Journal of Business Strategy

Innovation risk in digital business models: the German energy sector

Dominik Dellermann, Alexander Fliaster, Michael Kolloch,
Article information:
To cite this document:
Dominik Dellermann, Alexander Fliaster, Michael Kolloch, (2017) "Innovation risk in digital business models: the German
energy sector", Journal of Business Strategy, Vol. 38 Issue: 5, pp.35-43, https://doi.org/10.1108/JBS-07-2016-0078
Permanent link to this document:
https://doi.org/10.1108/JBS-07-2016-0078
Downloaded on: 02 September 2017, At: 13:13 (PT)
References: this document contains references to 16 other documents.
To copy this document: permissions@emeraldinsight.com
Downloaded by UNIVERSITY OF ADELAIDE At 13:13 02 September 2017 (PT)

Access to this document was granted through an Emerald subscription provided by emerald-srm:425905 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service
information about how to choose which publication to write for and submission guidelines are available for all. Please visit
www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of
more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online
products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication
Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.

*Related content and download information correct at time of download.

 Innovation risk in digital business models:
the German energy sector
Dominik Dellermann, Alexander Fliaster and Michael Kolloch

Introduction Dominik Dellermann is

Research Associate at
The concept of business model innovation gained significant attention over the last years, Universitat Kassel,
Downloaded by UNIVERSITY OF ADELAIDE At 13:13 02 September 2017 (PT)

as companies like Apple and Uber disrupted whole industries and generated tremendous Kassel, Germany.
returns, offering not just new products or services but designing new concepts of doing Alexander Fliaster is
business. Two key features characterize an essential portion of these business model Professor at the Otto-
innovations: They are enabled by digital technology and embedded in complex inter- Friedrich-University of
organizational ecosystems. In these ecosystems, firms do not solely rely on internal Bamberg, Bamberg,
innovation and value creation endeavors. Instead, they are essentially involved in joint Germany.
innovation activities with other organizations, and thus are highly dependent on resources Michael Kolloch is based
at the Otto-Friedrich-
and contributions of suppliers, vendors of complementary offerings, consumers and other
University of Bamberg,
partners.
Bamberg, Germany.
The accelerating interdependence between ecosystem actors, however, has not only
created new business opportunities but also introduced new risks not sufficiently covered
by traditional approaches of risk management. This paper addresses the critical gap by
offering insights that can guide organizational decision makers in managing the process of
digital business model innovation. We first briefly describe the idea of business model
innovation and show how digital technologies foster this innovation. Second, we analyze a
specific kind of digital business model innovation in the energy sector, virtual power plants
(VPPs). Based on empirical findings, we explore the following question: If the innovation of
a digital business model requires coordinated contributions from many organizations, how
should managers deal with risks related to this sort of innovation? We propose a new
multi-step framework for the strategic management of risks in digital business model
innovation.

What are business models

A business model refers to the logic of how the firm operates and creates value for its
stakeholders. As it represents a system-level approach to explaining how firms manage
their business, a key element of a business model is the firm’s boundary-spanning activities
(Zott et al., 2011), the firm’s relations to the partners and its position within the value network
(Chesbrough, 2007). These relations link suppliers, complementors, integrators and
customers and enable mutual value. Thus, to successfully design and deploy the business
model, the firm has to clarify which resources it has to acquire from its business partners
and which main activities these partners perform and build and maintain effective and
efficient relations to the key collaborators. Due to the rapid transformation of the
technological and competitive environment, business models require regular monitoring,
and therefore have themselves become a subject of innovation (Osterwalder and Pigneur,
2010).

DOI 10.1108/JBS-07-2016-0078 VOL. 38 NO. 5 2017, pp. 35-43, © Emerald Publishing Limited, ISSN 0275-6668 JOURNAL OF BUSINESS STRATEGY PAGE 35
 ‘‘More and more, smart, connected products are questioning
the traditional logic of how value is created and captured.’’

