Abstract

Little is known about how a configuration of dynamic capabilities (DC) contributes to the transformation of the business models (BM) of ICT acquirers. The chapter addresses this limitation by taking a strategy-as-practice theory perspective. The inductive (illustrative) case study Amazon.com acquisition of Whole Foods (2017) demonstrate how acquires sense new customer group and new key activity; seize new resources and key partnerships and transform organization by mean of new promotional channels and new customer relationship, therefore change cost structure, create new revenue streams, and develop new customer value proposition. The chapter develops a practice-driven model as a practical guide for scholars who have been studying DCs and BMs, as well as for those who are new to the field.

Keywords: dynamic capabilities, business model, merger and acquisition

#### 1. Introduction

A focal firm's growth strategies and performance are greatly influenced by the integrative type of strategies, collaborative (alliances, networks, joint ventures) or consolidative (mergers, acquisitions), to foster the innovation and to deliver new customer value propositions. In recent years, collaborative and consolidation strategies have received great attention in strategic management literature. Researchers in strategic management argue that the performance outcome of a specific growth strategy is usually affected by the dynamic capabilities and business models [1–3]. What is the research gap in the existing literature on dynamic capabilities and business models? First, dynamic capabilities in merger and acquisition are complex events in the process of sustain completive advantage of merging business for which we have an incomplete understanding, in part because researchers have tended to consider an only explanation of them. What is more, there are very few research papers that applied the dynamic capabilities' framework as a tool of the business analysis of a reinvention of a business model of an acquirer company in M&A processes. Second, the reinvention of business models of acquirers is still an open area for research due to the following reasons. Johnson et al. [4] gave brilliant ideas on a reinvention of business models and their building blocks for focal companies, but still, a question remains, what capabilities are needed in a reinvention of business models in the process of M&A? Pursuing scientific rigor and helping

practitioners to reinvent of their business model, Amit and Zott [5] integrated dynamic capabilities with business model design process, but what about reinvention of operationalized components of the model or building blocks of business models in M&A process? To reinvent building blocks of business models, Kim and Mauborgne [6] recommended to apply "four steps framework: eliminate, reduce, increase and create," namely, to eliminate and to reduce elements of business model thereby to eliminate and to reduce expenses as well as increase and/or create as new some elements of business model thereby to increase a revenue stream and to create a new customer value proposition [2]. However, it is silent about what dynamic capabilities are needed for that.

advantage in complex and volatile external environments has catapulted this issue to the forefront of the research agendas of many scholars" ([10], p. 917). This is especially true for strategic behavior in the digital economy, as shown in this chapter. This chapter examined DC in the online grocery business industry in which the external environment shifted to some extent from a click (online grocery) to a brick (offline grocery). DC can usefully be thought of as belonging to three clusters of activities and adjustments: (1) identification and assessment of an opportunity (sensing); (2) mobilization of resources to address an opportunity and to capture value from doing so (seizing); and (3) continued renewal of core competencies (transforming) [7]. Sensing implies that the organization must constantly scan, recognize, and appraise opportunities and threats across various markets and technologies. Investigating customer needs is a typical sensing activity. Once an opportunity has been sensed in order to bring the new services, processes, and activities, the organization should seize the opportunity. To seize an opportunity may require renewal and reconfiguration of organizational capabilities and investment in technologies, equipment, and markets. Thus, transforming is how to organize new and old resources for organization's value maximization. One key implication of the DC concept is that firms are not only competing on their ability to exploit their existing resources and organizational capabilities but also on their ability to explore, renew, and develop their organizational capabilities [11]. During the past two decades, research in DC has promised to unlock the understanding of how competitive advantage arises in dynamic markets. However, to date, empirical work has, by and large, focused on what DC is. There has been little work demonstrating how they actually operate and contribute to competitive advantage other than at the conceptual level [12]. Stefano et al. argue that despite the exceptional rise in interest and influence of dynamic capabilities, criticisms of the dynamic capabilities' perspective continue to mount [13]. Common concerns are related to a lack of consensus on basic theoretical elements and limited empirical progress [13]. Specific capabilities that have been identified and studied involve research and development [14], product innovation [15], ambidextrous organizational structures [16], network responsiveness [17], and human capital management [18]. However, there are only a few pieces of research on specific dynamic capabilities that have been identified and studied involving merger and acquisition. Teece argues that it might be "because assets are bundled together often tightly linked inside incumbent firms, it may be difficult to obtain assets in the desired configurations through asset purchase or sale in mergers and acquisitions" [7]. However, by Eisenhardt and Martin [11], practice with homogeneous acquisitions (i.e., those in the related markets) was positively associated with the accumulation of tacit and explicit knowledge about how to execute acquisitions and achieve superior acquisition performance. Making strategically important investment choice on M&A, dynamically capable management team needs such managerial capabilities as sensing and shaping, seizing and reconfigurations (transforming), as well as reinvention and implementation of new

