Teece and Linden Journal of Organization Design (2017) 6:8

DOI 10.1186/s41469-017-0018-x

TRANSLATIONAL Open Access

Business models, value capture, and the

digital enterprise
David J. Teece* and Greg Linden

* Correspondence:
[email protected] Abstract
Institute for Business Innovation,
University of California, Berkeley, Firms across all industries are embracing internet-based digitization strategies to
F402 Haas School of Business, expand or improve their business. In many cases, though, internet-based businesses
#1930, Berkeley, CA 94720-1930, pursue customer growth ahead of profits. The path to profitability, which is a core
USA
element of a business model, should not be an afterthought. A well-designed business
model balances the provision of value to customers with the capture of value by the
provider. The elements of a business model and the dynamic capabilities that help
design, implement, and refine a model for an organization and its business ecosystem
are reviewed. The article then translates these concepts with respect to key organizational
design decisions such as that of licensing versus practicing an innovation, insourcing
versus outsourcing, and building a business ecosystem.
Keywords: Business model, Dynamic capabilities, Platform, Business ecosystem, Boundaries
of the firm, Value capture

Introduction
As more and more elements of the physical world become sources of digital data, soft-
ware is able to analyze, control, and interact with devices, equipment, and people. This
has brought economy-wide changes from the disintermediation of traditional media to
the introduction of 3D printing in factories. Inside companies, digitization has contrib-
uted to new business processes, new business models, and even new managerial
models (Birkinshaw and Ansari 2015).
When a new idea is launched, either as a new enterprise or inside an established
company, it needs to be supported by a value capture strategy if it is to have a chance
of being more than a passing fad.1 While this is self-evident for firms with lots of
costly tangible (i.e., physical) assets, it is less obvious for creative firms, including pio-
neering born-digital companies, which, once the software has been built, often have
low or zero marginal costs associated with providing a service. Such companies can be
tempted to follow the path of the handful of successful web-based firms that built a
large following by giving away a product before deciding how best to leverage their
success. The reality, though, is that far more digital companies have made an initial
splash only to fail in finding a way to monetize their user base.
Existing companies making physical products that launch a new digital platform,
such as an automobile manufacturer providing in-vehicle mobile transactions, present
an intermediate case. The company may already have income-statement discipline, but
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Teece and Linden Journal of Organization Design (2017) 6:8 Page 2 of 14

it may be tempted to subsidize the new business for an indefinite period in order to en-
able learning about digital markets and/or to block competing services from encroach-
ing on its space.
Concern about how to capture value from internet-based activities is almost as old as
the World Wide Web (e.g., Ghosh 1998). The original Napster, launched in 1999, was
an early example, pioneering peer-to-peer file sharing with huge uptake but no
expressed value capture model. The challenges quickly became apparent, including the
danger of being late in a winner-take-all market niche and the difficulty of differentiat-
ing a product in a digital marketplace where potential customers can easily make
detailed feature and price comparisons.
Ultimately, any privately offered digital service must pay its own way, directly or in-
directly, by capturing a share of the value it creates if it is to be a sustainable business.
Competition has become more global, technology more widely dispersed, and business
ties more complex, requiring managers to think systemically about how they will
accomplish this. The question addressed in this article is “how can companies, espe-
cially in the digital realm, gain confidence that they are on a path to profitability when
they launch a business?”
While there is never any guarantee that a new business will be, or will remain, profit-
able, certain steps entrepreneurs can take in the early stages of creating a business will
improve its chances. An essential step is taking the time to think through a business
model.
A good business model explains how and why customers, suppliers, and complemen-
tors interact with the company through the digital interface. As circumstances change,
it provides guidance as to the ways the value architecture can be altered and a systemic
framework for maintaining overall coherence.
This paper begins by briefly examining the way competition has become more vola-
tile and fast-paced in the digital era. It then introduces the business model concept as a
system-level framework for navigating the next-generation competitive landscape by
connecting innovation to value capture, including how an organization’s dynamic
capabilities are used for business model design and implementation. The subsequent
section focuses directly on some of the organizational design aspects of the business
model, particularly whether an innovation should be exploited purely through licensing,
how to draw the boundaries of the firm, and how to use a platform to leverage a busi-
ness ecosystem. A final section summarizes the key points.

