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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 9: 99–117 (2015)
Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1191

UNLOCKING THE HIDDEN VALUE OF CONCEPTS:

A COGNITIVE APPROACH TO BUSINESS
MODEL INNOVATION
LUIS L. MARTINS*, VIOLINA P. RINDOVA, and BRUCE E. GREENBAUM
McCombs School of Business, University of Texas at Austin, Austin, Texas,
U.S.A.

We advance a theory of how business models can be innovated proactively in the absence of
exogenous changes, through processes of generative cognition. We contribute to the cognitive
perspective in strategy by analyzing business models as schemas that organize managerial
understandings about the design of firms’ value-creating activities and exchanges and by
theorizing how they can be innovated through processes for proactive schema change.
Drawing on cognitive psychology research on two major cognitive processes through which
individuals change their schema to cope with novelty, analogical reasoning and conceptual
combination, we theorize firm-level strategic processes for designing innovative business
models. Copyright © 2015 Strategic Management Society.

INTRODUCTION entrepreneurship and strategy scholars have also

increasingly begun to study business models as an
Companies increasingly find the need to innovate not important unit of analysis that is distinct from the
only by developing new products and services, but firm, industry, or network (Zott, Amit, and Massa,
by creating or modifying business models. GE’s 2011). A business model is defined as the designed
2013 Global Innovation Barometer survey of more system of activities through which a firm creates and
than 3,000 senior executives in 25 countries finds captures value (Zott and Amit, 2010). In a recent
that a majority of the executives (52%) reported the comprehensive review of research on the topic, Zott
development of new business models as a strategic et al. (2011) concluded that while the construct is
priority for their firms. A recent report notes that of clearly established, we need to develop better under-
the 26 companies that have been founded since 1984 standing of how new business models are created
and entered the Fortune 500 list from 1997 to 2007, and how existing ones change. They identified the
a majority owed their success to business model need for a better understanding of business model
innovations that either transformed existing indus- innovation as an important direction for research in
tries or created new ones (Johnson, 2010). In line the area.
with their growing prominence among managers, The goal of this article is to respond to this call by
building on the cognitive perspective in strategy and
Keywords: business models; business model innovation; on research on generative cognition in psychology
schemas; generative cognition; analogical reasoning; concep- to articulate systematic processes through which
tual combination new business models can be ideated and designed.
*Correspondence to: Luis L. Martins, McCombs School of
Business, University of Texas at Austin, 2110 Speedway Stop
Our ideas represent an important departure from
B6300, Austin, TX 78712-1750, U.S.A. E-mail: luis.martins@ current research on business model innovation,
mccombs.utexas.edu which analyzes it as either a response to exogenous

Copyright © 2015 Strategic Management Society

100 L. L. Martins, V. P. Rindova, and B. E. Greenbaum

technological and regulatory shocks (e.g., Amit and learning perspectives. In particular, by articulating a
Zott, 2001; Teece, 2010) or as a result of trial-and- methodology for proactively generating business
error experimentation in response to changes in the model innovation, it addresses limitations in mana-
environment (e.g., Chesbrough, 2010; McGrath, gerial implications of current perspectives on busi-
2010). While these perspectives effectively explain ness model innovation. Our ideas also contribute to
how business models change to respond to environ- current efforts to provide a more dynamic, forward-
mental changes, they offer little insight into the pos- looking analysis within the cognitive perspective
sibilities for business model innovation in the on strategy (Ocasio, 2011; Porac and Tschang,
absence of such exogenous change. 2013).
Yet, as anecdotal evidence suggests, new business The article proceeds as follows: we first review the
models are often the source, and not the outcome, of literature on business models to examine the three
industry change. Southwest Airlines, Walmart, and current underlying theoretical perspectives on busi-
Starbucks are among the most salient examples of ness models and highlight their limitations in
such changes. Each of these companies has gener- explaining business model innovation in the absence
ated tremendous shareholder value by designing of exogenous change. Next, we briefly review psy-
new business models in the absence of a need to chology and strategy research on cognitive represen-
respond to either technological or regulatory tations (schemas), emphasizing their key
changes. Instead, the new business models that these characteristics and mechanisms through which they
firms—and other business model innovators— change. Then, we build on these ideas to theorize
designed created large-scale disruptive industry two strategic processes through which firms can
change (Markides, 2008). Therefore, understanding innovate their business models in the absence of
the mechanisms that enable business model innova- exogenous change. We illustrate our theoretical
tion in the absence of exogenous change is critical to ideas with examples of such business model innova-
understanding the possibilities for value creation tions. We conclude with a discussion of our
through business model innovation. contributions.
In this article, we take a step in this direction by
building on the conceptualization of business models
as reflections of managerial schemas and explicating
the cognitive logic and processes through which CURRENT PERSPECTIVES ON
schemas can be changed to ideate and design new BUSINESS MODELS AND BUSINESS
business models in the absence of exogenous MODEL INNOVATION
change. Our ideas are rooted in the cognitive per-
spective in strategy research (Barr, Stimpert, and Business model researchers increasingly converge
Huff, 1992; Gavetti, Levinthal, and Ocasio, 2007; on a definition of business models as systems of
Gavetti and Rivkin, 2007; Narayanan, Zane, and ‘interdependent organizational activities centered on
Kemmerer, 2011; Rajagopalan and Spreitzer, 1997) a focal firm’ (Zott and Amit, 2010: 217) that are
and research on generative cognition in psychology ‘made up of components, linkages between compo-
(Ward, 2004). We build on these ideas to theorize nents, and dynamics’ (Afuah and Tucci, 2001: 4).
how two cognitive processes that individuals use While researchers agree on the view of business
naturally to cope with novelty—analogical reason- models as systems of activities, they differ in their
ing (Gentner, 1983) and conceptual combination understanding of how firms develop such systems.
(Wisniewski, 1997a)—can be developed as firm- Reviewing the literature in the area, we identified
level strategic processes to ideate and design new three theoretical perspectives on business models
business models. with varying explanations for business model
Our theory extends current research on business change. Each of these perspectives is consistent with
model innovation by explaining how business a core theoretical school in strategy research—the
model innovation can occur in the absence of rational positioning school, the evolutionary learn-
exogenous change and how new business models ing school, and the cognitive school (see Gavetti and
can be ideated and designed more generally. It pres- Rivkin (2007) for further discussion of these schools
ents a perspective on business model innovation that in the context of strategy creation, and Rajagopalan
differs from, but complements, those presented by and Spreitzer (1997) in the context of strategic
the existing rational positioning and evolutionary change).
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
 A Cognitive Approach to Business Model Innovation 101