The Transformation of Business Models in Technology-Enabled M&A: A Case Study of Amazon

DOI: http://dx.doi.org/10.5772/intechopen.85134

Value creation through M&A requires the simultaneous identification of target with similar dynamic capabilities on certain dimensions and different dynamic capabilities on other dimensions. "While similarity is seen as an indicator for efficiency-based synergies (scale and scope), complementarity provides firms with both efficiency synergies and value created from those differences that are mutually supportive. Studies give clear empirical evidence that complementarities are a significant factor for M&A success" ([19], p. 272). Through the interaction of complementary characteristics, value creation does not only derive from cost savings, but the value is also created by a growing turnover and market share [20].

Complementarity has been studied in terms of top management team

business model [7].

183

Capturing valuable insights from the dynamic capabilities' framework [4] and business model canvas [2], this chapter aims to integrate two theoretical perspectives in the cohesive conceptual model. Why is it important to combine the dynamic capabilities and business model literature? Adoption of seminal Teece's framework [7] of dynamic capabilities and operationalized components (building blocks) of business models [2], in online and offline grocery businesses, allowed the construction of the conceptual model for practitioners and scholars, which consequently can be tested by methods of statistical analysis in future research.

The motivation for the research is as follows: the author wanted to know how acquisition-based dynamic capabilities support a reinvention of building blocks of business models. The chapter discusses how a focal firm makes strategic decisions under uncertainty and deals with the commercialization of innovation by means of dynamic capabilities to sense a new demand, capture new resources and partnerships, transform channels and customers' relationship, and deliver a new customer value proposition, particularly, by means of acquiring new technologies, advanced engineering team, and new users' base. That is what Amazon did with Whole Foods in 2017. This case study of Whole Foods acquisition by Amazon was selected due to the following reasons. Firstly, this empirical literature is still at an early stage, and opportunities abound to dig deeper into the linkages between dynamic capabilities (DC), a reinvention of business models, and long-run firm performance. "The research paradigm of dynamic capabilities is still relatively new. Accordingly, illuminating case studies are likely to yield powerful insights" ([8], p. 1400). Secondly, the chapter digs deeper into the acquisition-based DC in M&A to develop an integrated practical example of how dynamic capabilities and building blocks of business models are interrelated in successful M&A process in the ICT industry. The main contribution of the chapter is an emerging conceptual model of research that integrates acquisition-based dynamic capabilities' frameworks [7] and business model canvas [2] together and, thereby, illustrates how acquisition-based dynamic capabilities underpinning a reinvention of business models in M&A process. This conceptual practice-driven model can be a practical guide for scholars who have been studying DCs and BMs, as well as for those who are new to the field. What is more, the chapter has contributed to the interest of the strategy practice group of the Strategic Management Society by answering questions which the group attempt to answer: what are the capabilities required to perform strategy work, and what are the microfoundations of the activities involved in the doing of strategy?

#### 2. Literature review

The recent scientific discussion in the field of strategic management broadly favors the idea of dynamic capabilities in order to overcome potential rigidities of organizational capability building [9]. "The theoretical and practical importance of developing and applying dynamic capabilities to sustain a firm's competitive

#### The Transformation of Business Models in Technology-Enabled M&A: A Case Study of Amazon DOI: http://dx.doi.org/10.5772/intechopen.85134