Next-generation competition
The pace of technological and business innovation seems to have accelerated in recent
decades, with the result that sustainably profitable business models are harder than
ever to craft. The Internet in particular enables the creation of new types of businesses
and allows them to achieve global reach almost instantly. Traditional definitions of “an
industry” are becoming outdated as digitization and networking drive convergence
across numerous formerly separate realms of activity including banking, IT, advertising,
social media, print, broadcasting, timekeeping, mapping, and insurance.
Many established companies are experimenting with the new possibilities in much
the same way as start-ups. General Motors, for instance, is experimenting with a new
model of car ownership that, for a monthly fee, allows customers to switch in and out
Teece and Linden Journal of Organization Design (2017) 6:8 Page 3 of 14

of different types of Cadillac up to 18 times a year rather than own a single car (Colias
2017). Other firms, like Blockbuster Video, proved unable to respond innovatively and
have vanished.
The nature of competition today is so different from the primarily scale-based com-
petition of the previous century that it deserves to be called next-generation competi-
tion (Teece 2012a). Next-generation competition is changing the way businesses
compete, collaborate, and operate. In particular, the acceleration of competition places
a premium on rapidly implementing (and continuously updating) novel business
models.
The salient characteristics of next-generation competition include:

 Dynamic competition
In standard formulations, such as Michael Porter’s “Five Forces” (Porter 1980),
competition is determined primarily by the structure of input and end-user mar-
kets. Innovation is absent from the model, and structural change is rare. Today, in-
cumbent firms struggle to gain durable advantage (D’Aveni et al. 2010). Disruptive
innovation from start-ups and entry by firms from once-separate industries brings
new competitive pressure that undermines existing business models. In 2009, RIM,
the developer of BlackBerry mobile devices, was the second-most profitable com-
pany in the cell phone business. Following the successful entry of Apple, a com-
puter company, and Google, an internet search company, into the mobile phone
business, it remains an open question whether RIM can even survive. It is now
primarily a software company, having sold its BlackBerry handset brand to a new
entrant from China, TCL, in 2016.

 A semi-globalized world
While the world remains in many ways at best semi-globalized (Ghemawat 2003), it
is nonetheless a much more complex landscape today than even 20 years ago. For the
latter half of the twentieth century, competitors to US firms were based in the USA,
Europe, or Japan. Now globally competitive firms have emerged from Taiwan, South
Korea, China, and other countries. A corollary of this is that the potential sources of
innovation are also more dispersed. Firms need to optimize their costs globally and, if
they decide to compete overseas, must learn what adaptations of their initial business
model are needed in each new market.

 Multi-invention contexts
Textbook treatments of innovation often assume that products depend on one, or a
few, patented inventions, trade secrets, and trademarks. It has, however, been true for
years that products of any complexity—either because of the number of parts or the
number of functions—may read on hundreds, if not thousands, of patents, as well as
numerous trade secrets. The smartphone is a contemporary example of this “multi-in-
vention context” involving a mind-numbing range of patents for displays, processing,
networking, design, and much more (Somaya et al. 2011). In the digital and e-
commerce realm, an ever-expanding number of patents for software and business
methods provide countless potential stumbling blocks for new ideas (Bessen 2012).
Teece and Linden Journal of Organization Design (2017) 6:8 Page 4 of 14

 Business ecosystems
Competition is no longer so much firm against firm as it is ecosystem against ecosys-
tem (Moore 1993). A business ecosystem contains a number of firms that work to-
gether (and also compete) to create and sustain new markets and new products. The
co-evolution of the system is typically reliant on the technological leadership of one or
two firms that provide a platform around which other ecosystem members, providing
inputs and complementary goods, align their investments and strategies. The value cap-
ture component of a business model must find an acceptable balance between profits
for the focal firm and the profitability of the firm’s ecosystem partners.

