make a brand for a start-up in this business (founder of Firm C)

... well speaking of how to make a company like ours work... first thing I did was to get our head around who exactly I want to serve with my technology and how to it, I mean our clients, come on..! how can I say I have a ‘business model’ when I don’t know how my technology blends with my marketing model to benefits my clients? (founder of firm D)

The theoretical rationale for this curiosity is the fact that the success of any ventures, especially high-tech ones, has been argued to be contingent on the executives’ ability to combine market and technological resources (Burgers et al. 2008; Penrose 1959). Executives’ interaction with both marketing and technological knowledge generates opportunity sets and possibilities that differentiate ventures form each other (Burgers et al. 2008). Corroborating this notion, are the following quotes from several executives:

... Beside my technological degree I had to learn marketing skills to sell myself and my business to clients.... (Founder of firm E)

I soon realized that just having technological capabilities is not enough for me to get my business model going, I need marketing skills and more importantly branding skills to sell my business model to clients. So I started to learn heaps of marketing things... (Founder of firm B)

Informed by these observations, we propose that:

This finding is consistent with the theory of entrepreneurial effectuation (Sarasvathy 2001). That is, enterprising individuals start an entrepreneurial process, such as developing a business model, by relying heavily on their knowledge and experience (i. e. managerial resources). They “know what to do and do what they know” (Read and Sarasvathy 2005). Therefore, enactment of a business model involves utilization of three resources: managerial resources, marketing resources and technological resources (Figure 2).

Figure 2:

Three types of resources involved in enacting a business model.

When managerial skills interact with marketing and technological resources (Figure 2) an actual business models starts to form and become part of a market. Because managerial skills are mostly personal and unevenly distributed among entrepreneurs, business model development is a heterogeneous process (Augier and Teece 2009; Wirtz et al. 2015). We observed peculiarities among our sample entrepreneurs with respect to factors as wide as arrangement of meetings, office layouts, and politics of managing clients, dealing with financers, and sales and promotional ideas that had been reflected in their business model development approaches. We noticed that, despite these personal preferences and differences carving a unique position in the market is a distinctive phase on its own which transforms a business model into an ‘actualized’ or as Casadesus-Masanell and Ricart (2010) call a ‘realized’ strategic entity.

Phase 3: Business Model Actualization

The analysis suggested that strategic actions in the commitment phase would lead to the actualization of the business model when the venture develops two separate but interrelated capabilities. These are: 1) The capability to deliver the promised value as defined in its business model idea; and 2) the capability to appropriate the value by converting revenue into profit by managing costs as defined in the business model idea:

I know some companies that failed to secure solid funding or couldn’t meet the expectations of financers because they had no idea how to consolidate their revenue streams... what I am trying to say is that once your business model starts to bring some income you need to know how to stabilize it, work with your financial advisor, team or whatever to do it before somebody else offers a better and more robust solution. (founder of firm A)

My business motto which is the DNA of my business model is to develop solutions that are unique and protect them so they last as long as possible before I need to change them or abandon them. (Founder of firm C)

..... the industry is tough... there are many similar solutions so we have no choice but to develop a different one and commercialize it quickly... once your solution is out, it is exposed... the fate of your company depends on how you securely commercialize it... at least ours is.” (Founder of firm D)

We are gaining momentum because we know how to shield our model against competition... I reckon we can do it as long as it is not obsolete.!!!” (Founder of firm E)

The difference between this phase and the commitment phase is that this phase involves the orchestration of resources, as explained in the previous phase, into two specific types of capabilities. Therefore, it is more of a capability building rather than a resource-partitioning phase (Sirmon et al. 2007). A venture actualizes its initial business model and consequently succeeds in the marketplace only when these two capabilities are in place (Figure 3).

We found that although different ventures deliver value in different ways, nevertheless they consistently devise alternative ways for appropriating value. For example, one venture (firm A) in our sample has developed different financial plans for different clients, whereas another one (firm D) has adopted a very strict financial policy. This implies that business models vary in their value delivery and appropriation regimes and mechanisms but they all have these two capabilities in common when being actualized.