The rational positioning view latory change. For example, in a study of the impact
of changes in Finnish and European banking regula-
The rational positioning view treats business models tions on the Finnish banking industry, Bask et al.
as purposefully designed systems (Zott and Amit, (2012) found that the regulatory changes triggered
2010) that reflect rational managerial choices and an expansion of services from incumbent banks and
their operating implications (Shafer, Smith, and prompted new entrants, changing the business
Linder, 2005; Casadesus-Masanell and Ricart, models in the retail banking sector. The business
2010). As Casadesus-Masanell and Ricart (2010: models of the larger, incumbent Finnish banks con-
198) explain, business models represent ‘concrete verged on a ‘financial supermarket’ model, while
choices made by management about how the orga- new entrants from insurance, retail, and logistics ser-
nization must operate and the consequences of these vices provided banking services to their existing cus-
choices.’ Zott and Amit (2010: 218) further argue tomers. Thus, while the trigger of business model
that managers ‘shape and design both the organiza- innovation is different, the mechanisms of business
tional activities and the links (transactions) that model innovation in the face of regulatory change
weave activities into a system. Such purposeful are similar to those under conditions of technologi-
design—within and across firm boundaries—is the cal change. In both cases, business model change
essence of the business model.’ Further, to the degree represents a search for a new optimal design that
that the rational perspective sees strategists as repositions the firm in response to changing interde-
‘highly rational managers (who) survey an environ- pendencies caused by exogenous environmental
ment and deductively apply economic logic to their changes.
observations’ (Gavetti and Rivkin, 2007: 424), their
choices regarding the components and linkages in a
The evolutionary view
business model generate an optimal design for value
creation or capture within a given context. The evolutionary approach to understanding busi-
Viewed as optimized systems of activities, busi- ness models is based on a view that strategists
ness models are seen as changing as a result of engage in local search ‘in response to specific prob-
exogenous shocks that shift the objective interdepen- lems or opportunities;’ this view emphasizes the role
dencies among firms and, therefore, require managers of routines, the relative inertia of routines, and incre-
to make new design choices that optimize the busi- mental strategic change driven ‘more by trial than by
ness model to the new conditions (Amit and Zott, forethought’ (Gavetti and Rivkin, 2007: 424). While
2001; Teece, 2010). The logic of this perspective is recognizing that managerial cognition is a potential
captured by Teece’s (2010: 188) argument that ‘. . . source of an initial business model (Sosna,
when the underlying technology changes, and an Trevinyo-Rodriguez, and Velamuri, 2010), an evolu-
established logic for satisfying consumer needs . . . is tionary view of business models primarily focuses
overturned, the business model must change too.’ For on the role of experimentation in the generation and
example, the emergence of the Internet represented a change of business models (e.g., Chesbrough, 2010;
technology change that created new competitive con- McGrath, 2010). This is because, as McGrath (2010:
ditions, resulting in new business models composed 253) argues, ‘many of the constraints that will turn
of new activity systems seeking to capitalize on out to be competitively important aren’t known at the
e-business opportunities (e.g., Dubosson-Torbay, time that critical resource allocation decisions need
Osterwalder, and Pigneur, 2002; Timmers, 1998). to be made’ (and it takes) ‘marketplace experimen-
Similarly, incorporating advances in information and tation and time to discover the most effective
communication technologies into existing products models.’ Thus, the evolutionary view ‘sees business
necessitated changes in the firms’ business models model development as an initial experiment fol-
(Björkdahl, 2009). As these examples illustrate, lowed by constant fine-tuning based on trial-and-
research on business model innovation as adaptation error learning’ (Sosna et al., 2010: 384).
to technological changes focuses on how firms use The evolutionary learning view of business model
business models to respond to the changes in their innovation argues that change in business models
interdependencies with exchange partners as a result is generated by external uncertainty, requiring
of technological change. managers to engage in experimentation until they
Similar findings have been reported in examina- find a system of activities that allows them to
tions of business model change in response to regu- compete effectively within their external conditions
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
102 L. L. Martins, V. P. Rindova, and B. E. Greenbaum

(Chesbrough, 2010; McGrath, 2010; Sosna et al., The cognitive view

2010). This process is illustrated in Chesbrough and
Rosenbloom’s (2002) analysis of the evolution of the While the rational positioning and evolutionary
business model of 3Com, which was established to views dominate research on business models, several
commercialize the Ethernet networking protocol scholars have suggested that business models reflect
developed at Xerox’s Palo Alto Research Center managerial mental models, or schemas. For
(PARC). 3Com initially utilized the business model example, Doz and Kosonen (2010: 371) argue that
of a computer systems company focused on ‘business models stand as cognitive structures pro-
selling complete systems using a direct sales force. viding a theory of how to set boundaries to the firm,
Following the launch of the IBM PC, it experi- of how to create value, and how to organise its inter-
mented with and arrived at a new business model nal structure and governance.’ This conceptualiza-
based on selling add-in boards to the IBM- tion of business models is consistent with the
compatible PC market through retailers and cognitive perspective within strategy research that
resellers. Chesbrough (2010: 356) uses this and other focuses on managers’ mental representations,
examples of business model innovation through emphasizing that each decision maker develops a
experimentation to conclude that business model somewhat unique view of reality (e.g., Gavetti and
innovation may not be the result of any grand master Levinthal, 2000; Gavetti and Rivkin, 2007; Gavetti,
plan or ‘a matter of superior foresight ex ante— Levinthal, and Ocasio, 2007; Kaplan, 2011;
rather, it requires significant trial and error, and quite Narayanan et al., 2011; Porac and Thomas, 1994;
a bit of adaptation ex post.’ Rajagopalan and Spreitzer, 1997; Walsh, 1995).
Importantly, the evolutionary perspective pro- Further, some scholars have suggested that ‘the
poses that business model innovation occurs through owner-manager’s cognition and sensemaking pro-
a search for incremental modifications that improve vides the most important input into the initial busi-
performance and reduce the necessity for wholesale ness model design’ (Sosna et al., 2010: 387). George
system overhaul. For example, Holloway and and Bock (2011) have similarly argued that strate-
Sebastiao (2010) argue that firms establish the criti- gists can embody distinct strategic visions about the
cal interdependencies underlying their business opportunities for value creation and capture in their
models through ongoing market testing of various industries, in the business models they create. While
hypothesized business models. Such frequent these suggestions represent important steps toward
experimentation enables managers to adjust their developing a cognitive perspective on business
business models on an ongoing basis, often incre- models, they stop short of delineating its application
mentally, consequently insulating firms from poten- to understanding how business models change.
tially dangerous wholesale changes to their business In summary, current research on business model
models. Similarly, McGrath (2010) discusses a com- innovation emphasizes that business models are
prehensive process of incremental experimentation designed or evolved to be optimal for their competi-
for the development of an appropriate business tive conditions and change primarily in response to
model within an industry following technological exogenous shocks, such as changes in technology or
and regulatory change. She presents evidence that regulation (see Demil and Lecocq, 2010, for an
external developments, such as growth of the Inter- exception). The rational positioning school repre-
net or changes in health care regulations, lead to sents business model innovation as outcomes of
industry-wide experimentation and learning that rational redesign processes focused on creating a
guide incremental investment of resources into an new system of components and linkages that opti-
emerging business model and ongoing innovation in mize the business model to new interdependencies
business models. Additionally, research on service created by exogenous shocks. The evolutionary
business model innovation finds that while manufac- learning school draws attention to the incremental
turing firms have been adding service businesses in process of refining a business model to improve fit
response to decreasing margins due to competition with changing interdependencies caused by external
and product maturity, they face a significant learning developments. Thus, these current views give
curve—including adjustments to their management primacy to the external context as the driver of busi-
systems—in making their new service business ness model innovation.
models profitable (Visnjic Kastalli and Van Looy, Further, current perspectives espouse under-
2013; Suarez, Cusumano, and Kahl, 2013). lying assumptions that limit their applicability to
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
 A Cognitive Approach to Business Model Innovation 103