 Organizational capabilities
With next-generation competition, businesses need to think differently about their
sources of advantage. A critical weakness in accounting and other financial perspectives is
their limited ability to recognize the competitive significance of intangible assets, despite
the fact that such assets are increasingly the essence of the contemporary business enter-
prise (Teece 2015). The most recognized of these assets is a firm’s intellectual property,
such as patents and trade secrets. But there are other, and arguably more important, types
of intangibles. In the management literature, a key idea of the 1990s was that a company’s
strength lay in its “core competences,” the technologies and know-how that underlie and
bring coherence to the company’s businesses (Prahalad and Hamel 1990). Since then, at-
tention has increasingly turned to higher-level competences called “dynamic capabilities”
(Teece et al. 1997). These enable a company to coordinate its various tangible and intan-
gible resources to accomplish tasks such as new product development and business model
design. Dynamic capabilities also contribute to the alignment of production plans with
customer needs (and willingness to pay) by activities that can be summarized as “sensing,
seizing, and transforming” (Teece 2007, 2014). These capabilities are embedded in both
organizational routines and managerial cognition.
To summarize, firms today must navigate a more complex innovation environment,
build and maintain a richer set of alliances, and counter a wider range of competitors
from both expected and unexpected quarters than ever before. It is vital for managers
to understand and augment the full range of their organization’s capabilities if they are
to design and implement innovative business models that track the evolution of
technology and consumer demand.

Business models
Business models, one of the most vital tools for articulating the “architectural” design
of a business so as to manage the complexity of next-generation competition, merit a
closer look. In this section, we consider their definition, design, and implementation.

a. Definition
There are multiple definitions of the business model concept in use, and several com-
parisons have been published (e.g., Birkinshaw and Ansari 2015). The definition used
here is that a business model “articulates the logic … that demonstrates how a business
creates and delivers value to customers [and] outlines the architecture of revenues,
costs, and profits associated with … delivering that value” (Teece 2010, p. 173).
Teece and Linden Journal of Organization Design (2017) 6:8 Page 5 of 14

Without the right balance between the creation, delivery, and capture of value, the
model will not be in operation very long, at least not by a for-profit enterprise.
A business model has many moving parts, all of which must work together congru-
ently. The model as a whole must also be aligned with the organization’s strategy, cul-
ture, and resources. These relationships cannot be optimized just through data
analytics. Good business model design depends as much on art and intuition as it does
on science and analysis.
A compact but fairly comprehensive list of business model components is provided
by Schön (2012). His schema is similar to that of Osterwalder and Pigneur (2010) but
further compiled into three main categories. Slightly adapted, the list is as follows:
Value proposition: product and service, customer needs, geography
Revenue model: pricing logic, channels, customer interaction
Cost model: core assets and capabilities, core activities, partner network
Extensions are possible. For example, some business model definitions incorporate
strategy (e.g., Chesbrough and Rosenbloom 2002). While strategic analysis, such as
which customer segments to target in which order, is inevitably tied to business model
design, it as an analytically separate and more detailed exercise (Teece 2010).
With a digital setting in mind, El Sawy and Pereira (2013) included the design of a
service platform and customer interface as part of business model design. This intro-
duced questions such as whether the digital platform would be based on open or pro-
prietary standards, and how easily the interface could be customized by users. These
sorts of product design detail choices, part of the model's value proposition, will not be
pursued further in the present article.

b. Business model design

The process of designing a particular business model is typically engaged by sensing
the existence of customers with an unmet (or poorly met) need who are willing and
able to pay for a potential product or service. A successful business model will provide
a customer solution that can support a price high enough to cover all costs and yield
profit that is at least sufficient to support the business and its growth.
Sensing takes place at all levels of the organization, with lower levels helping to pro-
vide information and insights about external developments to middle and top man-
agers. A manager looking to profit in a particular technology area needs “generative
sensing” through which various hypotheses about the underlying state of consumer de-
mand are tested until a set of options can be validated (Dong et al. 2016).
Most “new” (to a given firm) business models will be similar to older ones, involving
a permutation or hybridization of existing models. A typical example would be a firm
that excels in a particular area of operations, e.g., running a restaurant chain, and then
leverages its expertise into a services business such as supply chain consulting. While
there are a finite number of business model types, the opportunities for recombinations
are virtually endless.
A firm’s seizing capabilities come into play for the crafting of a revenue mechanism
and the planning of the organization’s value chain, including the designation of which
activities will be internalized and which will be left to outside suppliers. An important
early decision is whether to test a business model on a segment of the potential user
base before the new product or service is introduced more widely. This can help prove
Teece and Linden Journal of Organization Design (2017) 6:8 Page 6 of 14