In other words, business model actualization (BMAC) is composed of two equally important capabilities: to deliver value, that is to create what customers want and make it accessible to them; and to capture value by appropriating it, that is to profit from the delivered value. All executives in our sample ventures stressed the importance of these two capabilities:

To run a business model it is important to have different systems in place. On the one hand we need to develop, monitor and manage our service delivery, and at the same time we need to make sure that our finances add up. Without linking finance to service delivery we cannot make ends meet, let alone stay in the business... (Founder of firm B)

... The most challenging and important thing we have learned to do is to translate our offerings into financial outcomes... I personally do know now how we did it first time, but now I exactly know how to develop a service for our client, price it, present it and make sure that we at least meet our primary profit goals... (Founder of firm D)

Therefore, we propose the following:

It is important to note that, without delivery, value cannot be appropriated, and without appropriation, future value cannot be delivered (Najmaei 2014b). This observation is in accordance with Zott et al.’s (2011) conceptualization that a business model is more than a value creating tool. It is a means by which firms create and capture value (Figure 3).

Figure 3:

Two underlying capabilities of business model actualization.

Synthesis: Modelling Dynamics of Business Model Development

By synthesizing three phases of the business model development phenomenon we arrive at a dynamic model, illustrated in figure 4, that explains the genesis or development of new business models in new ventures This discovery corresponds to the theoretical view of the punctuated equilibrium (George and Bock 2011, 88) according to which business model development occurs in parallel to the firm’s life-cycle evolution (Andries and Debackere 2007).

Figure 4:

A conceptual view of business model development in new ventures.

Robustness and Verification of the Model

To further validate the model and its empirical robustness a content-analytic approach was used (Najmaei et al. 2014). First, we counted the number of codes provided by executives of each venture in support of each proposition (Table 6). Then we plotted a polar diagram (Figure 5) to visualize the conurbation of executives of each venture relative to others in the development of the final model.

Figure 5:

A polar diagram of the contribution of each venture to the proposed model.

Table 5 and Figure 5 show that all executives from five ventures have made significant contributions to the model. This observation alleviates the concerns over biased induction and offers evidence in support of the fact that we have successfully guarded against artificial inflation by any single case by reporting findings that have received support from all sample firms. Furthermore, as was noted earlier, each proposition is supported by at least a power and a proof quote (Appendix F). These measures only partially reflect the robustness of findings. Verifying qualitative findings is another crucial step in establishing the robustness of a qualitative study. Verification refers to the mechanisms used in every step of the investigation to incrementally contribute to ensuring the robustness or soundness of a study by identifying and correcting errors before they subvert the analysis (Morse et al. 2002).

Because qualitative research is iterative rather than linear, it becomes self-correcting. That is, the congruency between data collection, analysis and research objectives is ensured when the researcher moves back and forth between the objectives in mind, namely the collection and interpretation of data (Morse et al. 2002).

Several verification strategies were executed in this process. First, we deliberately relinquished any idea or theme that was not sufficiently supported. Second, we ensured that participants were clear about the objective of the research. We used probes and prompts to extract sufficient data to ensure all aspects of the phenomenon have been obtained.

Thirdly, multiple coders assessed the data saturation point to make sure that five firms provide enough data for the model. This check was essential because it ensures replication in categories, and replication verifies comprehension and completeness (Morse et al. 2002). Finally, we deliberately moved between a micro perspective of the data and a macro conceptual/theoretical understanding to develop our process model (Eisenhardt 1989; Morse et al. 2002). In this way, our proposed model is both an outcome of the research process, rather than being adopted as a framework to move the analysis along, and a template for comparison across cases (Morse et al. 2002). As a result, we can place more confidence in our findings and discuss the implications of the study.

Theoretical Implications

Business model development is the subject of a vibrant stream of debate that so far has created more heat than light. This research contributes to this debate by shedding new light on the underlying processes that define how business models are developed. Two implications are particularly important. First, we address the recent calls for an improved understanding of the development of business models (Abdelgawad et al. 2013; Huarng 2013). In particular, it has been said that business modelling in ventures has important macro effects on industries and markets (Najmaei 2015), yet the existing entrepreneurship literature offers, at best, only limited conceptual explanations for the origins of these effects (Eckhardt 2013; George and Buck 2011).