How digital technology fosters business model innovation

As digital technology is combining atoms and bits to turn digital and physical components
into novel products, ubiquitous computing enables the interconnection of multiple devices
(Iansiti and Lakhani, 2014). In particular, the internet of things (IoT) has a strong potential
to transform products, services and whole industries (Manyika et al., 2015). The IoT
constitutes a “dynamic global network infrastructure with self-configuring capabilities
based on standard and interoperable communication protocols where physical and virtual
things [. . .] use intelligent interfaces, and are seamlessly integrated into the information
network” (Vermesan and Friess, 2014, p. 15). Companies like Nest, SmartThings and
Downloaded by UNIVERSITY OF ADELAIDE At 13:13 02 September 2017 (PT)

Axeda, for instance, link billions of devices worldwide. Moreover, established firms like GE
and Cisco have started to develop and offer numerous IoT-based products and services,
increasingly extending to virtually all areas of everyday life. More and more, smart,
connected products are questioning the traditional logic of how value is created and
captured, offering firms new possibilities for business model innovations (Porter and
Heppelmann, 2014).
In the context of digital business models, various devices and IT infrastructures allow
multiple actors to interoperate and distribute value creation across companies within the
ecosystem. Even companies in traditional industries, such as the German energy sector,
are increasingly realizing the disruptive potential of digital innovations. For instance, the
Fraunhofer Institute for Integrated Circuits is currently offering its OGEMA 2.0 (Open
Gateway Energy Management 2.0) open-source framework, enabling the development and
implementation of all kinds of systems, components and apps for energy and facility
management. Moreover, start-ups like Next Kraftwerke GmbH leverage digital technology
to create and implement new business models for virtual power plants (VPP).
However, as digitization redefines nearly all elements of doing business, such as customer
interactions, deployment of resources and economic models (de Jong and van Dijk, 2015),
it also gives birth to new risks for the actors in novel ecosystems (Olson, 2005). As
companies innovate their digital business models together with ecosystem partners, the
accelerating interdependence with these partners makes new strategic approaches of
managing risk indispensable.

Role of risks in digital business model innovation

Risk management refers to the process of assessing, treating and monitoring risks (e.g.
ISO/IEC 33000). Traditionally, managers focus on risk management at the operational level,
while its strategic role in the multi-partner business model innovation remains
under-investigated (Calandro, 2015). Conventional risk management techniques like VaR
(Value at Risk) rely on quantitative and historic data and on predicting and controlling
specific risk events. Thus, they provide little help for digital business model innovations.
New threats in digitally enabled ecosystems are often beyond the direct control of the
single innovator. Instead, they are related to the interdependencies between suppliers,
vendors of complementary products and services and other relevant actors. For instance,
if the innovating firm struggles with problems in new product development, these problems
might cause risks for complimentary innovators, as well as risks associated with negative
snowball effects experienced by intermediaries (Adner, 2006).

PAGE 36 JOURNAL OF BUSINESS STRATEGY VOL. 38 NO. 5 2017

 These risks make new risk management frameworks and tools necessary, which is
especially true for the German energy industry, currently changing dramatically in the
onslaught of digitization.

How digital technology transforms the energy industry

In the past, the success of German energy supply companies resulted from the ownership
of big centralized power plants that mass-produced electricity for a large number of
households and industrial customers. In this business environment, energy providers
gained competitive advantages by building on the economies of scale. This business
model, however, is increasingly under siege from the shift toward decentralization of
production, ecological consciousness of customers (de-carbonization and the so-called
“German nuclear exit”), as well as the liberalization of energy markets. Realizing this
dramatic change and addressing it through innovation strategies is crucial for firms
competing in energy markets. The municipal utility companies that used to rely heavily on
conventional (fossil) power plants are currently facing significant disruption through
increasing capacity additions of renewable energies. For these companies, an innovative
response that compensates for the loss of market share involves offering consultancy
Downloaded by UNIVERSITY OF ADELAIDE At 13:13 02 September 2017 (PT)

services and new storage solutions for the fluctuating renewable power supply. This
change leads to a fundamental transformation of the underlying business model where the
IoT and Big Data offer many new business opportunities for energy providers because the
collected data can help to develop new products and services for customers, including
weather forecasts, energy consumption data and optimization of connected electricity
flows.