the concept behind the business model and allow an opportunity to make adjustments
before large-scale commitments are made. However, it can also allow potential rivals
valuable information and time to better position themselves to compete.
Tested or not, business models are seldom successful “out of the box” and must be
fine-tuned—and sometimes completely overhauled—before they enable the business to
become a profit engine. Start-ups generally find transformation easier than do mature
firms because they have fewer established assets and procedures to reengineer. The
“lean start-up” model that has spread well beyond Silicon Valley includes the capacity
to “pivot,” i.e., to quickly test, discard, and replace ideas and business models that do
not work (Ries 2011). This is especially relevant for software-intensive Internet-based
business models (where pivoting is relatively easy because much software can be repur-
posed) and in circumstances where social media can provide fast feedback.
Business models can last for years or even decades, but they all have finite life spans.
When changes are sensed in technology, consumer demand, or the competitive land-
scape, business model revision is needed. This is best undertaken before the need for
change becomes obvious. Proactive sensing of the need for change is a dynamic cap-
ability that must be cultivated and built into the organization’s structure. Scanning and
interpretive processes can be embedded throughout the organization, with open com-
munication channels leading back to upper management so that information flows to
where it is needed (Teece 2012b).
Sensing must consider more than just technology; it entails awareness of large market
trends and numerous other factors. A famous example is Kodak, which invented a
mass-market film-based camera in the early 1900s and refined its designs incrementally
over decades as it made most of its money from selling photographic film. Although a
Kodak engineer demonstrated a digital camera prototype in 1975, the company’s film
business was so profitable that it only slowly explored the digital camera opportunity,
failing to recognize the technology’s disruptive potential. It continued to invest in R&D,
with results that included the first megapixel image sensor. However, Kodak’s manage-
ment had no sense of urgency, perhaps fearing cannibalization. In consequence, digital
camera technologies were commercialized most effectively by other companies. Digital
cameras came to market in the 1990s and thereafter followed the same “smaller, better,
cheaper” trajectory as personal computers. Kodak responded in the 2000s to the faster-
than-expected decline of its film business with entries in the digital camera and color
printer markets, but it struggled to distinguish its products and finally declared bank-
ruptcy in 2012. Although other leading camera firms also came under extreme pressure
at that time, had Kodak’s management moved more quickly, it arguably would have
bought itself valuable time to explore other options.
In some cases, an existing business model can be rejuvenated by altering only some
of its elements. For example, Rolls-Royce changed its revenue model in the 1960s to
"power-by-the-hour", or "jet engines as a service" (Rolls-Royce 2012). The customer, in-
stead of paying the high fixed cost of the engine up front, pays only for the hours when
the engine is operational. Rolls-Royce has strong incentives to keep the customer’s en-
gines in good working order, as opposed to the old system in which its incentive was
purely to sell engines. Furthermore, an hourly contract enables Rolls-Royce to dampen
rivalry from third-party service providers, helping it capture the lucrative service rela-
tionship that has always been more profitable than selling the engines themselves.
Teece and Linden Journal of Organization Design (2017) 6:8 Page 7 of 14

Of prime import is how the elements of a business model create (or destroy) differen-
tiation from competitors in the market. Although many business models, such as
power-by-the-hour, can be copied by rivals, in practice it may take many years for this
to occur. Rivals may calibrate their opportunities differently, and they may lack the
organizational adaptability to switch business models. In other words, they may have
weaker dynamic capabilities.
Pioneering a new business model is particularly important when the market has net-
work effects and “installed base” characteristics such that the more users who are en-
gaged, the greater the value associated with the platform (Katz and Shapiro 1994). In
such cases, winner-take-all, or winner-take-most, competition is more likely (Teece
2013). This helps to explain why early Internet companies like Amazon that survived
initial industry shakeouts have developed formidable leadership positions.