explaining how business models may change in the teristics, relationships and entailments under condi-
absence of exogenous changes. As Gavetti and tions of incomplete information’ (DiMaggio, 1997:
Rivkin (2007: 424) have argued, the positioning 269).
school portrays managers as highly rational decision Schemas represent accumulated knowledge and
makers who survey the environment to identify best provide frames for interpreting new information
positions and ‘has produced relatively little research (Fiske and Taylor, 1991). They encompass a broad
on how integrated sets of activities emerge,’ with range of representations, ranging from simple yet
Siggelkow (2002) being an exception. The evolu- abstract ones, such as food or competitor, to ones
tionary school exhibits general skepticism about that represent concrete activities, such as going to a
‘how much deliberate cognitive efforts affect behav- restaurant or negotiating with a channel partner, to
ior’ (Gavetti and Rivkin, 2007: 424), as it empha- ones that refer to complex social phenomena, such as
sizes local search and trail-and-error learning. gender stereotypes or industry categories. Schemas,
Finally, the cognitive school has been criticized as therefore, organize knowledge at different levels of
being overly focused on how managers are limited in abstraction and scope and may include concepts,
their cognitive processes by bounded rationality and models, scripts, or theories. Despite these differ-
other cognitive constraints—the so-called ‘small- ences, schemas have a relatively consistent basic
brained’ view of managers in cognitive strategy structure, consisting of: (1) attributes, which are
research (Hastie, 1991; Ocasio, 2011; Porac and called ‘slots’ and can take on various values called
Tschang, 2013). As a result, all three offer limited ‘fillers’ which themselves can be subschemas; and
insights into processes for ideating and designing (2) relations among them that organize or structure
new business models. the slots and the interactions among them (Gureckis
In this article, we focus on this gap by proposing and Goldstone, 2010; Wisniewski, 1997b). For
a theory of how structured cognitive processes can example, ‘a schema for elephant might include the
be utilized to innovate business models in the slots color and habitat and the typical fillers gray
absence of exogenous change. In the section that and zoo, respectively’ (Wisniewski, 1997b: 62).
follows, we discuss relevant research from the cog- Similarly, a schema for competitive strategy might
nitive school in strategy and from cognitive psychol- include slots for scope and advantage, and typical
ogy to: (1) highlight key characteristics of business fillers may be global and low cost, respectively.
models schemas; and (2) theorize processes through These characteristics of schemas are important for
which they can be changed strategically. understanding that schemas organize knowledge
through a combination of attributes and relations
among them and that they can be changed system-
A COGNITIVE APPROACH TO atically by reorganizing their structures.
BUSINESS MODEL INNOVATION

Key characteristics of schemas as

cognitive structures Schema change
Cognitive psychologists and managerial cognition The majority of research in both psychology and
scholars typically refer to mental representations as strategy has emphasized the inertial properties and
‘schemas’ defined as ‘cognitive structures that rep- effects of schemas. For example, Ocasio (2011)
resent knowledge about a concept or type of stimu- and Porac and Tschang (2013) have recently stressed
lus, including its attributes and the relations among that cognition research in strategy has been focused
attributes’ (Fiske and Taylor, 1991: 98). Schemas primarily on inertia and cognitive constraints. This
refer to both ‘people’s theories and concepts about focus of cognition research is not surprising, given
the world’ (Fiske and Taylor, 1991: 98, italics that one of the primary functions of schemas is to
added)—that is to knowledge about specific provide cognitive efficiency by simplifying and fil-
stimuli—as well as to the organization of knowledge tering out information. As a result, schemas tend to
in larger structures. Furthermore, although schemas be self-reinforcing, filling data gaps with typical
organize individual knowledge, much of their information, ignoring discrepant but possibly impor-
content is based on ‘culturally available schemata— tant information, and discouraging disconfirmation
knowledge structures that represent objects or events of their content and revision of their structures
and provide default assumptions about their charac- (Gioia, 1986).
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
104 L. L. Martins, V. P. Rindova, and B. E. Greenbaum

Recent research in both strategy and psychology, an integral part of human thinking, and it varies in
however, points to important sources of dynamism in levels of complexity, abstraction, and automaticity.
cognition, thereby providing a theoretical foundation Analogical reasoning differs from ‘literal similarity
for understanding how schemas can be changed statements, applications of abstractions, and other
proactively. First, recent research on attention high- kinds of comparisons’ in that in analogical reasoning
lights the simultaneous operation of multiple ‘(a) (r)elations between objects, rather than attributes
attentional processes that differentially affect the sta- of objects, are mapped from base (or source) to
bility and change in allocation of attention and its target; and (b) (t)he particular relations mapped are
consequences for schema use (Ocasio, 2011; Ocasio determined by systematicity, as defined by the exis-
and Joseph, 2008). In particular, the distinction tence of higher-order relations’ (Gentner, 1983: 155,
between selective attention—which ‘describes the italics in original). Thus, the generative potential of
process by which individuals focus information pro- analogical reasoning derives from its focus on
cessing on a specific set of sensory stimuli at a ‘structure-mapping’ in which there is a high degree
moment in time,’ and executive attention—which of mapping of relations (and a low degree of
‘involves allocating controlled (nonautomatic) cog- mapping of attributes) from the base concept to the
nitive resources . . . to information independent from target concept (see Gentner (1983) and Gentner and
incoming sensory data and to diverse or schema- Kurtz (2006) for a detailed discussion).
inconsistent stimuli . . . (Parasuraman, 2000)’ Conceptual combination is a cognitive process
(Ocasio, 2011: 1287)—is particularly important for through which a focal/target concept is combined
understanding how schemas change. Whereas selec- with a modifier/source concept in order to create a
tive attention is stabilized by and stabilizes existing new concept. It preserves core similarities with the
schemas, executive attention enables change in target concept, but it generates essentially a new
schemas through the controlled, nonautomatic allo- concept through the integration of attributes derived
cation of cognitive resources (Ocasio, 2011; Ocasio from the modifier/source concept (Wisniewski,
and Joseph, 2008). Such proactive cognitive search 1997a). The new concept results not only from the
facilitates the processes that reorganize existing incorporation of attributes of the modifier, but also
schemas as discussed next. from the emergence of new attributes that were not
Second, within the cognitive psychology litera- present in either constituent concept (Murphy,
ture, recent research on creative or generative cog- 1988). Conceptual combination is similar to analogi-
nition (i.e., research on how knowledge is cal reasoning in its use of a second (source) concept
reorganized rather than stored and used) suggests to reorganize the knowledge associated with the first
that schemas can be changed, and entirely new (target) concept by changing some of its attributes,
schema can be created through specific mental structure, or both. However, it is different from ana-
operations that enable individuals to reorganize their logical reasoning in the ways in which the source
existing knowledge and cope with novelty (Ward, concept is used. Analogical reasoning relies on the
2004; Ward, Smith, and Vaid, 1997). Two cognitive identification of similarities that can be profitably
processes involving controlled mental operations on leveraged to broaden the understanding associated
the structures of schemas have been identified: ana- with the target concept. Conceptual combination
logical reasoning and conceptual combination represents a search for a difference between two
(Ward, 2004; Ward et al., 1997). Both processes concepts that can be integrated into the target con-
occur naturally in situations in which individuals cept to alter its attributes, thereby creating a new
need to make sense of novelty and have been shown concept (Wisniewski, 1996, 1997a). Thus, the gen-
to span a broad spectrum of situations. erative potential of conceptual combination derives
Analogical reasoning refers to use of the knowl- from its facility in incorporating attributes or struc-
edge contained in the schema about one domain tures from a wide range of concepts to modify a
(termed ‘source’) to interpret information in another target concept, so that fundamentally new attributes,
domain (termed ‘target’) (Gentner, 1983). It involves unavailable in either preexisting concept, can
selecting an analog, mapping the attributes of the emerge.
analog to the target to make inferences, and adapting In our view, analogical reasoning and conceptual
the inferences to take into account the unique attri- combination have several characteristics that make
butes of the target (Holyoak and Thagard, 1995). them particularly useful mechanisms for business
According to psychologists, analogical reasoning is model innovation. First, they involve controlled
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
 A Cognitive Approach to Business Model Innovation 105