Recent exploratory investigations of the dynamics of business models have focused either on business model transformation in large multinational companies, such as Nokia (Aspara et al. 2013), or on strategies for changing the business models of established firms (Achtenhagen et al. 2013), leaving a gap in our understanding of how entrepreneurs actually develop a business model in the first place in the early stages of their journey to markets.

In particular, we empirically showed that entrepreneurial knowledge, commitment and resource-centred actions lie at the heart of business model development. These findings shed new light on the individual–opportunity nexus view of business model development (Eckhardt 2013) and provide new avenues for developing a theory of business modelling (Arend 2013; Najmaei 2014a), as developing the right business model is the fundamental task of entrepreneurs; getting the business model right is critical to the success of a new business (Augier and Teece 2009). Therefore, the model suggests that a theory of business modelling in the context of small high-tech ventures could be seen as a meta-theory that spans theories of entrepreneurial action, cognition and resource-based views. This is perhaps the main departing point of this study from previous work and its unique contribution to the literature.

Secondly, we advance the dynamic capabilities literature by showing how the business model of a venture, as the structure of its resources and foundation of its dynamic capacities, comes into existence. Our findings show that the formation and actualization of a business model could be conceptualized as a higher-order managerial capability or a dynamic capability of entrepreneurs (Abdelgawad et al. 2013; Augier and Teece 2009; Teece 2007, 2010) that is composed of two first-order capabilities (i. e. value delivery and value appropriation capabilities). In light of these findings, we believe that this study represents a first step toward a more fine-grained empirically grounded account of how the capabilities of entrepreneurs are transferred into capabilities of a new venture through the development of a business model. This further substantiates the recognition that a business model is beyond just a simple representation or description of the business (Arend 2013; Najmaei 2014a), rather it is an embedded unobservable entity that links entrepreneurs to their ventures and ventures to the markets.

Managerial Implications

There are strong indications in this paper, as well as in others (Augier and Teece 2009; Wirtz et al. 2015; Jokela et al. 2014; Spiegel et al. in press), that business model development is a complicated risky task for which managers of high-tech ventures may not be fully equipped. However, as stated by Spiegel et al. (in press), the success of internet start-ups depends heavily on the founders’ ability to develop their business models. Our study, though, offers some implications that could help managers better understand the complexity surrounding and challenges associated with this task. These implications have general practical significance but they are specifically relevant in the context of small high-tech ventures specially those operating in Australia. ^[2] First, our findings suggested that business models combine market and technological resources. This implies that entrepreneurs should develop capacities to capture both market and technological trends and issues in their business landscape if they are to develop successful business models for their ventures. Secondly, we showed that strategic commitment is an important and perhaps essential factor in developing a business model for new ventures.

Commitment to the initial idea brings about a vital managerial competence required for creating the right business model for a unique position in the marketplace. Therefore, entrepreneurs who lack strategic commitment to their business model ideas are less likely to successfully implement their ideas and convert them into an actualized business model for their ventures. Thirdly, research on entrepreneurial financing and venture capitalists’ behaviour (Chesbrough and Rosenbloom 2002; Gerasymenko, Clercq and Sapienza 2010) shows that entrepreneurs who have a better perception of the phases of their business model development are more likely to secure access to necessary capital to grow their business. Finally, high-tech ventures are niche players (Lubik and Garnsey, 2015; Zott and Amit 2013). That is, they develop business models that offer solutions to a niche market in which they can become “indispensable to early adopters, remaining out of sight of predatory incumbents while improving their offering and building a sufficient resource base” (Lubik and Garnsey 2015).