c. Business model implementation

In an existing company, the introduction of a new business model can prove challen-
ging because of a cultural mismatch, the ability of existing businesses to influence bud-
gets, or other reasons that start-ups do not face. This is particularly true when adding a
next-generation business into a company that has been competing in more traditional
ways. One solution is to set the new business apart, with its own premises and possibly
even a different incentive system. This can work provided there is high-level support
for the new venture. The capability of an established firm to experiment with new busi-
nesses while not undermining its existing revenue sources has been called ambidexter-
ity (O’Reilly and Tushman 2004).
When a new business model is implemented in a start-up or within an established
firm, the organization’s transforming capabilities come into play to configure, or recon-
figure, the necessary resources and maintain organizational coherence. Radical business
model transitions that change numerous elements of an existing model at the same
time are unlikely to succeed without major financial resources and a steady commit-
ment. For example, most taxicab companies are not attempting to replicate the ride-
sharing capabilities of Uber or Lyft because those models are based primarily on soft-
ware and data skills unavailable at low-tech cab companies. However, staying within
their existing business model, taxis have improved quality as shown by a reduction in
complaints in the New York City and Chicago areas (Wallsten 2015). Although a cap-
ability such as data analytics can be acquired, integrating an unrelated capability into
an existing organization is challenging at best, disastrous at worst.
Business model implementation, like transformation more generally, involves closing
capability gaps between the firm’s current activities and those required to enact the
new business model (Teece forthcoming). The gap closure can be accomplished
through internal or external means, with the decision depending on a number of vari-
ables, including the strategic relevance of the capability, the time that would be re-
quired to “build” it, and the availability of the capability from third parties.
The gap identification process begins by examining the match between a proposed
business model and the firm’s existing capabilities. An analysis of existing capabilities
needs an objective point of view that is detailed and realistic. Organizational instincts
tend to compel the exaggeration of current capabilities. The true magnitude of a gap
may become apparent only after an organization falls short in executing a strategic
Teece and Linden Journal of Organization Design (2017) 6:8 Page 8 of 14

initiative. The early phase of a project may be satisfactory, but as it progresses, prob-
lems begin to crop up, the senior team has to get more and more involved, and the goal
slips further away. Management may have thought that a particular capability, such as
supply chain management, was in place only to discover that it was inadequate to the
needs of a new product or strategy.
To build a new capability, the people must be chosen correctly in terms of skills, cre-
ativity, and readiness to learn. Moreover, teams need time and guidance to develop
their routines and develop working relationships. Even if much of the capability resides
in a new piece of specialized equipment, it takes time for it to be fully understood and
integrated into new routines then diffused to the divisions and geographies where it is
needed. Many projects and programs fail because of an organization’s inability to de-
velop and integrate the capabilities needed to deliver on a new objective. While build-
ing capabilities is hard, there is a silver lining; if well-built, they can be difficult for
others to imitate and provide a basis for competitive advantage.
Many “ordinary” capabilities for production and administration are unlikely to be dif-
ferentiators. They can be outsourced or developed to best-practice levels with the aid
of consultants.
When a required new capability is less mundane, questions of how to acquire, whom
to hire, and what to measure become harder to answer. Filling capability gaps involves
more time, effort, and expense the larger the “distance” that separates the desired cap-
ability from what the firm is currently doing in technological, marketing, and business
model terms (Teece forthcoming).
Radical business model innovations are particularly challenging to implement because
they involve addressing multiple gaps simultaneously, and the effort and attention
needed to do so is non-linear with closing individual gaps. Large organizations are
complex systems where every change can have a systemic impact on social, economic,
and other dimensions.
Above all, the closing of capability gaps requires leadership by managers. An
organization will not embrace transformation unless its managers are clearly commit-
ted. Employees will not engage in the necessary learning unless they are encourage-
d—and given the means—to do so. During the initial learning phase, the emphasis
should be on effectiveness and improvement. A premature focus on financial perform-
ance can impair the ability to deliver better results in the longer run.
Capabilities can sometimes be obtained through merger or acquisition, but taking this
perceived shortcut can introduce other problems. An acquired capability still needs to
be learned and absorbed by the acquiring firm’s existing employees, which reduces the
time saved. Moreover, management, prior to the acquisition, needs a deep understand-
ing of the capability and how excellence is measured, failing which a hasty acquisition
could turn out to disappoint.