information processing and targeted mental opera- firm (Afuah and Tucci, 2001; Casadesus-Masanell
tions to reorganize the structure of existing schemas. and Ricart, 2010). Casadesus-Masanell and Ricart
Thus, although these processes occur naturally at the (2010: 197) further argue that the logic that creates
individual level, they involve systematic steps that coherence in business model schemas encompasses
can be implemented as strategic processes at the firm both ‘design elements (content, structure, and
level. Second, both processes involve leveraging of governance) that describe the activity system’s
preexisting knowledge. Their effectiveness in inno- architecture, and design themes (novelty, lock-in,
vation arises from the possibility of using this pre- complementarities, and efficiency) that describe its
existing knowledge from another domain to inform sources of value creation’ (as articulated by Zott and
the understanding of one’s current domain by Amit (2010)). This argument suggests that whereas
relying on familiar concepts and relations among managerial schemas for strategy are frames for deci-
them. At the organizational level, such preexisting sion choices, business model schemas are design
knowledge can provide managers with a reliable logics (Porac and Tschang, 2013) that guide how
structure with understood interrelationships that can managers structure relations among attributes, even
be used to explore new possibilities. In the next when they change specific attributes or links. As
section, we theorize how these naturally occurring design logics, business model schemas provide an
cognitive processes that help individuals make sense underlying logic for consideration and exploration of
of novelty can be developed as strategic firm-level new possibilities. Chesbrough (2010) argues that
processes for business model innovation by trans- such logic limits the range of possibilities a firm
forming managers’ business model schemas. To this would explore, and Winter and Szulanski (2001)
end, we first highlight some distinctive characteris- argue that even the pursuit of a successful replication
tics of business model schemas. strategy requires exploratory development of a new
business model schema.
Second, because of their highly structural nature,
Business model schemas
business model schemas are likely to be particularly
Business model schemas can be defined as cognitive inertial and cannot be easily modified through piece-
structures that consist of concepts and relations meal modifications and extensions as other schemas
among them that organize managerial understand- can be (Rindova and Petkova, 2007). This point is
ings about the design of activities and exchanges that underscored by Doz and Kosonen (2010: 371), who
reflect the critical interdependencies and value- argue that there is a reinforcing relationship between
creation relations in their firms’ exchange networks. business models as ‘actual’ relationships that are
This conceptualization is consistent with prior articulated in procedures or contracts and embedded
research emphasizing that business models are in (often) tacit action routines’ and as ‘their collective
designed systems of activities that reflect manage- cognitive representation,’ as a result of which ‘busi-
rial choices and their operational implications ness models tend also to be naturally stable and hard
(Casadesus-Masanell and Ricart, 2010; Shafer et al., to change. George and Bock (2011: 102) have further
2005; Zott and Amit, 2007, 2010). Viewing business argued that unlike a strategy, ‘a business model is
models as reflections of managerial schemas recasts inherently nonreflexive.’ These arguments suggest
the interdependencies that business models orga- that business model change may require executive
nize from an objective, environmental construct attention, as well as dedicated strategic processes, in
(Christensen and Rosenbloom, 1995; Thompson, the absence of an exogenous imperative.
1967) to a cognitive construct that has the potential
to create distinct conceptualizations and innovative
reconceptualizations of environmental situations. As Business model innovation through
schema change
a result, business model schemas can be understood
as vehicles for enactment of environments. In this section, we develop our theory of business
While the idea of business models as managerial model innovation based on schema change. We
schemas is just emerging in the literature, several theorize how two generative cognition processes—
distinctive characteristics of these schemas must be analogical reasoning and conceptual combination—
articulated. First, business model schemas are orga- can be used to ideate and design new business
nized by a specific logic of value creation that guides models. As noted earlier, at the individual level,
the structuring of activities and transactions of the these are natural cognitive processes that are
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
106 L. L. Martins, V. P. Rindova, and B. E. Greenbaum

triggered by the need to make sense of novel stimuli. of the challenges of business model change, Doz
We will articulate how they can be used as system- and Kosonen (2010: 371) similarly highlight the
atic innovation processes at the firm level to create need for ‘sharpness of perception,’ ‘intensity of
new business models. We use several examples to awareness,’ and attention to strategic development.
illustrate our ideas. For analogical reasoning, we use These are all qualities of what Ocasio (2011) terms
as examples Tesla Motors, a manufacturer of fully organizational attentional engagement and identifies
electric automobiles based in California, Aravind as a key process generating proactive change in stra-
Eye Care, a low-cost ophthalmic care provider based tegic cognition. Attentional engagement, therefore,
in India, and Better Place, a now-defunct ‘electric is an underlying enabler of the processes we
miles’ service provider based in California but oper- theorize.
ating largely out of Israel. For conceptual combina- Our theory focuses on how strategists can use
tion, we use as examples Starbucks Coffee concepts to generate new lenses in a manner that is
Company, a specialty coffee retailer based in Seattle, particularly relevant to innovating business models,
Washington, Cirque du Soleil, a producer of circus- due to their complex, systemic, and architectural
based artistic entertainment based in Montreal, characteristics. Put in the context of general innova-
Canada, and Best Buy, an electronics ‘big-box’ tion research, our theory pertains to the ‘idea gen-
retailer based in Richfield, Minnesota. eration’ phase (Hansen and Birkinshaw, 2007), as it
Our theory presents analogical reasoning and con- explains how strategists originate new designs of
ceptual combination as two strategic processes for potentially value-creating new business models. We
business model innovation that can be enacted in focus on this step, rather than the entirety of the
four-step sequences. The four steps in each process business model innovation process, because, as we
capture how an existing schema—the source con- show in our literature review of business models, this
cept—that is currently external to the firm, and often is the step in business model innovation that is least
external to its industry, can be used to reorganize the understood. Finally, whereas idea generation pro-
firm’s current business model schema or the existing cesses are important for all innovation, they are par-
dominant business model in an industry—the target ticularly critical for business model innovation
concept—to create a new business model schema for because business models are complex structural rep-
the firm. Although the content of the four steps differs resentations that are difficult to ideate from scratch
across the two processes, the two processes have a (Baden-Fuller and Morgan, 2010). Further, because
similar sequential structure consisting of: (1) identi- business model schemas are defined by their struc-
fication of a source concept to compare to the target ture and logic, generative cognition mechanisms that
business model schema; (2) comparison of the struc- enable structural recombination—as is the case of
ture of the source concept to the target business model analogical reasoning and conceptual combination—
schema to determine what elements (attributes, rela- are likely to be particularly useful in developing
tions, or subschema) of the source concept may create strategic processes for ideating new business
value in the context of the target; (3) integration of models.
elements from the source concept into the target
business model schema; and (4) modification of the
borrowed elements from the source concept to fit the Business model innovation through
analogical reasoning
context of the target business model.
The strategic processes that we theorize require The process of analogical reasoning, defined as the
executive attention and controlled information pro- application of structured knowledge from a familiar
cessing to search for target schemas, carefully domain to a novel domain, has received attention
investigate their attributes and potential fit, and both in psychological research on creative cognition
rework the existing schemas.1 In their discussion (Gentner, 1983; Gentner, Holyoak, and Kokinov,
2001) and in management research on entrepreneur-
1
ship (Cornelissen and Clarke, 2010), innovation
We note that there are other cognitive processes based on more
automatic (rather than controlled) information processing (e.g., (Rindova and Petkova, 2007), and strategy making
intuition, an epiphany, serendipity) that can result in the gen- under uncertainty (Gavetti, Levinthal, and Rivkin,
eration of new business models. We limit our focus to con- 2005). This is because analogies are powerful means
trolled information processing since the goal of our article is to
articulate processes that managers can deploy systematically as for framing unfamiliar experiences to enable action
part of their strategy making. (Gavetti et al., 2005; Hargadon and Douglas, 2001).
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
 A Cognitive Approach to Business Model Innovation 107

