Business Model Innovation and Productivity

Change log
Wannakrairoj, Wit 

Rapid increase in computer power and performance at an exponential rate, coupled with significant reduction in costs of computer hardware and software, has been generally expected to help enhance productivity in many industries. However, recent global statistics show that productivity growth has slowed down in major industrialised nations, especially so in the United Kingdom since the 2007-2008 financial crisis. This phenomenon is now known as the “Productivity Paradox” and has attracted the interest of many researchers. Several hypotheses have been proposed to explain this productivity paradox, but they all have not quite unlocked the mystery nor completely revealed the real causes of the problem. Here we show that business model innovation can be an important source of productivity growth through both quantitative and qualitative studies.

The first study investigates the relationship between business model innovation and productivity growth. In this study, business model innovation is considered as an important organisational factor which may have an impact on productivity growth. In order to study the relationship between business model innovation and productivity empirically, this first study introduces a novel approach of measuring business model innovation by analysing changes in net asset turnover ratio. Through this newly introduced business model innovation variable, this study shows through empirical analysis that business model innovation contributed significantly to productivity growth across UK firms between 2003 and 2017.

After showcasing that there is a relationship between productivity and business model innovation and that business model innovation can be the source of productivity growth in the first study, the second study looks further into how change in risks as a result of business model innovation affects productivity. The study also looks at servitization of manufacturing, as part of business model innovation, and its impact on productivity. As the servitization of business models changes the fundamental economics related to risk, strategic risk management is found to be one of the reasons why firms have servitized. To account for risk within different business models, this study introduces a novel approach to measure productivity by adjusting for risk, based on volatility and source of output variation. This study looks at the differences in risk and productivity between service and manufacturing sectors in UK manufacturing industry as a proxy of pre- and post-servitization of manufacturing. This empirical study compares risk adjusted productivity and unadjusted productivity between the service and manufacturing sectors in the UK between 2003 to 2018. The results show that the productivity gap between the manufacturing and service sectors reduces significantly after adjusting for risk. Although prior studies have found that the service sector contributes to a slowdown in productivity growth, this study provides empirical support that once adjusted for risk, the results show otherwise.

To understand the mechanics and consequences of business model innovation to productivity, the third study takes a closer look at a firm level case study of Rolls-Royce, to study the relationship between the servitization of business models and productivity growth. To understand what levers of business model influenced by servitization impact on productivity growth, both quantitative and qualitative methods were used. Through qualitative representation, the firm’s business model choices based on business model levers were linked with profitability and productivity consequences. With quantitative analysis, the consequences of business model innovation to productivity can be quantified through a method of profit decomposition. The results of this study show that firms can increase or decrease their productivity through the use of different levers dependent on business model choice.

Our results from these three studies demonstrate that business model innovation can be one of the possible solutions to the productivity paradox puzzle. Overall, in the methodologies implemented herein, and their subsequent results, this dissertation contributes to the literatures of business model innovation, servitization and productivity. The results also have significant implications for both policy makers and managers on the importance of business model innovation, particularly servitization to achieve productivity growth.

Velu, Chander
Business Model Innovation, Productivity, Risk adjusted productivity, Servitization
Doctor of Philosophy (PhD)
Awarding Institution
University of Cambridge
Chulalongkorn Business School, Chulalongkorn University