Designing an organization and its ecosystem

Many new business models are based on a key business or technological innovation. A
framework that can assist in choosing some of the organizational design aspects of a
business model is the Profiting From Innovation (PFI) model (Teece 1986, 2006). The
PFI model, in the first instance, helps an innovator identify the key considerations for
deciding a fundamental business model question: whether to license the innovation to
Teece and Linden Journal of Organization Design (2017) 6:8 Page 9 of 14

other companies or to develop and commercialize it internally. The PFI model also
helps to decide which functions to outsource and how external complementarities can
be harnessed.

a. Licensing
Licensing (or selling an early-stage start-up) potentially surrenders a larger share of
the potentially available profits from an innovation but may be the surest route to
monetization when direct commercialization by the innovator poses too many chal-
lenges for the inventor, e.g., when the capability (and financing) gaps are too numerous
and large (see Teece 1986, Figure 9). Moreover, for an innovation with multiple uses, li-
censing can potentially cover more of the potential applications than the innovating
firm could exploit on its own.
However, licensing is subject to numerous pitfalls. A key question before choosing
this business model concerns the strength of the relevant intellectual property regime.
If the innovation can be imitated and intellectual property protection in the relevant
jurisdiction is weak, then licensing may not be viable, and the innovator may be forced
to integrate in order to have a decent chance of capturing some value.
The strength of intellectual property (IP) such as patents, trade secrets, and copy-
rights is often illusory. For instance, patents are not self-enforcing; patent infringement
and trade secret misappropriation is frequent, sometimes leading to costly litigation.
Moreover, many patents can be “invented around” at modest costs (Mansfield 1985;
Mansfield et al. 1981). The pioneer’s business challenge is usually quite a hard one; fol-
lowers often have it easier. To help with appropriability, the pioneer of a core technol-
ogy can try to seek complementary patents on new features and/or processes and, in
some cases, on designs, but these activities may delay efforts at licensing or
commercialization.
A licensing model may also require that technology be transferred to licensees. That,
too, involves costs. Moreover, the technology’s use may not be easy to monitor (Somaya
et al. 2011). A further complication in recent times is the emergence of cybertheft and
other cybersecurity problems. Being secure to market must often take precedence over
being first to market.

b. Internal development and the boundaries of the firm

When a pure licensing model is rejected, the innovator must invest in direct (or
joint-venture) commercialization. A key insight from the PFI model is that successfully
commercializing an innovation requires complementary assets and technologies, often
including other innovations, in order to provide a reasonably complete value propos-
ition to users. Complements that exist and are competitively supplied can generally be
outsourced or left to the ecosystem that builds products and services around the inno-
vator’s platform. Various other types of complements require special attention:

 A complement might not yet exist and need to be developed. That adds risk and
delay to the commercialization path.
 A complement may be highly specialized to the innovation being commercialized. If this
is supplied by another firm, that firm may hold too much leverage over the innovator.
Teece and Linden Journal of Organization Design (2017) 6:8 Page 10 of 14

 A complement may be in short supply or can become so in the event the

innovation proves successful. This is a “bottleneck” that can attract a large share of
the profit stream if not owned or otherwise controlled by the innovator.
 A complement may be systemically linked to the focal innovation so that the two
need to co-develop for future iterations of the product or service offering (de Fi-
gueiredo and Teece 1996). Leaving the complement in a separate firm risks losing
control of the technological trajectory (Chesbrough and Teece 1996).