They do so by providing a basic relational structure noted that a wide variety of concepts can be used as
for framing and understanding stimuli that are too analogs. Evidence exists that new firms often use
novel and too complex to afford ready interpretation. industry types as analogs to inform the design of
What has received less attention is how analogical their business models. For example, early Internet
reasoning can be used to change the familiar, that is, search engines used ‘media’ as the industry type
as a source of innovation. We theorize how analogi- concept to guide the development of their portal
cal reasoning can be used to reexamine understand- business models (Gavetti and Rivkin, 2007; Rindova
ing within a familiar domain. We argue that within a and Kotha, 2001). As our examples illustrate, par-
familiar domain, even if direct interpretation is pos- ticularly effective analogs can be unearthed by
sible by application of an existing schema, use of examining contexts in which firms have addressed
executive attention can bring to the fore new con- problems or opportunities similar to those on which
cepts that can be assessed through analogical reason- the innovating firm is focusing . This requires con-
ing to reconceptualize the familiar and transfer a new trolled information processing and wide search in
relational structure that can guide the reorganization contexts that may appear distant from the industry
of existing interdependencies in new ways. context in which they are operating. Indeed, system-
To apply analogical reasoning to business model atically searching in nonobvious contexts for an
innovation, firms can follow the four-step process analog can help managers find analogs that can
described earlier. First, managers must select an produce powerful changes in the target business
analog as the source concept whose relational struc- model. For instance, illustrating the nonobviousness
ture could potentially be applied to reorganize the of McDonald’s as an analogy for cataract surgery,
target concept to address a particular strategic Dr. Larry Brilliant, a leading physician and former
problem or opportunity. For example, Tesla Motors director of Google’s philanthropic arm, commented
found a useful analog in Apple Computers, seeking that ‘Dr. V came to my office, and when he talked
to position its distinctive technology (electric about eliminating blindness, you got the feeling that
motors) favorably relative to the dominant design this man was either a saint or a complete nut. He kept
technology (internal combustion engines) in the auto talking about McDonald’s and hamburgers, and
industry. Tesla Motors founder Elon Musk (and the none of it made any sense to us’ (Mehta and Shenoy,
designer of the Tesla S) has been reported to refer to 2011: 133).
the Model S as ‘his ‘Macintosh’ ’ (Kunzler, 2013: 1). Second, managers must compare the relational
Similarly, with a goal of providing cheap, ubiquitous structure of the analog concept to that of the target
cataract surgery to the poor in India, the founder of concept (generally referred to within the literature on
Aravind Eye Care, Dr. Govindappa Venkataswamy analogical reasoning as ‘mapping’ of relational
(‘Dr. V’) found a ready analog in McDonald’s. As structures) to determine what elements of the analog
Mehta and Shenoy (2011: 16) observed, ‘Dr. concept could be used to create value in the context
Venkataswamy saw in McDonald’s the power of of the target concept. For example, in mapping how
standardization, product recognition, accessibility, Apple overcame the disadvantage of competing in its
and scale. ‘Just as fast food is affordable to many industry using a nondominant design technology,
lower-middle-class families in the West, in develop- Tesla Motors founder Elon Musk recognized the
ing countries we can organize to provide affordable need to compete on high-end design. In discussing
cataract operations,’ he declared in an interview in his strategy, he ‘notes that the vehicle has some very
the late 1980s.’ Similarly, Shai Agassi, the founder of Apple-like design characteristic—every detail has
Better Place, analogized from the cellular phone been given the sort of extraordinary attention that
industry to sell ‘electric miles’ whereby a purchaser you rarely see in vehicle design (or design in
of an electric car contracts with the company for a general)—and all this to make the Tesla Model S as
certain amount of electric charge that is provided distinctive as possible’ (Kunzler, 2013: 1). Similarly,
through a ubiquitous network of charging and mapping the mechanisms that McDonald’s uses to
battery exchange stations. He has stated that ‘It’s a deliver its product across a wide range of geogra-
subscription system much like cellular providers phies enabled Dr. V to identify the system of activi-
have,’ in which ‘you sign up for a certain number of ties that enable the standardization, product
miles a month’ (Squatriglia, 2007: 1). consistency, and cheap production that he needed in
In understanding this step of business model inno- his own business model to make cataract surgery
vation through analogical reasoning, it should be cheap and ubiquitous. As he noted, ‘My goal is to
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
108 L. L. Martins, V. P. Rindova, and B. E. Greenbaum

spread the Aravind model to every nook and corner volume and lower prices with each successive
of India, Asia, and Africa . . . Can’t we do what model’ (Tesla Motors, 2006: 2). Similarly, Aravind
McDonald’s and Burger King have done?’ (Rangan Eye Care borrowed from the McDonald’s business
1993: 2). model the design of standardized processes,
The success of this step in the process of business throughput metrics, and a wide network of outlets.
model innovation through analogical reasoning Observers confirm the fidelity of the transfer. As
depends on the appropriate identification of relevant Rosenberg, (2013: 1) a blogger for The New York
similarities to inform modifications to the target Times noted, ‘it is run like a McDonald’s, with
(Holyoak and Thagard, 1995). In developing new assembly-line efficiency, strict quality norms, brand
business models through analogical reasoning, man- recognition, standardization, consistency, ruthless
agers must distinguish between attribute and rela- cost control and above all, volume’. Also, the
tional similarity (Gentner and Kurtz, 2006). founder of Better Place highlighted the integration of
Attribute similarity is direct similarity and is rela- the cellular phone service provider analogy as
tively easily recognizable and enables ready recog- follows: ‘(i)n the same way that wireless operators
nition of potentially useful applications (e.g., deploy a network of cell towers to provide an area of
pharmacies providing the convenience of drive- mobile phone coverage, Project Better Place will
through service much like fast food restaurants). establish a network of charging spots and battery
Whereas such attribute similarity will enable man- exchange stations to provide ubiquitous access to
agers to identify obvious elements of a source electricity to power electric vehicles’ (Paz, 2007:
concept for borrowing into the target business 17).
model, the true power of analogical reasoning The success of this step of the development of a
derives from similarity in relational structure, i.e., new business model using analogical reasoning
the extent to which the analog and the target share an depends on managers’ ability to implement the
underlying structure of the interrelationships among design logic of the analog business model in the
attributes. Analysis of the similarity of relational redesign of the target business model. The effective-
structures enables more systematic application of the ness with which managers execute this step depends
analog (due to the so-called ‘systematicity bias’) on developing substantive understanding of the
(Gentner and Kurtz, 2006: 610), which should aid in architecture of the analog’s activity systems as well
the discovery of new activity systems (which are as of the strategic problems to be solved in the
interrelationships of attributes) that can be borrowed context of the target business model. For example,
to inform the activity system of the target business ‘Dr. V spent a few days at McDonalds’ Hamburger
model schema. University in Oak Brook, Ill., but that visit was a
Third, based on the comparison of the relational product of his longstanding obsession with effi-
structures of the source concept and target business ciency’ (rather than an interest in McDonalds prod-
model schema, managers must determine what ele- ucts) (Rosenberg, 2013: 2). In a different approach
ments of the analog will be incorporated into the aimed at similar ends, Tesla hired former Apple
target concept. For example, based on its decision to executive George Blankenship to shape its retail
compete on high-end design, Tesla incorporates operations.
several aspects of Apple’s activity system. Like Fourth, managers must determine how the ele-
Apple, it unveils new models in lavish ‘reveals’ at ments borrowed from the analog need to be modified
invitation-only events at company headquarters in order to fit the context of the target concept. For
rather than in large auto shows. In terms of their example, whereas the sales process of Tesla Motors
retail operations, an industry observer noted that, strongly resembles that of Apple products, unlike the
‘it’s trying the Apple model of placing its own stores latter, the delivery of the product occurs much later.
in high-end malls and shopping centers instead of The modification is necessitated by the fact that
relying on dealer franchises. Salespeople, who don’t stocking cars in high-end malls and shopping centers
receive commissions, help buyers configure their is economically impractical. Similarly, given that the
cars on giant touchscreens’ (Vance, 2013: 51). Also key focus of efficiency in the case of Aravind Eye
borrowing from Apple, the pricing strategy of Tesla Care is maximizing the utilization of an eye surgeon’s
‘is to enter at the high end of the market, where time rather than maximizing the utilization of equip-
customers are prepared to pay a premium, and then ment and low-skilled employees as in the case of
drive down market as fast as possible to higher unit McDonald’s, they have modified the ‘assembly-line’
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
 A Cognitive Approach to Business Model Innovation 109

