Exploring the Metaverse from a Legacy Company Perspective: A C apabilities-Based View

Legacy Companies

A legacy company can be identified by its historical repository of beliefs, knowledge, and practices, ²⁹ which it preserves over time. ³⁰ Such companies adopt basic and long-term routines that might develop new capabilities, but that also make adaptation to change difficult. Scholars have explored how successful companies can be reluctant to adjust, offering convincing explanations ³¹ and remedies. ³²

Not all legacy companies share this fate. Some fail to capitalize on past successes and fumble, others adapt and find balance. Adaptation can vary considerably, as emerging paradigms can make technologies obsolete in some industries. To survive, companies are often forced to modify their legacy business quickly. ³³ For others, adaptation can be softer, occurring over longer periods with less of an impact on the legacy business model. ³⁴

Legacy companies trace their origins back to a previous technological era. ³⁵ They remain curiously skeptical of new technological breakthroughs, while other firms embrace advancements. ³⁶ In contrast, digitally born firms exploit the full potential of modern business environments focused on a dense web of interdependencies between companies. These interdependencies are designed and accomplished through digital technologies and are difficult—if not impossible—to replicate. Unsurprisingly, legacy companies often deem it too complicated to leverage these discrete technological components and fully utilize their ecosystems. ³⁷

Legacy companies are normally undiversified. ³⁸ They focus on the same industry, rely on their original repository of knowledge, and are anchored in their history. ³⁹ Stable operations and routines determine the lessons to be taken from experience. ⁴⁰ This adds to the company’s stock of knowledge. The processes of these companies are time-invariant, meaning that the mainstays of their production routines are somehow entrenched in traditional production procedures. Technological updates are mainly intended to support existing procedures, minimize operational mistakes, and increase efficiency. ⁴¹ Legacy companies are not data-driven, but they are designed to minimize operative mistakes. ⁴² They do not pursue disruptive innovations, and they do not generally have internal units assigned to exploration. Legacy companies are not, by definition, resistant to technological changes, but they are orientated toward finding an equilibrium between original beliefs and new practices. This orientation does not prevent legacy companies from growing, nor does it require these firms to remain fixed as small or medium enterprises (SMEs), but rather it implies the pursuit of organic growth by increasing production capacity or improving products. They therefore represent an interesting case to consider amid technological change, as they must balance day-to-day operations and adaptation to changes.

The Metaverse

Recent literature offers firms advice on how to develop tethered digital platforms, ⁴³ create digital business models, ⁴⁴ and become more customer-oriented. ⁴⁵ However, advice is of little use if technological paradigms continue to emerge, as with the metaverse.

Put simply, “metaverse” means “beyond the universe”—a hypothetical, synthetic environment linked to the physical world. In his 1992 science-fiction novel, Snow Crash, Neal Stephenson coined the term “metaverse”: “he’s in a computer-generated universe that his computer is drawing onto his goggles and pumping into his earphones. In the lingo, this imaginary place is known as the metaverse.” ⁴⁶ The metaverse is a perpetual multiuser environment, blending physical reality with digital virtuality through convergent technologies, ⁴⁷ such as VR, AR, mixed reality, blockchain, avatars, and software agents. ⁴⁸ The blend of physical reality and digital virtuality offers users immersive, interactive, realistic, and augmented digital experiences. ⁴⁹ The growing permeability between the physical and digital worlds converges seamlessly, making the metaverse a limitless and ubiquitous environment.

Several issues make full convergence impossible today and problematic in the future. Digital worlds are currently proprietary ecosystems that grant users access and regulate content and services. They are not interoperable. Users must have different accounts to access various platforms, and they cannot use their digital belongings freely across different environments. ⁵⁰ Fully convergent metaverse applications also demand extraordinary storage capabilities and computational requirements that require global infrastructure. ⁵¹

Today, only fragmented elements of the full paradigm, dubbed as metaverses, exist. ⁵² Hyperreal video games like Roblox and Fortnite offer metaverses where users can connect, work, and play together in a digital space. ⁵³ Users can also buy digital products using the platform’s currency. The video gaming industry is experiencing an extraordinary boom, and recent market analyses report that gamers in 2023 will total 2.7 billion. The global revenue of the industry in 2023 exceeded $200 billion. ⁵⁴ Video gaming companies are gaining momentum, and their figures are impressive. Fortnite has over 350 million registered users and frequently hosts 8 million concurrently. Roblox has 43.2 million active users. More than 170 virtual worlds categorizable as publicly accessible metaverses exist. The growth rate of users of virtual worlds is estimated at around 10% per annum, and the majority of avatars belong to users under 18 years of age. ⁵⁵ New generations spend the highest percentage of their leisure time on video games and are a perfect target market due to their high-spending attitude, enjoyment of digital novelty, and desire to seek escape in virtual worlds. ⁵⁶ The market case for industrial metaverses is also on the rise. Companies spent about 22.1 billion in 2022, with an estimated compound annual growth rate (CAGR) of 17.5% for the 2021-2031 period. ⁵⁷