The issue of timing must also be considered. Decisions about where to draw the
firm’s boundaries lead to a list of investments in assets and capabilities that need to be
made to implement particular business models. Are other companies racing the innov-
ator to market with similar products? Given the amount of time the contemplated in-
vestments would take, are rivals better positioned to compete? A positive answer here
leads to a consideration of licensing.
This question of where to draw the boundaries of the firm’s activities is seldom straightfor-
ward and may need to be revisited periodically. Even a start-up offering a purely digital
service must decide which corporate functions, such as HR and ad placement, can be rented
from other service providers without harming its ability to build up its differentiated value
proposition. And the challenge is even greater for products that straddle the digital-physical
divide, even for formidable digital innovators like Google/Alphabet. In 2009, Google
launched a project to develop technology for self-driving vehicles. In 2014, it announced that
it was launching its own fleet of custom-designed driverless vehicles without steering wheel
or pedals, suggesting that it might be becoming a car company (Walsh 2014). In 2017, not
long after being established as a separate division called Waymo within Google’s Alphabet
holding company, the company announced that, while it would not be bringing its own cars
to market, it would be offering other car companies a platform consisting of its software and
a set of sensors (radar, lidar, and vision modules) that it had designed (Higgins 2017).

c. Digital platforms and business ecosystems

If one applies the PFI model, many complements are likely left to other firms to pro-
vide. These firms, which may supply inputs, accessories, or ancillary services, add value
to the focal firm’s innovation and constitute the innovator’s business ecosystem.
At the heart of most ecosystems lies the innovator’s platform. Although platforms are
not entirely new, digital technologies have vastly expanded their reach by allowing the
easy inter-operability of systems based on common standards. As a result, products
that were once separate are more easily integrated, creating opportunities for new busi-
ness models.
A platform is a combination of hardware and software that provides standards, inter-
faces, and rules that allow providers of complements to add value and interact with
each other and/or users. Collectively, the platform innovator(s) and the complementors
constitute an ecosystem that depends on continued innovation and maintenance of the
platform by its owner(s) for success.
There are at least two basic types of digital platform, of which there are also numer-
ous hybrid combinations (Evans and Gawer 2016). The first kind, a transaction plat-
form, facilitates exchanges by otherwise fragmented groups of consumers and/or firms.
Teece and Linden Journal of Organization Design (2017) 6:8 Page 11 of 14

A paradigm example is eBay, which allows huge numbers of individual sellers and
buyers located anywhere in the world to find one another with an ease that was previ-
ously unimaginable. While digitization has enabled transaction platforms in a growing
range of industries, this transactional type of platform is not entirely new. For example,
the credit card industry has long provided a viable payment option that merchants will
accept, that banks will join by issuing cards and processing transactions, and that card-
holders find of value. However, the newer digital transaction platforms present an un-
precedented opportunity to accumulate and leverage the knowledge voluntarily shared
by its users (Brousseau and Penard 2007).
An innovation platform provides a base technology and a distribution system to
which other companies can add their own innovations, increasing the value for the sys-
tem as a whole. Apple’s “app” ecosystem is a well-known, and much copied, example of
this. The PC ecosystem based on Intel chips and Microsoft software was an earlier
instance.
Platform owners of either type must attract complementors. While the process is some-
what different depending on whether the complementors are partner businesses or individual
consumers, both types of partner need to see a compelling value proposition to adopt the
platform. Platform owners must also decide whether or not to impose an exclusivity require-
ment, such as an exclusive distribution agreement by a content provider with a digital media
outlet. In other cases, a complementor (e.g., an application software provider) can participate
in multiple ecosystems (e.g., both Apple’s iOS and Google’s Android).
The potentially disastrous effects of a failure to connect with ecosystem partners is demon-
strated by the problems that a Japanese wireless carrier, NTT Docomo, had when it tried to
take its domestic success overseas. Docomo’s i-mode system, launched in 1999, became one
of the first successful wireless data services. The i-mode service, limited by the 2G cellular
technology of the time, allowed keypad phones to access email and certain specially rede-
signed web pages. It also included a simplified version of an app store through which third
parties provided i-mode users with paid services and content and shared the profits with
NTT. Although i-mode was wildly successful—and profitable—in Japan, efforts to export it
failed. NTT invested heavily in overseas partnerships, including a nearly $10 billion invest-
ment in AT&T Wireless in 2000, but failed to convince them to adopt the integrated i-mode
business model (Kushida 2011). NTT also faced an equipment problem in export markets be-
cause the Japanese companies making i-mode phones had no presence outside Japan, where
the wireless standards at the time were incompatible with those of most other countries. NTT
had difficulty convincing the leading non-Japanese phone manufacturers, particularly then-
dominant Nokia, to develop i-mode-compatible devices. Another element of the ecosystem, i-
mode compatible content, was also in short supply. In 2002, NTT’s partners in the USA and
Europe began to roll out i-mode-based services, but the uptake by consumers was poor, and
in 2002, Docomo took a write-down of more than $1 billion on its overseas investments.