advantage in complex and volatile external environments has catapulted this issue to the forefront of the research agendas of many scholars" ([10], p. 917). This is especially true for strategic behavior in the digital economy, as shown in this chapter. This chapter examined DC in the online grocery business industry in which the external environment shifted to some extent from a click (online grocery) to a brick (offline grocery). DC can usefully be thought of as belonging to three clusters of activities and adjustments: (1) identification and assessment of an opportunity (sensing); (2) mobilization of resources to address an opportunity and to capture value from doing so (seizing); and (3) continued renewal of core competencies (transforming) [7]. Sensing implies that the organization must constantly scan, recognize, and appraise opportunities and threats across various markets and technologies. Investigating customer needs is a typical sensing activity. Once an opportunity has been sensed in order to bring the new services, processes, and activities, the organization should seize the opportunity. To seize an opportunity may require renewal and reconfiguration of organizational capabilities and investment in technologies, equipment, and markets. Thus, transforming is how to organize new and old resources for organization's value maximization. One key implication of the DC concept is that firms are not only competing on their ability to exploit their existing resources and organizational capabilities but also on their ability to explore, renew, and develop their organizational capabilities [11]. During the past two decades, research in DC has promised to unlock the understanding of how competitive advantage arises in dynamic markets. However, to date, empirical work has, by and large, focused on what DC is. There has been little work demonstrating how they actually operate and contribute to competitive advantage other than at the conceptual level [12]. Stefano et al. argue that despite the exceptional rise in interest and influence of dynamic capabilities, criticisms of the dynamic capabilities' perspective continue to mount [13]. Common concerns are related to a lack of consensus on basic theoretical elements and limited empirical progress [13]. Specific capabilities that have been identified and studied involve research and development [14], product innovation [15], ambidextrous organizational structures [16], network responsiveness [17], and human capital management [18]. However, there are only a few pieces of research on specific dynamic capabilities that have been identified and studied involving merger and acquisition. Teece argues that it might be "because assets are bundled together often tightly linked inside incumbent firms, it may be difficult to obtain assets in the desired configurations through asset purchase or sale in mergers and acquisitions" [7]. However, by Eisenhardt and Martin [11], practice with homogeneous acquisitions (i.e., those in the related markets) was positively associated with the accumulation of tacit and explicit knowledge about how to execute acquisitions and achieve superior acquisition performance. Making strategically important investment choice on M&A, dynamically capable management team needs such managerial capabilities as sensing and shaping, seizing and reconfigurations (transforming), as well as reinvention and implementation of new business model [7].

Value creation through M&A requires the simultaneous identification of target with similar dynamic capabilities on certain dimensions and different dynamic capabilities on other dimensions. "While similarity is seen as an indicator for efficiency-based synergies (scale and scope), complementarity provides firms with both efficiency synergies and value created from those differences that are mutually supportive. Studies give clear empirical evidence that complementarities are a significant factor for M&A success" ([19], p. 272). Through the interaction of complementary characteristics, value creation does not only derive from cost savings, but the value is also created by a growing turnover and market share [20]. Complementarity has been studied in terms of top management team

practitioners to reinvent of their business model, Amit and Zott [5] integrated dynamic capabilities with business model design process, but what about reinvention of operationalized components of the model or building blocks of business models in M&A process? To reinvent building blocks of business models, Kim and Mauborgne [6] recommended to apply "four steps framework: eliminate, reduce, increase and create," namely, to eliminate and to reduce elements of business model thereby to eliminate and to reduce expenses as well as increase and/or create as new some elements of business model thereby to increase a revenue stream and to create a new customer value proposition [2]. However, it is silent about what dynamic

Capturing valuable insights from the dynamic capabilities' framework [4] and business model canvas [2], this chapter aims to integrate two theoretical perspectives in the cohesive conceptual model. Why is it important to combine the dynamic capabilities and business model literature? Adoption of seminal Teece's framework [7] of dynamic capabilities and operationalized components (building blocks) of business models [2], in online and offline grocery businesses, allowed the construction of the conceptual model for practitioners and scholars, which consequently can

The motivation for the research is as follows: the author wanted to know how acquisition-based dynamic capabilities support a reinvention of building blocks of business models. The chapter discusses how a focal firm makes strategic decisions under uncertainty and deals with the commercialization of innovation by means of dynamic capabilities to sense a new demand, capture new resources and partnerships, transform channels and customers' relationship, and deliver a new customer value proposition, particularly, by means of acquiring new technologies, advanced engineering team, and new users' base. That is what Amazon did with Whole Foods in 2017. This case study of Whole Foods acquisition by Amazon was selected due to the following reasons. Firstly, this empirical literature is still at an early stage, and opportunities abound to dig deeper into the linkages between dynamic capabilities (DC), a reinvention of business models, and long-run firm performance. "The research paradigm of dynamic capabilities is still relatively new. Accordingly, illuminating case studies are likely to yield powerful insights" ([8], p. 1400). Secondly, the chapter digs deeper into the acquisition-based DC in M&A to develop an integrated practical example of how dynamic capabilities and building blocks of business models are interrelated in successful M&A process in the ICT industry. The main contribution of the chapter is an emerging conceptual model of research that integrates acquisition-based dynamic capabilities' frameworks [7] and business model canvas [2] together and, thereby, illustrates how acquisition-based dynamic capabilities underpinning a reinvention of business models in M&A process. This conceptual practice-driven model can be a practical guide for scholars who have been studying DCs and BMs, as well as for those who are new to the field. What is more, the chapter has contributed to the interest of the strategy practice group of the Strategic Management Society by answering questions which the group attempt to answer: what are the capabilities required to perform strategy work, and what are

be tested by methods of statistical analysis in future research.

the microfoundations of the activities involved in the doing of strategy?