Virtual power plants (VPP): a digital business model innovation in the energy
sector
Mainly caused by highly fluctuating feed-in times of renewable energies, a stable energy
supply, in particular a reliable base load that enables companies to ensure their power
supply, has become much more important than in previous years. VPPs provide an
innovative solution to this problem as they integrate several small, decentralized
power-generating units, especially renewable ones such as photovoltaic, wind farms and
biogas plants.
This business model innovation in the energy sector results from recent technological
innovations in the IT area, notably the IoT, which allows connecting various digitized
objects integrated into the internet. Moreover, the VPP business model transcends
industrial borders as it substantially relies on coordinated activities of various actors from
different industries, such as IT vendors, energy producers, hardware developers and
marketers. In this new ecosystem, digitization facilitates organizational learning across
borders and innovation that builds on creative new combinations of knowledge from
diverse technology and application fields.
This digitally enabled business model innovation fundamentally transforms the value chain
from the conventional vertical design toward a network-centric approach. For instance,
electricity customers (factories, farmers, etc.) in VPPs play a dual role as both consumers
and producers of electricity. The involvement of these “prosumers” in the ecosystem

‘‘Even companies in traditional industries, such as the German

energy sector, are increasingly realizing the disruptive
potential of digital innovations.’’

VOL. 38 NO. 5 2017 JOURNAL OF BUSINESS STRATEGY PAGE 37

 radically transforms the key element of any business model, defining the logic of how
customers receive value at an appropriate cost (see Figure 1).
The basic principle of a VPP is as follows: several operators of energy-generating units
(such as biomass plants, photovoltaics, wind farms, etc.), generally characterized by
erratic feeds to the grid, are virtually combined by the VPP operator into one unit. The
advantage is that other participants in this business model equalize the inconstant
generation on a broader scale. Thus, the VPP operator is able to offer stable energy
delivery. In addition, in the pooling effort, weather forecasts and grid requirements are
assessed to optimize the sale of the generated power. The target customers in the
commercialization phase may be the power producers themselves (who upgrade their
highly unstable generation toward a fitting stable one) or energy markets in times of high
revenues. The VPP operator plays the role of the key business model innovator and
integrator.
Consequently, VPPs provide a current and rich real-life example to explore risks associated
with the innovation of a digital business model – that is, the design of a new IT-enabled
ecosystem consisting of many diverse and interdependent actors integrated into value
creation and capture processes.
Downloaded by UNIVERSITY OF ADELAIDE At 13:13 02 September 2017 (PT)

VPP case study methodology

To address co-innovation risks in digital business models, the paper adopts an exploratory
multiple-case study research design that allows us to research unexplored topics (Yin,
2014). For an in-depth examination of the risks, the authors conducted 22 semi-structured
interviews with managers from leading German energy utilities, as well as major providers
of VPP technology. We chose the case companies for their popularity and their market
position, deliberately choosing pioneers, as well as fast and late followers, to compare their
differing approaches. To provide a holistic view, we included perspectives from all
ecosystem actors over the value chain. For instance, we interviewed leading project
managers from the supply side (power operators), the customer side (industry, grid
operator), internal project managers, as well as leading research institutes for industry
standard development. In addition, we collected, clustered and listed 36 press articles and
official documents along with internal documents (partnership agreements, supplier
conditions, legal documents, etc.). Finally, we included the observations made by one of

Figure 1 Logic of VPPs

PAGE 38 JOURNAL OF BUSINESS STRATEGY VOL. 38 NO. 5 2017

 the authors who participated in the VPP project in one of the case companies for more than
10 weeks.

Management of risks in digital business model innovations: a new framework

From the in-depth analysis of both the best and the worst practices and experiences
mentioned by the interview partners, our research findings suggest a four-step framework
for the management of risks associated with the innovation of business models with multiple
partners (see Figure 2).

