Is a business model reflected in the financials of organizations- a generally unseen part of an organization?

In this article, we investigate whether mature industry players vs. a disruptor’s strategic choices are reflected in their financials since the organizations’ business models (BM) differ. When a disruptor comes into an industry, do the mature traditional players’ BM become unsettled by the new approach and the new BM that is being introduced into the industry? Do the two categories of financials differ? The common modeling approach to deal with peer effects is to assume that firms in the same industry face similar regulation and institutional environments, and also face similar technology shock and limitations, investment opportunities and risks. Thus, many studies simply include industry dummies to control for unobservable and fixed industry effects. This simple approach, however, ignores the important dynamic response of the firm with respect to peer firms’ activities as well change in the peer firms’ characteristics: profit margin, sales growth, for example.

To examine the intra-industry variation of business model patterns, and whether this variation is associated with industry-level factors, we choose Southwest and Delta in the airline industry as the alternative benchmark of the peer to describe how Southwest disrupts the airline industry. We conduct a financial analysis and our empirical results reveal that the unobservable business model shift can be examined by analyzing the observable financials. While it is difficult to quantify the economic value of business model, managers consider the levels and changes of the business model in peer firms as informative for their own business model. We interpret our results by asserting that the business model of Southwest provide a shock to peer firms. Then peer firms make some changes and consequently the peer firms’ activities affect Southwest because of the spillover or feedback effect.

We extracted all financial statement information from the Compustat database. Compustat is a database of financial and market information on active and inactive companies throughout the world. The database covers 99% of the world's total market capitalization with annual company data history available back to 1950. Compustat is widely used in academia for research in finance, accounting, economics, and other business areas. It is publicly available by subscription.