The recent scientific discussion in the field of strategic management broadly favors the idea of dynamic capabilities in order to overcome potential rigidities of organizational capability building [9]. "The theoretical and practical importance of developing and applying dynamic capabilities to sustain a firm's competitive

capabilities are needed for that.

Strategy and Behaviors in the Digital Economy

2. Literature review

182

complementarity [20], technological complementarity [21], strategic and market complementarity [22], or product complementarity [23]. However, the study in terms of complementarity of dynamic capabilities in M&A is still waiting for researchers.

Proposition 1. The success of consolidative strategies (merger or acquisition) is provided by the degree of similarities and complementarity between the dynamic capabilities of two merging businesses.

In recent year, the business models have received increasing attention of strategy researchers. Business models characterize the focal firm's plan for its value creation and capture [24]. From the point of view of Johnson et al. [4], a business model consists of four main elements, the synthesis of which delivers value, customer value proposition, profit formula, key resources, and key processes. Osterwalder and Pigneur [2] with real 470 business practitioners from 45 countries extended a number of elements and developed Business Model Canvas with nine building blocks: customer segment, value proposition, channels, customer relationship, revenue stream, key resources, key activities, key partners, and cost structure. Slightly adapted Johnson et al. [4] and Osterwalder and Pigneur [2], Teece proposed three main components of the business model: "Cost Model: Core Assets and Capabilities; Core Activities; Partner Network. Revenue Model: Pricing Logic; Channels; Customer Interaction. Value proposition: Product and Service; Customer Needs; Geography" ([25], p. 41). With respect to brilliant contributors to dynamic capabilities and business models' frameworks, there is still a gap in understanding what and how dynamic capabilities lead to new cost structure and revenue streams and how dynamic capabilities foster new value proposition of acquirer's company in M&A process. We must understand how acquisition-based dynamic capabilities transform and reinvent components of a business model acquirer's company.

cost, to create a new revenue stream, to deliver a new value proposition, and

The theoretical model of research: bridging together acquisition-based dynamic capabilities and reinvention of a

The Transformation of Business Models in Technology-Enabled M&A: A Case Study of Amazon

"Building theory from case studies is a research strategy that involves using one or more cases to create theoretical constructs, propositions and/or midrange theory from case-based, empirical evidence" ([26], p. 25). Yin defines the case study research method as "an empirical inquiry that investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used" ([27], p. 23). Some critics suggest case study research is useful only as an exploratory tool or for establishing a hypothesis, and some would claim it is unscientific [28]. When it comes to the validity of qualitative case study research, the validity refers to the extent to which the qualitative research results accurately represent the collected data (internal validity) can be generalized or transferred to other contexts or settings (external validity) [28]. Ultimately, each case can be

This chapter seeks to explore how acquisition-based dynamic capabilities underpinning a reinvention of business models in the M&A process. As objects of research, the author selected the company that is especially active and successful in online shopping and particularly in the online and offline grocery business. The unit of analysis is dynamic capabilities. In this research, two stages of research work will be involved. Firstly, to justify propositions, the author did the contextual content analysis which relied on an archival search that included financial statements, annual reports, internal documents, industry publications, and CEO statements to get at a microlevel understanding that really boosts data and the better understanding of the microfoundations of DC and building blocks of business models of

therefore to sustain competitive advantage.

DOI: http://dx.doi.org/10.5772/intechopen.85134

Table 1.

business model.

3. Research design and methodology

acquirers and targets.

185

viewed as a discrete experiment that could be repeated [29].