process such that ‘(p)atients are prepared before an analog concept and the appropriate transfer of
surgery and bandaged afterwards by Aravind-trained attributes and relationships from the analog to
nurses. The operating room has two tables. The inform the activity system of the target business
doctor performs a surgery—perhaps 5 minutes—on model to address the innovating firm’s strategic
Table 1, sterilizes her hands and turns to Table 2. goals in a manner appropriate to its strategic context.
Meanwhile, a new patient is prepped on Table 1’
(Rosenberg, 2013: 2). In the case of Better Place, the Business model innovation through
conceptual combination
key difference between its analog of cellular phone
minutes and its target of electric miles is that while the Like analogical reasoning, conceptual combination
former are delivered with no effort on the part of the involves comparisons between two concepts.
consumer, the latter required drivers to change their However, unlike analogical reasoning, its use rests
batteries at swap stations, which Better Place on differences, rather than similarities, between a
installed at numerous locations (Squatriglia, 2007). source and a target concept (Wisniewski, 1997a,
Just as important as the integration of the relevant 1997b). Thus, it has different generative potential
aspects of the analog is the critical examination of from the generative potential of analogical reason-
which of its aspects do not transfer directly to the ing. Whereas analogical reasoning has attracted
context of the target. For example, while the activity growing attention in management research
system of McDonald’s provides guidelines for effi- (Cornelissen and Clarke, 2010; Gavetti et al., 2005),
ciently producing a standard product, it needed to be the cognitive process of conceptual combination has
modified to fit with the eye surgery context of not been incorporated in strategic analysis. Yet, the
Aravind Eye Care in order to be applied successfully. process is considered central to understanding the
Failing to take into account critical differences generative and creative aspects of human thinking
between the context of the analog and that of the (Ward et al., 1997) and the ideation of new products
target can lead to imperfect application of analogical (Ward, 2004).
reasoning. For example, one reason given for the To apply conceptual combination to business
demise of Better Place is that the effort involved in model innovation, firms can also follow a four-step
swapping batteries frequently (around every 100 process. First, managers must select a modifier
miles) was unpalatable to buyers of electric cars, concept, which is a concept that can provide ele-
especially those using them for long drives ments to be combined into the target concept. For
(Rogowsky, 2013). Thus, while the analogy to cel- example, Starbucks, which defines its stores as
lular phone service providers was informative for the ‘coffee bars,’ selected a bar as the modifier concept
development of a network of charging systems, akin to compare to the well-established business model of
to cellular phone towers, by Better Place, it was a café in the process of developing an innovative
ineffective for the business model as whole, as the variant of a café (Schultz and Yang, 1999). Similarly,
comparison of cell phone minutes to electrical miles Guy Laliberte, the founder of Cirque du Soleil used
does not account for the structural difference in elements from the concept for a theater production to
delivery of the consumable. While cell phone towers modify aspects of the circus in the process of creat-
push minutes to the phone, requiring no effort from ing the new genre of ‘contemporary circus.’ As he
the user, obtaining electrical miles requires consum- noted in an interview at Google’s Zeitgeist Europe
ers to make frequent stops at battery-swapping conference in 2011, ‘We didn’t reinvent the circus. I
stations. think we just reshaped it . . . We took it and we
To summarize, while analogical reasoning is an worked creatively, very specifically with what the
integral part of human thinking, in its natural use, it people of the theater were doing.’ Starbucks and
is driven by selective attention and the need to make Cirque du Soleil developed innovative business
sense of novel stimuli. Here we have proposed a models through purposeful selection of modifier
systematic process rooted in attentional engagement, concepts. In contrast, Best Buy’s use of the concept
whereby analogical reasoning can be applied as a of ‘fire sale’ as a modifier for its business model as a
purposeful, strategic firm-level process for generat- chain of high-end stereo stores (then called Sound of
ing business model innovation. We emphasize that a Music) was triggered by chance—the heavy damage
defining characteristic of analogy-based business of its flagship store in Roseville, Minnesota, by a
model innovation is the correct identification of tornado. According to media reports, founder
similarities between an existing business model and Richard Schulze set up a big tent and trailer in a
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
110 L. L. Martins, V. P. Rindova, and B. E. Greenbaum

fairground near the store and ‘filled both with retailer), and interaction with customers (remember-
damaged products and other excess stock, trundled ing names of regulars in the case of a bar versus
in cash registers and portable toilets, and advertised knowledgeable but somewhat impersonal transac-
a Tornado Sale, promising ‘best buys’ on everything’ tions in a coffee retailer). They used these in making
(Gruley and McCracken, 2012: 73). Based on the changes to their existing business model as a spe-
success of the sale, Schulze and future CEO Brad cialty coffee retailer. In the case of Cirque du Soleil,
Anderson ‘wondered if they could recreate the managers identified differences between the theater
carnival-like atmosphere every day in a real store,’ and a circus along the slots for production theme (a
setting in motion the process of creating the big box coherent theme in the case of the theater versus a
format of what is now Best Buy (Gruley and collection of unrelated acts in the case of a circus)
McCracken, 2012: 73). and viewing environment (refined viewing environ-
A few aspects of this first step of business model ment of the theater versus the aisle concessions and
innovation through conceptual combination must be in-seat beverage and food sales at a circus). For Best
noted. The discovery of a modifier concept can be Buy, comparing a fire sale to a high-end retailer of
intentional, as in the case of Starbucks and Cirque du sound systems helped managers identify differences
Soleil, or accidental, as in the case of Best Buy. in the slots for pricing (discounted pricing in a fire
Regardless of how it occurs, the strategists have to sale versus high-end pricing for a specialty retailer of
recognize its potential utility to inform the current sound systems), stocking (wide range of products at
business model. For example, in the case of a fire sale versus a narrow range in a specialty store),
Starbucks, the conceptual combination of coffee and selling space (large space in the case of a fire
retailer and a bar was not understood, even by its sale versus a much smaller space for a specialty
original founders who rejected Howard Schultz’s sound systems store) (Gruley and McCracken,
idea, refusing to enter ‘the restaurant business’ 2012).
(Koehn, 2004). Furthermore, managers may select Whereas there is no general process for identify-
multiple modifier concepts to address different ing relevant differences to be selected for integration
aspects of their business model. Thus, while or general understandings of how they are integrated,
Starbucks used the bar as the modifier of the concept research suggests that individuals tend to select attri-
of a coffee retailer to create the core of its business butes that are highly prototypical for a given concept
model, it also used the concept of gallery to inform and that prototypical attributes are selected because
the store design aspect of its business model (Schultz their presence reliably identifies the entity as associ-
and Yang, 1999). Thus, unlike analogical reasoning, ated with the concept (Wisniewski, 1997a). Such
which provides whole activity systems that could be attributes facilitate the transfer of meanings from the
borrowed into the target business model and may not modifier into the new concept created through con-
work effectively if too many of their elements are ceptual combination. The key to the effective execu-
modified, conceptual combination allows for flexible tion of this step in the process of business model
combinations of elements borrowed from multiple innovation through conceptual combination is accu-
modifiers. racy in discerning the differences between the modi-
Second, managers must compare the modifier fier concept and the target concept. Such an analysis
concept to the target business model schema to iden- requires a systematic exploration of the modifier
tify differences that can be used as the bases for concept. For example, after their tornado sale,
creating a new variant of the target business model. Richard Schulze and Brad Anderson of Best Buy
Recall that a slot is a dimension or aspect of the systematically explored the distinctive characteris-
business model schema, and a filler is its typical tics of such a sale (e.g., they explored various
value (Wisniewski, 1997b). The differences between formats for large selling space) and compared them
the modifier and target concepts can be identified by to the existing business model they used as retailers
comparing fillers in slots that are similar across the of high-end sound systems (Gruley and McCracken,
two concepts. For example, in comparing a bar to a 2012). It may also require a fresh look at the target
coffee retailer, Starbucks identified differences in the business model to question the existing fillers in
slots for server (bartender in the case of a bar and specific slots. For example, Howard Schultz
cashier in the case of a coffee retailer), drinks describes how he began to question the prior busi-
(customizable mixed drinks in the case of a bar and ness model of Starbucks when he visited Italy and
standard coffee options in the case of a coffee observed their cafés. He notes that ‘The Italians
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
 A Cognitive Approach to Business Model Innovation 111