Conclusions
Global competition is placing a higher premium than ever before on astute manage-
ment. Strategy and organizational design choices are immensely complicated in many
markets today. Digitization, a driver of next-generation competition, adds flexibility but
also speeds up the pace of competition. Tasks such as calibrating threats from rivals,
cultivating cultural awareness, forming a patent strategy, and developing a portfolio of
Teece and Linden Journal of Organization Design (2017) 6:8 Page 12 of 14

organizational capabilities must all be done more quickly and with less margin for error
than ever before. In markets with network effects, the need to move early and rapidly
must be balanced with the need for thorough analysis and thoughtful experimentation.
An understanding of system-level concepts can help managers build robust, coherent
organizations and strategies.
A critical tool for mapping a pathway to profit through the obstacle course of
next-generation competition is the business model. It is in some sense the skel-
eton around which a company structures an internal organization, builds capabil-
ities, and, of course, formulates strategy so that the company can make its way in
the market. A robust business model provides a solid basis for success. Key
principles include:

 Good business model design requires deep knowledge of customer needs and the
technological and organizational resources that might meet those needs.
 Most new business model designs involve the hybridizations of others. An
understanding of current business models at work in the market is essential.
 The elements of a business model should be mutually reinforcing.
 Business models evolve. They need to change in response to competition, imitation,
or other changes outside the firm. In the longer term, they eventually need to be
replaced.
 The introduction of a new business model into an existing organization is often
difficult and may require a separate organizational unit.

The design and implementation of a business model requires strong dynamic

capabilities for sensing, seizing, and transforming. Customer needs must be identi-
fied, products developed, revenue and pricing mechanisms designed, and capability
gaps closed. These are not one-time actions; they are processes involving learning
loops that contribute to continually adjusting the business model so as to maintain
the organization’s competitive edge. Conjectures must be formed and tested. Fail-
ures must be recognized, analyzed, and used as a springboard to new learning.
The Profiting From Innovation model provides an organized approach to think-
ing through critical business model issues. Is a pure licensing approach viable?
Which assets will be in short supply? Which capabilities can be safely outsourced?
How can a platform attract a robust business ecosystem?
Innovations do not exist in isolation; they interact or compete with numerous others.
Changing one element of a business model (e.g., distribution channels) requires changing
others (e.g., customer interaction, pricing). Companies do not go to market in isolation; in
most cases, their products and services become more valuable to customers when com-
bined with the products and services of other firms. Managers today must think systemic-
ally. Those who comprehend and implement system-level concepts such as business
model, dynamic capabilities, and Profiting From Innovation will be less likely to lose
themselves inside the forest among the trees.

Endnotes
1
This has been a long-standing focus of Teece’s research, as reflected in Teece (1986,
1988, and 2006).
Teece and Linden Journal of Organization Design (2017) 6:8 Page 13 of 14

Acknowledgements
The authors are grateful to two anonymous reviewers for helpful feedback.

Authors’ contributions
The paper was developed and written collaboratively by both authors. Both authors read and approved the
final manuscript.

Competing interests
The authors declare that they have no competing interests.

Received: 30 March 2017 Accepted: 19 July 2017

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