Papers in Brief (XXX): Bohnsack, Ciulli & Kolk (2020): The role of business models in firm internationalization – An exploration of European electricity firms in the context of the energy transition

[Note: This is the 30th post in our “Papers in Brief” series. This series offers a special service as it explains the core ideas of chosen research papers in a nutshell.]

Papers in Brief (XXX) by René Bohnsack, Francesca Ciulli, and Ans Kolk

Bohnsack, R., Ciulli, F., & Kolk, A. (2020). The role of business models in firm internationalization: An exploration of European electricity firms in the context of the energy transition. Journal of International Business Studies, https://doi.org/10.1057/s41267-020-00364-4. [Open Access]    

Background and relevance

The global energy transition presents a challenge for almost all industries, but some face specific difficulties. A case in point are firms in the electricity sector: while traditionally electricity was “generated in large power plants operating in a central location” (Alanne & Saari, 2006, p. 541), and essentially included coal, gas, and nuclear power stations, the growth of electricity generation from renewables has led to a more variable and decentralized electricity system, with “households, community groups, new energy companies, as well as utilities with new business models all becoming producer–consumer” (Smith & Raven, 2012, p. 1033). Concurrently to the energy transition, electricity firms have been confronted with a gradual, albeit uneven, opening of markets and increasing cross-border competition (Kolk, Lindeque, & Van den Buuse, 2014). The current stage of the energy transition is characterized by a diverse degree of internationalization among electricity firms, with ‘traditional’ business models co-existing with and being challenged by novel ones relying on new technologies, against the background of liberalization policies coupled with persisting national approaches (Geels et al., 2016). The business model has been mentioned in previous international business literature as key for realizing a competitive advantage across borders (e.g., Rugman & Verbeke, 2004). However, thus far, the role and potential of the business model concept in relation to firm internationalization have not been studied in detail, let alone in the context of a grand challenge such as the energy transition. We coin the concept “Business Model Specific Advantage” (BMSA) and propose that the degree to which the individual components of the business model are location-bound or non-location bound  – i.e., linked to local idiosyncrasies, local knowledge, or local innovation activities – renders the entire BMSA configuration either as (more) location-bound or as (more) non-location bound (see figure 1). Stemming from this business model perspective our study investigates what is the role of business models when firms internationalize?

Figure 1: Conceptual framework for BMSA location-boundedness (the exemplary configuration represented by the dashed lines illustrates the underlying logic)

Research method

Our sample encompasses 14 firms, covering all the core types of activities in the EU electricity sector and including both incumbents and new entrants in the industry. Interviews, conducted with the founders and product and/or project managers, were the core source of information. The data analysis encompassed four main stages. The first stage consisted of a deductive analysis with a focus on the business model components and their location-boundedness. The second stage entailed an inductive analysis about key (potential) host country-related challenges, to uncover barriers that impede firms to ‘recombine’ their BMSA in foreign countries. Third, we deductively analyzed the firms’ internationalization. Fourth, we developed a framework representing, on the horizontal axis, the degree of BMSA location-boundedness and, on the vertical axis, the level of barriers to BMSA recombination. We plotted the cases in the framework and examined their position in relation to its internationalization.

Results

Our study found that the configuration of the value proposition, value network and the revenue-cost model makes a business model more or less transferable internationally. We also found that the internationalization potential also depends on the barriers to recreating elements of a business model in a host country, namely: regulatory barriers, infrastructural barriers and market barriers. Firms tied to the ‘traditional’ centralized energy system emerged as more likely to face higher recombination barriers in (potential) host countries than firms that rely on or offer novel technologies. This diversity suggests that the energy transition is experienced differently across electricity firms: those with ‘traditional’ business models experience a fragmented and localized electricity market –particularly when regulation and infrastructure have not yet been affected by the energy transition – which hampers their international expansion; firms with novel business models, instead, generally experience an international, relatively integrated, electricity market, which facilitates internationalization.

The combination of BMSA transferability and recombination barriers creates four options for the success potential of internationalization (see Figure 2).

Figure 2: A framework of BMSA location-boundedness and recombination barriers

In the best case a business model and all its components are transferable and can also be easily integrated in the context of a host country (e.g. a situation without regulatory barriers, similar market designs and no logistical challenges): this would result in a position in cell 3 in the matrix. The findings suggest that firms embedded in the new energy system, which is triggered by the energy transition and characterized by decentralization and smart technologies, are more likely to be positioned in cell 3. These companies are more likely to benefit from low costs of adaptation of the value proposition and network to local market needs. In such situations, limited impediments to BMSA recombination, coupled with low adaptation costs, will encourage a firm to engage in a wide internationalization.  Instead, if part of the business model is not easily transferable, i.e. location-bound (e.g. culturally-specific value propositions or value networks entrenched with local infrastructures) and the barriers to recombination in multiple foreign countries are high (e.g. the necessary infrastructure is absent or the sector consists of a monopoly), then the firm moves further to cell 2 in the matrix and will have a hard time to internationalize. Firms that have a business model that is attached to the ‘old’, centralized energy system face higher costs and challenges to internationalize, and they are thus more likely to be positioned in cell 2. We therefore suggest that the combination of BMSA and recombination barriers influences the internationalization of firms: to improve our understanding of whether and how firms enter foreign markets, it is important to assess (1) whether a firm’s BMSA is non-location or location-bound, and (2) whether the recombination barriers in a (potential) host country are high or low. This matrix is valuable for firms to ascertain whether their business model can be internationalized, to compare which host countries might be least difficult to internationalize in, but also this approach can help investors to assess the scalability of ventures and policy makers to assess whether their region is attractive for investors.

References

Alanne, K. and Saari, A. (2006). “Distributed energy generation and sustainable development”. Renewable and Sustainable Energy Reviews, Vol. 10, pp. 539–558.

Geels, F., Kern, F., Fuchs, G., Hinderer, N., Kungl, G., Mylan, J., et al. (2016). “The enactment of socio-technical transition pathways: A reformulated typology and a comparative multi-level analysis of the German and UK low-carbon electricity transitions (1990-2014)”. Research Policy, Vol. 45, pp. 896–913.

Kolk, A., Lindeque, J. and Van den Buuse, D. (2014). Regionalization strategies of European Union electric utilities. British Journal of Management, Vol. 25, pp. 77–99.

Rugman, A. M. and Verbeke, A. (2004). “A perspective on regional and global strategies of multinational enterprises”. Journal of International Business Studies, Vol. 35, pp. 3–18.

Smith, A. and Raven, R. (2012). “What is protective space? Reconsidering niches in transitions to sustainability”. Research Policy, Vol. 41, pp. 1025–1036.

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