understood the personal relationship that people efficient and focused generative process than the
could have to coffee, its social aspect. I couldn’t system-level comparison process required for the
believe that Starbucks was in the coffee business, yet use of analogical reasoning. For example, in filling
was overlooking so central an element of it’ (Schultz the slot for ambiance, Starbucks incorporated values
and Yang, 1999: 52). Thus, through a process of from the schema for an office to attract professionals
studying the modifier and questioning the target and to stimulate prolonged use by business people;
business model, managers can discover important from the schema for a gallery to ‘aestheticize’ the
differences between the two that can serve as the coffee and the coffee drinking experience; and from
basis for integrating new fillers from the modifier the schema for a specialty retail store to diversify its
into the slots of the target business model schema. merchandise into a wide range of coffee-making and
Third, once the elements from the modifier drinking accessories (Koehn, 2004; Schultz and
concept that could inform the target business model Yang, 1999).
schema have been identified, managers must inte- Fourth, managers must adapt the new filler(s) in
grate the selected values (fillers) of the modifier the slots of their target business model schema to suit
concept in the place of the corresponding existing the characteristics of the target business model and
fillers in slots of the target business model its context. They also must attend to and capitalize
schema—a process that is termed ‘slot filling’ on the new attributes that emerge from the combina-
(Wisniewski, 1997b). For example, from the concept tion that are distinct from those of either of the
of a bar, Starbucks incorporated into their existing concepts being combined. For example, while
business model of a purveyor of coffee beans, fillers Starbucks has incorporated the bar into the coffee
such as a bartender (called a ‘barista’), who develops retailer concept, there are no bar stools and custom-
a personal relationship with customers (especially ers do not chat with the barista while they are con-
with regular ones), and a customizable menu of suming coffee. Instead, the sociality of the bar is
mixed drinks (Gulati, Huffman, and Neilson, 2002; transferred to the entire space, converting a specialty
Schultz and Yang, 1999). Similarly, from the concept coffee retailer into a social gathering place (which
of the theater, Cirque du Soleil integrated into the they explicitly refer to as ‘a third place’ between
existing business model of a circus fillers such as a home and work). Cirque du Soleil also modified the
production theme, high-quality music, and theatri- fillers it derived from the theater to create replicable
cality in the performance of acrobatics which is shows that can be performed by multiple groups of
achieved by training acrobats and ex-athletes in the- artists in multiple locations. Thus, rather than head-
atrical skills. Thus, ‘(u)nlike most circus acts which lining its performers as is done in theatrical produc-
are a collection of unrelated variety acts, Cirque’s tions, Cirque hides its artists behind masks.
shows have a narrative and plot set to rock or world However, while the masks and costumes hide the
music with the emphasis on athletic and acrobatic identity of the individual performer, they make the
skills under the artistic direction of people whose role strikingly beautiful, creating a new visual expe-
background is in the theatre’ (Morgan, 2007: 3). Best rience that does not exist in either the circus or
Buy replaced the fillers within its prior business theater.
model of a specialty sound systems store with fillers The generative potential of conceptual combina-
derived from a fire sale and, in the process, founder tion focuses on the creation of new concepts that are
Richard Schulze created a superstore that was ‘at variants of existing ones. As such, it is particularly
least triple the size of any store he had and vowed to effective for creating new dimensions of value in
stock it not merely with stereos and TVs but also existing business models. However, the adaptation of
VCRs, dishwashers, camcorders, computers—just new fillers derived from a modifier concept and used
about anything that plugged into a wall—and sell it to replace prior ones in the target business model
all at the lowest prices anywhere’ (Gruley and schema must be guided by an understanding of cus-
McCracken, 2012: 73). tomer needs and a thorough examination of the strat-
Because conceptual combination operates through egy of the firm. In that sense, this step in the business
‘slot filling,’ it presents strategists with an option to model innovation process through conceptual com-
focus on a specific dimension (slot) of an existing bination is similar to that for business model inno-
business model schema and search for possible vation through analogical reasoning. However,
modifiers from which values (fillers) can be inte- unlike in the case of analogical reasoning, which is
grated into the slot. This approach enables a more focused on borrowing system-level structures into
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
112 L. L. Martins, V. P. Rindova, and B. E. Greenbaum

