Effects of organizational and individual dynamic capabilities on business model innovation and sme performance

Abstract

Technological developments, limited resource supply, and market volatility challenge especially small and medium business managements, particularly in developing countries. They're trying to upgrade how they work to stay competitive in local and global markets. They are continuously in search of new business models. Research on how dynamic capabilities affect business model innovation and firm performance yields mixed results. Teece introduced dynamic capabilities framework with three dimensions as sensing, seizing, and reconfiguration. However, it doesn't fully explain how these capabilities work and to whom they belong to at the firm. The current dissertation addresses these gaps through two studies. In the first one, the Dynamic Capabilities framework has been used to understand how business model innovation happens in both new and established entrepreneurial firms through semi-structured interviews with owner-managers actively involved in business model innovation decision-making. The study focused on individual and organizational layers of dynamic capabilities and gathered data in the science parks of Istanbul. Through content analysis of nine semi-structured interviews, several key insights emerge: (1) Entrepreneurs come ahead of all other stakeholders in undertaking the main responsibility of each dynamic capability sud-dimension. (2) Organizational layer capabilities come into action in case the organization's frontline people and technology people increase in count. (3) Entrepreneurial team's complementary capabilities are encountered in each sample case. Moreover, organizational layer capabilities manifest prominently when business model innovation activities necessitate broad-based involvement, such as customer engagement and technological experimentation. These mechanisms exhibit variances contingent upon firm size and structural arrangements. Furthermore, entrepreneurs assert control through established routines and organizational culture, particularly evident in smaller enterprises. As these firms evolve, they develop and institutionalize procedures to transform their dynamic capabilities into organizational ones, to sustain innovation. The 10 DC sub-dimensions suggested in this study are grouped under three dimensions of Teece's DC framework. Sensing skills and mechanism: (1) reaching to data, (2) filtering customer data, (3) decomposing and reframing, (4) idea generation and visualization of BM, (5) conceptual validation of visualized BM. Seizing skills and mechanisms: (6) physical validation of targeted BM, (7) decision making, (8) external integrative capabilities (co-creation of solution). Reconfiguring skills and mechanisms: (9) aligning organization to new BM, (10) aligning process to new BM. Those skills and mechanisms are clues for entrepreneurs to develop BMI. Practitioners are recommended to consider their primary responsibility for BMIs processes independent of the size of the firms, to build entrepreneurial teams with partners having the complementary skill set and concentrate on the employees' selection, as well as their adaptation to the firm routines. Additionally, the study complements Teece's Dynamic Capabilities framework on business model innovation extending it into fulfillment layer. The second empirical study investigated the effects of dynamic capabilities on the quality and financial aspects of firm performance in SMEs and the mediating role of BMI in these relations in a developing country context. The following four questions are addressed: • What are the nature and fulfillment layers of DCs employed in technology-based firms engaging in BMI? • How organizational DCs can be categorized according to organizational layers in terms of owner/managerial and employees' levels in SMEs? • Which DCs are more effective on SME performance in terms of quality and financial aspects? • What is the role of BMI in the DCs-performance relations? The sample of the study consists of SMEs involved in BMI processes, and participants were chosen as business owners and top-level managers due to their managerial power over business models and their understanding of the bigger picture in this field. The analysis is conducted on the SMART PLS analysis tool. Partial Least Squares Structural Equation Modeling (PLS-SEM) is compliant in examining small sample sizes, complex models with numerous constructs and indicators. It also offers an advantage in analyzing complex second-order latent constructs and examining reflective and formative structures in the same model. As the result of the study, business model innovation has emerged as a formative second-order construct having three sub-dimensions (value creation, value proposal and value capture). Constructs for owner-manager and employee layer dynamic capabilities also emerged as formative second-order constructs. Employee layer dynamic capabilities construct is also formed by three sub-dimensions such as employee layer sensing, seizing and reconfiguring capabilities. The construct of owner-manager layer dynamic capabilities, on the other hand, is formed by two sub-dimensions. Seizing and reconfiguring dimensions have been merged into one as the result of discriminant analysis. Those employee layer dynamic capabilities and owner-manager layer dynamic capabilities constructs supported their effect on performance factors in the mediation of business model innovation. Business model innovation has a high association with all performance types. Owners' dynamic capabilities have a positive association with financial performance, while their total effect is not significant on quality performance. Conversely, employees' dynamic capabilities show a positive association with quality performance, but their total effect is not significant on financial performance. The findings underscore the paramount significance of business model innovation in determining firm performance. It is revealed that owners and top managers possessing dynamic capabilities apply a positive influence on the financial performance of the firm, even in instances where they do not introduce new business models. Conversely, notwithstanding the presence of dynamic capabilities, they are unable to drive the firm's quality performance without either the engagement of BMI or the active involvement of employees. The dissertation opens a new horizon for future research extending the framework of Dynamic Capabilities to differentiate among organizational layers. As a result, the findings from both qualitative and quantitative studies conducted within the scope of the thesis underscore the significant importance of business model innovation in determining firm performance. It is revealed that firm owners and top-level managers with dynamic capabilities exert a positive influence on the financial performance of the firm even when new business models are not involved. However, it cannot be expected for them to improve the quality performance of the firm without innovating in their business models or active involvement of employees, even if they possess dynamic capabilities.