First step: mapping the ecosystem and interdependencies

The major challenge of this step is to assess whether the company is maneuvering through
the interplay of several interdependencies. Managers need to identify their ecosystem
partners and their roles first. The actors participating in the digital business model
innovation are, for instance, the providers of technical components, complementary
products and services, as well as the marketers and the customers.
At this stage, it is crucial to diagnose the interdependencies for each partnership required
Downloaded by UNIVERSITY OF ADELAIDE At 13:13 02 September 2017 (PT)

for the collaborative creation and functioning of the new business model. Managers apply
the concept of interdependence to take into account that organizations rely on an
exchange of resources with external actors such as suppliers, competitors and regulators
(Katila et al., 2008). Our research revealed three main sources of interdependence salient
in the VPP business model innovation: regulation-driven interdependence, technological
interdependence and contractual interdependence. First, regulatory requirements shape
the interdependence of ecosystem relationships, especially in highly regulated industries
like the German energy sector where the partners must apply directives for shut-down/
response times or grid-operator requirements and certified guarantees of supply origins
simultaneously and strictly. Second, the innovation of a digitally enabled business model
bears critical technological interdependencies: to function appropriately, software and
hardware components from several providers must be compatible and technologically
integrated. In VPPs, this is especially important for the connectedness of all control devices
in the complete system, as well as for valid software codes, for the linkage to the grid
system operators of VPPs. Third, critical interdependencies become manifest in
collaborative agreements that set mutual contractual obligations for actors and economic
sanctions for failure to fulfill them. Because in the VPPs, all customers are also suppliers of
energy, the failure of performance by one actor may affect the whole ecosystem. If a vendor
of hardware boxes does not deliver on time, the customers cannot be connected to the VPP
in a timely manner and the whole business model suffers.

Figure 2 Risk management framework for innovations in ecosystems

I. IV.
Mapping the II. III. Collaboraon
Ecosystem and Risk Idenficaon Risk Assessment with Innovaon
Interdependencies Partners

VOL. 38 NO. 5 2017 JOURNAL OF BUSINESS STRATEGY PAGE 39

 ‘‘An innovative response that compensates for the loss of
market share involves offering consultancy services and new
storage solutions for the fluctuating renewable power
supply.’’

Second step: risk identification

Following the insights gained in step one, managers should identify distinct categories of
risks associated with the innovative business model. First, there are typical risks of internal
corporate R&D and product innovation projects (e.g. development of a new component).
These risks can be mitigated with well-known technology and innovation management
tools, such as the Stage-Gate® model. Another category of risks relates to the strategic
environment of the company and its dynamics (e.g. market changes, appearance of new
Downloaded by UNIVERSITY OF ADELAIDE At 13:13 02 September 2017 (PT)

substitute technologies, governmental interventions, etc.). Those external risks, such as

tightening of ecological regulations, can seriously affect the new ecosystem and its actors.
In addition to these two types of risks, the third risk category results from the fact that
multiple partners base the novel ecosystem on joint innovation activities. Such innovation
risks fall into two subcategories: relational and performance risk (Das and Teng, 1996).
While relational risk refers to the “will” dimension of collaborative innovation, performance
risk primarily relates to the “skill” dimension. Relational risk is associated with opportunistic
behavior such as distortion of information and fraud. On the contrary, performance risk of
co-innovation relates to capability factors: despite the willingness to innovate in
collaboration with other partners, firms might not be able to do so due to the lack of skills.
For example, in the case of VPP, the developer of important software could not deliver the
sophisticated and novel software and had to be replaced by another provider, which
caused a delay and opportunity costs borne by all ecosystem actors. What is more, it also
caused high transaction costs for search and negotiation borne by the system integrator.
Our study has shown that managers should clearly distinguish between different types of
risks to be able to address them in an effective way.