the target business model schema, conceptual com- firm-level strategic processes for designing innova-
bination can be based on incorporating one or more tive new business models. For each process, we
potentially unrelated elements from the modifier articulate a four-step methodology specifying how
concept. As such, it allows for more creativity in managers can enact these processes effectively to
changing products or customer experiences and cre- ideate and design new business models in the
ating new market categories. Furthermore, it gener- absence of exogenous change.
ates new dimensions of value based on emergent The novel theoretical ideas about business model
attributes that cannot be derived directly and cannot innovation we develop respond to the call by Zott
be predicted, but can be noticed and cultivated as the and colleagues (2011) for further theory develop-
conceptual combination is enacted in a new business ment on the mechanisms through which business
model. model innovation takes place. Specifically, the cog-
To summarize, while individuals can readily nitive processes we propose direct research on busi-
engage in conceptual combination to generate new ness model innovation toward a greater focus on the
ideas, the process has not been examined in detail role managers play in the design of activity systems
for its generative potential within the strategy litera- as reflections not only of rational calculation of inter-
ture. Here we propose a four-step process through dependencies, but also of interpretive visions. A
which the human capacity of conceptual combina- comparison of the three perspectives on business
tion can be deployed strategically through executive model innovation is summarized in Table 1.
processing to generate new business models. We
emphasize that a defining characteristic of business
model innovation through conceptual combination Contributions to research
is the strategic identification of differences between Our ideas contribute to two main areas of research
a modifier concept and the existing business model in strategy and entrepreneurship: (1) research on
schema. These differences can be used to alter business models and business model innovation; and
dimensions of existing business model schema by (2) cognitive research in strategy. First, although our
incorporating fillers from the modifier concept and focus was on explaining conceptual innovation as a
adapting them to the context of the target business distinct, stand-alone business model innovation
model, thereby creating novel value-enhancing process, the ideas we articulated can inform business
variants. model innovation more generally. Second, structured
cognitive processes of schema change are distinct
causal mechanisms underlying business model inno-
DISCUSSION vation and strategic change. Our theory suggests that
rather than viewing cognitive processes simply as
Prior research has viewed business models as mediating processes in the search for a rational
optimal activity systems that managers design to design, they can form a part of the strategic toolkit
address their firms’ interdependencies with strategic that affects the dynamism and uniqueness of a firm’s
partners (Zott and Amit, 2010) and has emphasized strategy. We elaborate on each of these contributions
their inertia in the absence of exogenous change. We below.
contribute to theory on business model innovation by
theorizing how business models can be proactively
innovated in the absence of exogenous changes Contribution to research on business models and
business model innovation
through processes of generative cognition. In
keeping with recent developments within the cogni- The cognitive methodology we advance fills an
tive perspective on strategy that have argued for a important gap in the literature on business model
movement away from a focus on managerial cogni- innovation with regard to our understanding of how
tion as constraints, we suggest how managers can new business models are developed in the absence of
proactively engage in systematic processes of exogenous change. As noted in our introduction,
schema change to innovate new business models. examples of such innovations abound. However,
Drawing on cognitive psychology research on two they are often attributed to ‘entrepreneurial insight,’
major cognitive processes through which individuals which is often assumed to arise from luck or ‘epipha-
change their schema to cope with novelty (analogical nies.’ In contrast, our article identifies a set of struc-
reasoning and conceptual combination), we theorize tured processes firms can use to systematically
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
 Table 1. Perspectives on business model innovation: rational positioning, evolutionary learning, and cognitive approaches

School of Definition of business Sources of change Ideation Design Business model innovation outcome
strategy models

Rational Optimal design of Exogenous shocks Optimization based on Redesign to reflect Repositioning for optimal fit with a
positioning activity systems to change rational economic analysis of changed given context and strategy

Copyright © 2015 Strategic Management Society

manage key interdependencies analysis of exchange interdependencies
interdependencies relationships
Evolutionary Optimal design of Uncertainty due to Unspecified Trial-and-error learning Evolving design adaptive to small
learning activity systems to exogenous changes entrepreneurial to reduce uncertainty changes
manage key cognition and insight
interdependencies producing an initial
hypothesis
Cognitive Cognitive structure Processes for schema Use of concepts to Modification and A reconfigured business model
organizing managerial change transfer knowledge to integration of incorporating a structure of
understanding of - Analogical reasoning reorganize or modify transferred knowledge activities and relationships that
interdependencies - Conceptual existing business to existing business have been shown to have
combination model schema model schema value-creating effects in a different
- Analogy-based context deemed to bear structural
knowledge transfer similarity with the one in which the
- Combination-based innovated business model is
knowledge introduced
reorganization A variant of an existing model that
incorporates substantively novel
features that reinforce
value-creating themes in the
innovated business model
A Cognitive Approach to Business Model Innovation
113

DOI: 10.1002/sej
Strat. Entrepreneurship J., 9: 99–117 (2015)
114 L. L. Martins, V. P. Rindova, and B. E. Greenbaum

ideate and design new business models in the for evolutionary learning in response to regulatory
absence of exogenous change. changes in the case example they examined arose in
The processes we articulate provide a general the cognition of the owner-manager. It could also be
framework for ideating new business models, which argued that Better Place might have avoided going
is a task that both existing and new firms face under if it had used experimentation or rational posi-
when they seek to commercialize new technologies tioning processes to fine-tune or position its business
(Chesbrough, 2010), to respond to competitive model to fit its context appropriately.
threats, or to pursue growth opportunities (Winter The conceptual innovation processes we specify
and Szulanski, 2001). Since established firms start can also be used as mechanisms for overcoming
with their existing business models, they are likely to three causes of cognitive inertia that pose challenges
encounter cognitive inertia that is difficult to over- to business model innovation identified by prior
come in the absence of exogenous changes (Doz and research: (1) complexity (Baden-Fuller and
Kosonen, 2010; Sosna et al., 2010). The strategic Morgan, 2010; Ward, 2004); (2) the need for integ-
processes we outline can help them overcome this rity across design elements and design themes
challenge, provided that these firms’ strategists use (Casadesus-Masanell and Ricart, 2010) resulting
attentional engagement to effect a cognitive search from the systemic structure of business models; and
for conceptual resources. Both Best Buy and (3) the draw of familiarity and the inertial nature of
Starbucks were existing firms with established busi- business models (Chesbrough and Rosenbloom,
ness models, but attended to the possibility of rein- 2002). Scholars have pointed to these sources of
venting their business models through conceptual cognitive inertia as obstacles to business model inno-
combination. New firms have greater latitude to vation even in the presence of external technological
apply the strategic processes of analogical reasoning change (Chesbrough, 2010). Researchers have
and conceptual combination in designing their busi- observed that business model schemas are complex
ness models. However, their challenge is selecting structural representations of the underlying activity
the right analogies or modifier concepts to inform systems and, as such, are difficult to ideate from
their target business models in the face of a host of scratch due to the challenges of working out at once
uncertainties about their offerings and market all the attributes and interrelationships comprising a
demand. There is evidence that new firms are often complex system (Baden-Fuller and Morgan, 2010;
prodded by advisors and investors to employ certain McGrath, 2010). The strategic processes we propose
analogies, and their challenge is to recognize how can help overcome this challenge since analogs and
the structural characteristics of these analogies modifiers themselves are structured representations
impose a structure on their strategy. For example, the that capture interdependencies among attributes that
media analogy adopted by the early search engines can be used to inform a target business model.
led them to fundamentally transform their strategies Analogs and modifiers are structured by design ele-
and to limit their investment in search technologies ments and design themes, thereby facilitating an
(Rindova and Kotha, 2001). Our theory highlights assessment of both their value-creating effects in
for both existing and new firms that the choice of their current context and their compatibility with
concepts for potential analogizing or conceptual those of the target business model. As a result, the
combination is a strategic choice and that their appli- strategic processes we propose provide managers
cation to a particular firm involves a strategic with better opportunities to consider the design ele-
process. These ideas suggest that skillful use of these ments and themes of a new business model than they
choices and processes can be an important source of would have if they were to develop it de novo.
performance differences among firms. Researchers have also identified the tendency of
The controlled cognitive processes we draw atten- managers to seek familiarity in business models
tion to can also serve as a starting point for analyses (Chesbrough and Rosenbloom, 2002) and the chal-
and development of business models based on ratio- lenges they face when confronted with unfamiliar
nal planning and evolutionary learning. For example, concepts (Ward et al., 1997). Since analogical rea-
a new business model derived through analogical soning and conceptual combination essentially are
reasoning may then serve as the baseline model for based on comparing a familiar source concept to a
evolutionary learning through experimentation. For familiar target concept, these mechanisms may be
example, Sosna and colleagues (2010) note that the more readily utilized by managers to generate new
baseline business model that was the starting point business models.
Copyright © 2015 Strategic Management Society Strat. Entrepreneurship J., 9: 99–117 (2015)
DOI: 10.1002/sej
 A Cognitive Approach to Business Model Innovation 115

Contribution to cognitive strategy research generate business model innovation and uncover
novel sources of value creation.
Our theoretical ideas build on the growing body of
strategy research that focuses on the importance of
managerial cognitions and representations for under-
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DOI: 10.1002/sej