Niche building requires careful business model development (Morris et al. 2005; George and Bock 2011). Even though market niches are associated with higher margins, it doesn’t means that appropriation of value is easier in niche than in mass markets (Zott and Amit 2007). In contrast, the profit potential of niche markets attracts many large and small players. Thus, success in value delivery and appropriation become a function of distinctive competencies and close relationships with clients embedded in well-developed business models (Spiegel, et al. in press; Zott and Amit 2007). Drawing on our findings, we advise managers of high-tech ventures to base their value delivering strategy on their distinctive competencies and base their appropriation strategy on close and mutually-reinforcing relationships with their clients. A business model is developed based on aligning these two would create a long-lasting niche position for the venture.

Contextual Implications

According to the global competitiveness report 2014–15 (World business forum 2015), Australia is an innovation-driven economy whose global competitiveness is driven by the competitiveness of its high-tech industries. ^[3] The IT sector and specially the cloud-computing sub-sector has a pivotal role to play in this context. Although the model developed in this study was intended to be as generally applicable across contexts as possible, it has two important implications for the Australia’s cloud-computing industry. First, cloud-computing is a disruptive technology (Kranz et al. in press) that is attracting a growing number of entrepreneurs who are actively and passionately engaged in developing business models that serve clients at both public and private sectors (DaSilva et al. 2013). Australia aims to become a regional hub for cloud providers (Lateral Economics 2011). Providing support for these entrepreneurs is a fundamental enabler of this movement. High-tech ventures are particularly vulnerable to large multinational players such as Google and Amazon which have invested heavily in the Australian market to tap into its growing market (Lateral Economics 2011). Although it was not directly addressed in this research but it was implicit in our findings that business model development is a multi-phase task which can go wrong and derail at each phase if not properly guarded against competition. Hence, continuous and systematic support are needed to enable an entrepreneur to generate an idea for, develop commitment and actualize his business model in the form of a new venture.

Secondly, in advanced economies like the UK and the US, government agencies are increasing their use of cloud-based systems which in turn expands the opportunity space for new ventures with novel business models (Lateral Economics 2011) and opens up new avenues for innovative ecosystems that promote entrepreneurship and enhance the business model development capacities of high-tech entrepreneurs (Berman et al. 2012). Although the Australian government spends approximately around $6b on IT services every year, its share of cloud-computing has been a miniscule fragment of their total IT investment at both state and federal levels (Department of finance 2014). An increase in the government’s investment in the cloud-based businesses has started since 2014 which, we expect, can boost the development of new business model in this sector not only by enhancing entrepreneurs’ capacity to look for new ideas, develop stronger commitments and test and experiment with various business models but also by helping them practice various appropriability mechanisms and delivery systems to tailor their business models for clients in both public and the private sectors.

Limitations and Directions for Future Research

Conclusions and inferences from this study must be used with caution, due to some limitations. First, as a qualitative investigation, the findings of this study are not generalizable to the population of small ventures, rather they offer initial context-specific, in-depth insights into a less-known phenomenon. Secondly, this study is limited in scope to small high-tech ventures in Australia. In particular, although the number of cases chosen and interviews conducted seemed sufficient when we reached a saturation point (Eisenhardt 1989), this point is subjective and our findings must be interpreted in light of this fact. Therefore, to increase the validity of our findings future studies can replicate this methodology using case studies of a larger number of ventures in other industrial sectors and countries.

Furthermore, as we discussed business model development is a complicated process that involves interactions among various resources. We identified knowledge and technological resources as key complementary resources in this context. However, a limitation of our study is that we did not embark on an explicit investigation of how these resources actually interact in various stages of business model development. We encourage researchers to address this limitation in future studies by probing into the interactions between market and technological resources particularly tacit and codified knowledge of the market and technological landscape in which a business model is developed to extend and enrich our procedural model. ^[4]

Finally, our model is parsimonious and does not incorporate environmental contingencies into the process of business model development. Therefore, it can be used as a basis for further theoretical development and theory-testing research. In particular, new empirical research is necessary to test various causal contexts in which BMID, BMSC and BMAC interact and influence the performance of ventures in different settings. However, we believe the findings from this study advance the understanding of the genesis of business model development in small ventures; this will enable scholars to design more fine-grained studies for exploring the uncharted aspects of the realm of business model generation, and their genesis and evolution in entrepreneurship as a scientific field.