Third step: risk assessment with the risk radar

To map and assess risks, many companies deploy a risk response matrix. This popular
managerial tool reflects two key risk dimensions – the potential impact, or magnitude, and
the likelihood of a certain risk (Aabo et al., 2005). Our research shows, however, that when
many partners innovate the digital business model, such as VPP, this approach to risk
assessment has to expand. Relational and performance risks can be contagious, as they
might affect not only the given contractual partner but other interdependencies within the
ecosystem, passing problems onto other companies in the value network, such as
complementary innovators, intermediaries and system integrators.
Based on our research findings, we assume that, in new digital ecosystems, managers
must consider an additional dimension for risk assessment“ the outreach”. This dimension
reflects whether the risk affects only the focal company, one or many of its direct
collaboration partners or even the entire ecosystem.
Based on the key risk factors mentioned above, we suggest a risk radar, a novel tool to
visualize and compare risks associated with the relationships the company maintains to
other innovators within the ecosystem. The five-point scale for three possible
interdependencies with the given innovation partner shows their estimated degrees. For the
two sorts of risks of collaboration with the given innovation partner (that is, the relational and

PAGE 40 JOURNAL OF BUSINESS STRATEGY VOL. 38 NO. 5 2017

 the performance risk), as well as for the strategic environmental risk (as far as it affects this
collaboration with the given partner), the radar also assigns a risk rating on a five-point
scale. This happens by combining both estimated magnitude of risk and the likelihood of
its occurrence (Aabo et al., 2005). The risk outreach goes beyond the bilateral dimension
and reflects the levels in the ecosystem that are affected by the risks embedded in the
given innovation partnership between two companies (Figure 3).

Fourth step: collaborate with innovation partners

After identifying and assessing the interdependencies and risks, organizational
decision-makers must be able to come up with a strategic action plan. For successfully
managing the risks of digital business model innovations, it is crucial to integrate selected
partners in this process. Depending on the allocation of responsibility for mitigating
particular risks and the decision whether those risks are manageable independently or
collaboratively, we suggest the following risk matrix that helps draw detailed mitigation
plans for specific types of risks (see Figure 4).
In sum, the example illustrates the practical use of the proposed framework. As indicated
above, an essential performance risk in setting up a VPP business model results from
Downloaded by UNIVERSITY OF ADELAIDE At 13:13 02 September 2017 (PT)

technological complexity. The operator of a VPP needs to ensure the synchronization of the
software layer, the hardware devices and the transmission standards of the respective grid
operators. Here, this innovation partners are the software vendors and the grid operator.
The relationship with the grid operator reflects a high level of regulatory and technological
interdependencies, while the relationship with the software provider shows high level of
technological and contractual interdependency.
The findings also reveal that the likelihood of the technological interdependency risk in
setting up a VPP is relatively high. Moreover, the outreach of this risk is systemic, as it
affects nearly the entire ecosystem. Without a functional software layer, not even a single
power supplier – and thus, not even a single customer – can be connected. In this case,

