Past over Future?

How managerial cognition shapes business model innovation decisions

It has been only 20 years since the invention of the MP3 codec by the Fraunhofer Institute and the introduction of the first portable digital music players. Since then, numerous groundbreaking technologies and products have been developed that fundamentally changed the music business.

As a result, companies had to adapt or innovate their business model accordingly. Some took advantage of these new opportunities, like Apple with iTunes and the iPod range, while other players that held on to their more traditional business models of marketing music such as Tower Records suffered or even went out of business.

Like the music industry since the early 2000s, many other industries have seen similar challenges. The increasing dynamic of technological development could require that decisions affecting business models be made at shorter intervals. According to a recent study by NIM, the lifetime expectancy of business models became even shorter during the COVID-19 pandemic and the accelerated digitalization it caused.

Of course, the innovation of a business model is not per se the best solution by default and depends on various factors, but is seen as one determinant of business success. And, in contrast, not innovating the business model even led to companies failing or at least accelerated the failure of established companies in some cases.

Empirical research, however, shows that companies often refused to innovate or adapt the business model, especially in the face of market threats such as entrants or potentially market-shifting technological changes.

This phenomenon that sees companies adhere to familiar solutions under market threats is known as Threat Rigidity: Organizations facing external threats tend to react cautiously, are more inward-looking, and tend to draw on familiar and routine patterns of action.

According to Threat Rigidity Theory, managers react with risk-averse behavior under threats and with risk-seeking behavior under opportunities. However, this contradicts typical findings from literature on risk behavior, especially the Prospect Theory, according to which individuals are more risk-seeking if they can avoid losses.

The perception of risk in a certain situation might not only be influenced by potential gains or losses but also by the experience of the decision-maker, whether with previous business model innovations or simply the status quo, for example, the past performance of the company. Managers of successful companies might behave in a more risk-seeking way than those of companies that have experienced losses in the past.

In this project, we investigate how risky business model innovation is perceived under market threats or opportunities, respectively, how this affects the innovation behavior, and how this is influenced by the previous performance of a company.

Key Results

  • When facing market threats, top managers tend toward the status quo and less toward innovation and, thus, are risk-averse when faced with imminent losses.

  • The average population, in contrast, tends to be risk-seeking in the face of imminent losses.

  • Top managers are more present-oriented than the average population.

Project team

Cooperation partner

  • Prof. Dr. Elena Freisinger, Ilmenau University of Technology


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