What exactly is meant by the reinvention of building blocks of business models? The reinvention of building blocks of business meant the process of the transformation of the most important activities, capabilities, and resources of the company to reduce cost, to increase revenue stream, to deliver new customer value proposition, and thereby to sustain competitive advantages. How acquisition-based dynamic capabilities support a reinvention of building blocks of business models? There are three sets of acquisition-based dynamic capabilities which should be developed to transform and reinvent a business model of an acquirer to achieve competitive advantage. The first set of acquisition-based dynamic capabilities (sensing and shaping) is contributing to select new key activities and new customer segments, thereby contributing to an acquirer to shape emerging market demand and new technologies needed. The second set of acquisition-based dynamic capabilities (identifying and seizing) is supporting an acquirer's company to obtain new key idiosyncratic (VRIN) resources and to extend a partnership's networks. The third set of acquisition-based dynamic capabilities (transforming and reconfiguring) is contributing an acquirer's company to transform new customer relationships and promotion channels and, thus, to deliver the new customer value proposition. Thereby, an acquiring company would result in a new cost structure by eliminating and reducing capital expenditure and operating expenses, due to an economy of scope, and would generate new revenue streams by increasing and creating new key activities. A result of those transformation processes, acquirer's company can newly sustain competitive advantage. The theoretical framework of the research is presented in Table 1.

Proposition 2. Business model's elements of both acquirer's and the target's companies can successfully fold into the new business model by means of acquisition-based dynamic capabilities and contribute to reduce

The Transformation of Business Models in Technology-Enabled M&A: A Case Study of Amazon DOI: http://dx.doi.org/10.5772/intechopen.85134


#### Table 1.

complementarity [20], technological complementarity [21], strategic and market complementarity [22], or product complementarity [23]. However, the study in terms of complementarity of dynamic capabilities in M&A is still waiting for

Proposition 1. The success of consolidative strategies (merger or acquisition) is provided by the degree of similarities and complementarity between the dynamic

In recent year, the business models have received increasing attention of strategy researchers. Business models characterize the focal firm's plan for its value creation and capture [24]. From the point of view of Johnson et al. [4], a business model consists of four main elements, the synthesis of which delivers value, customer value proposition, profit formula, key resources, and key processes.

Osterwalder and Pigneur [2] with real 470 business practitioners from 45 countries extended a number of elements and developed Business Model Canvas with nine building blocks: customer segment, value proposition, channels, customer relationship, revenue stream, key resources, key activities, key partners, and cost structure. Slightly adapted Johnson et al. [4] and Osterwalder and Pigneur [2], Teece proposed three main components of the business model: "Cost Model: Core Assets and Capabilities; Core Activities; Partner Network. Revenue Model: Pricing Logic; Channels; Customer Interaction. Value proposition: Product and Service; Customer Needs; Geography" ([25], p. 41). With respect to brilliant contributors to dynamic capabilities and business models' frameworks, there is still a gap in understanding what and how dynamic capabilities lead to new cost structure and revenue streams and how dynamic capabilities foster new value proposition of acquirer's company in M&A process. We must understand how acquisition-based dynamic capabilities transform and reinvent components of a business model acquirer's company.

What exactly is meant by the reinvention of building blocks of business models? The reinvention of building blocks of business meant the process of the transformation of the most important activities, capabilities, and resources of the company to reduce cost, to increase revenue stream, to deliver new customer value proposition, and thereby to sustain competitive advantages. How acquisition-based dynamic capabilities support a reinvention of building blocks of business models? There are three sets of acquisition-based dynamic capabilities which should be developed to transform and reinvent a business model of an acquirer to achieve competitive advantage. The first set of acquisition-based dynamic capabilities (sensing and shaping) is contributing to select new key activities and new customer segments, thereby contributing to an acquirer to shape emerging market demand and new technologies needed. The second set of acquisition-based dynamic capabilities (identifying and seizing) is supporting an acquirer's company to obtain new key idiosyncratic (VRIN) resources and to extend a partnership's networks. The

third set of acquisition-based dynamic capabilities (transforming and

Proposition 2. Business model's elements of both acquirer's and the target's companies can successfully fold into the new business model by means

of acquisition-based dynamic capabilities and contribute to reduce

the research is presented in Table 1.

184

reconfiguring) is contributing an acquirer's company to transform new customer relationships and promotion channels and, thus, to deliver the new customer value proposition. Thereby, an acquiring company would result in a new cost structure by eliminating and reducing capital expenditure and operating expenses, due to an economy of scope, and would generate new revenue streams by increasing and creating new key activities. A result of those transformation processes, acquirer's company can newly sustain competitive advantage. The theoretical framework of

researchers.

capabilities of two merging businesses.

Strategy and Behaviors in the Digital Economy

The theoretical model of research: bridging together acquisition-based dynamic capabilities and reinvention of a business model.

cost, to create a new revenue stream, to deliver a new value proposition, and therefore to sustain competitive advantage.