Figure 3 Risk radar for co-innovation relationships

VOL. 38 NO. 5 2017 JOURNAL OF BUSINESS STRATEGY PAGE 41


Downloaded by UNIVERSITY OF ADELAIDE At 13:13 02 September 2017 (PT)
Keywords:
Risk management,
Internet of Things,
Business model innovation,
Digital innovation,
Energy industry,
Virtual power plant
PAGE 42 JOURNAL OF BUSINESS STRATEGY
Figure 4 Risk response matrix in the ecosystem
the regulation will not qualify the business model for going online on the grid. Also, the
supplier of hardware boxes that allow communication and control of the decentral power
plants will be affected, as its hardware is highly interdependent with the software.
For the management of this sort of risk, the most suitable approach is to “help them do it”.
Even if the VPP operator is not directly responsible for managing the risk, the performance
of nearly all other partners (e.g. customers, power suppliers, complementors) relies on the
prevention of this hazard. Thus, the VPP operator must collaborate with the partners (e.g.
via cross-organizational teams) to support them in mitigating the risk.
Conclusion
In sum, this paper reveals that digital business model innovations do not only give birth to
new business opportunities, but they also give rise to serious new risks. These risks result
from interdependencies between multiple partners who take part in the business model
innovation. Therefore, organizational decision-makers have to identify, assess and manage
these risks in a strategic manner. To make digitally enabled ecosystems both profitable and
sustainable, risk management calls for new strategies that transcend the boundaries of a
single firm and build on collaboration between interdependent partners to create mutual
value. By applying such collaborative approaches to risk management, firms can
strengthen the relationships with key partners and gain the ability to manage complex
innovation activities needed to set up digital business models. Collaborative risk
management, thus, has to become an essential part of the new approach to the risk
management in technology-driven industries.
References
Aabo, T., Fraser, J.R.S. and Simkins, B. (2005), “The rise and evolution of the chief risk officer:
enterprise risk management at hydro one”, Journal of Applied Corporate Finance, Vol. 17 No. 3,
pp. 62-75.
Adner, R. (2006), “Match your innovation strategy to your innovation ecosystem”, Harvard Business
Review, Vol. 84 No. 4, pp. 98-107.
Calandro, J. (2015), “A leader’s guide to strategic risk management”, Strategy & Leadership, Vol. 43
No. 1, pp. 26-35.
Chesbrough, H. (2007), “Business model innovation: it’s not just about technology anymore”, Strategy
& Leadership, Vol. 35 No. 6, pp. 12-17.
Das, T.K. and Teng, B. (1996), “Risk types and inter-firm alliance structures”, Journal of Management
Studies, Vol. 33 No. 6, pp. 827-843.
VOL. 38 NO. 5 2017
 de Jong, M. and van Dijk, M. (2015), “Disrupting beliefs: a new approach to business-model
innovation”, McKinsey Quarterly, Vol. 3, pp. 66-75.

Iansiti, M. and Lakhani, K.R. (2014), “Digital ubiquity: how connections, sensors, and data are
revolutionizing business (Digest summary)”, Harvard Business Review, Vol. 92 No. 11, pp. 91-99.

Katila, R., Rosenberger, J.D. and Eisenhardt, K.M. (2008), “Swimming with sharks: technology
ventures, defense mechanisms and corporate relationships”, Administrative Science Quarterly, Vol. 53
No. 2, pp. 295-332.

Manyika, J., Chui, M., Bisson, P., Woetzel, J., Dobbs, R., Bughin, J. and Aharon, D. (2015), Unlocking
the Potential of the Internet of Things, McKinsey Global Institute, Washington, DC.

Olson, E.G. (2005), “Strategically managing risk in the information age: a holistic approach”, Journal
of Business Strategy, Vol. 26 No. 6, pp. 45-54.

Osterwalder, A. and Pigneur, Y. (2010), Business Model Generation: A Handbook for Visionaries, Game
Changers, and Challengers, John Wiley & Sons, Hoboken, NJ.

Porter, M.E. and Heppelmann, J.E. (2014), “How smart, connected products are transforming
competition”, Harvard Business Review, Vol. 92 No. 11, pp. 11-64.

Vermesan, O. and Friess, P. (2014), Internet of Things – From Research and Innovation to Market
Deployment, River Publishers Series in Communication, available at: www.internet-of-things-research.
Downloaded by UNIVERSITY OF ADELAIDE At 13:13 02 September 2017 (PT)

eu/pdf/IERC_Cluster_Book_2014_Ch.3_SRIA_WEB.pdf

Yin, R.K. (2014), Case Study Research: Design and Methods, 5th Edition, Sage Publications,
Los Angeles.

Zott, C., Amit, R. and Massa, L. (2011), “The business model: recent developments and future
research”, Journal of Management, Vol. 37 No. 4, pp. 1019-1042.

Further reading
Casadesus-Masanell, R. and Ricart, J.E. (2011), “How to design a winning business model”, Harvard
Business Review, Vol. 89 Nos 1/2, pp. 101-107.

Corresponding author
Dominik Dellermann can be contacted at: dominik.dellermann@uni-bamberg.de

For instructions on how to order reprints of this article, please visit our website:
www.emeraldgrouppublishing.com/licensing/reprints.htm
Or contact us for further details: permissions@emeraldinsight.com

VOL. 38 NO. 5 2017 JOURNAL OF BUSINESS STRATEGY PAGE 43