However, metaverse communities can interact exclusively in their individual virtual world, making platforms effectively separate technological silos. These unsolved issues could render the worldwide economic impact of the metaverse problematic, but forecasts remain positive. Christensen and Robinson’s analysis estimated a 2.8% contribution of metaverses to the global GDP in ten years but concluded that the impact will differ by sector. ⁵⁸ Even if the idea of a complete metaverse substituting or replicating the entire real world is far from reality today, specific applications of metaverses offer companies several opportunities. ⁵⁹ First, metaverses enhance brand visibility and customer activation. Major brands are increasingly investing in virtual spaces, experimenting with new phygital product launches and other initiatives to engage customers. Second, metaverses offer new revenue-generation opportunities through the sale of virtual goods. Third, metaverses offer large-scale training prospects in various fields. ⁶⁰

The Dawn of a New Technological Paradigm

The idea underpinning the metaverse did not appear overnight. Second Life, founded in 2003, was one of its predecessors. Two recent events, however, marked a rise in interest about the metaverse. First, large corporations began investing heavily in the metaverse. Famous chip maker Nvidia invested in an omnichannel platform; Microsoft acquired the videogame holding company Activision Blizzard; and Alphabet acquired AR-VR hardware company Raxium. Second, in October 2021, Facebook’s CEO, Mark Zuckerberg, announced “Meta,” a new company brand for Facebook apps and technologies. Rebranding the giant social media company was instrumental in supporting a future vision where metaverses play a key role.

Together with an unprecedented social and communication campaign, these events acted as signals of the emergence of this technological paradigm. Announcements came from one of the largest companies in the digital industry, were backed by a vast investment program, and were popularized through commercial campaigns. ⁶¹ The echo caused by these campaigns, promoted by Meta and several competitors, ⁶² reached most managers worldwide—even those working in companies far from hi-tech. Metaverses were deemed the new frontier for industries such as higher education and travel.

For most legacy companies, metaverses were relatively unknown and were not considered. For these firms, the gap between internal knowledge and the resources needed to successfully enter a metaverse was noticeable. Legacy companies are attached to well-established processes and traditional routines. Most adopted a “wait and see” attitude, but some started exploring virtual worlds or the general paradigm. ⁶³ Examining this exploratory process can shed light on not only what prompts investigation but also how it is conducted.

Legacy companies exploring new technological innovations engage in a search process that goes beyond the current business model and the firm’s traditional objectives. ⁶⁴ The search process consists of a set of activities that allow companies to examine new emerging logic and detect changes occurring in their environment. This exploration enables firms to identify a possible strategic fit, linking the deliberated strategy to its execution context. For legacy companies, achieving strategic fit is extremely important, as their longevity can be attributed to their persistent capacity to reconfigure and align with their environments, all while preserving their legacy business. ⁶⁵ Legacy companies must reconfigure their knowledge base, leveraging both existing and new knowledge. This reconfiguration can be unpacked by focusing on co-specialization. Co-specialization implies the existence of some capabilities whose utility and value are greater when jointly deployed with a complementary capability. ⁶⁶ This enhances value, making imitation difficult, if not impossible. Co-specialization requires not only that capabilities exist but also that managers are involved in the arrangement of newly co-specialized capabilities. As discussed, “managers should identify, develop, and utilize in combination specialized and co-specialized capabilities.” ⁶⁷ Co-specialization occurs when managers perceive the existence of two or more complementary capabilities and work to have these coupled and deployed together to use a resource differently. The chances of success for this process increase according to the degree of complementarity between the capabilities. The more these are functionally related, the better the coupling will be. The application of resources will consistently be more efficient. ⁶⁸

Notwithstanding managerial literature, which offers a rational analysis of how important exploration is to a company’s survival, research thus far has neglected to provide an explicit investigation of how the process unfolds and its outcomes in terms of strategic fit. On one hand, co-specialization is extremely cost-effective for legacy companies looking to explore and reconfigure. On the other hand, the importance of reconfiguration in pursuing strategic fit is well known. ⁶⁹ Accordingly, we argue that the missing link between these concepts is the contextualization of co-specialization in the exploration process and its outcomes in achieving new strategic fit configurations. Building on this, we analyze how legacy companies perform metaverse exploration through capabilities co-specialization, and in what way they consistently achieve different strategic fit configurations.

Alpha: Exploring Metaverses to Support Research and Development Procedures

In October 2021, “Alpha” was working toward a broad digital initiative and began considering metaverse technologies. The initial trigger stemmed from some influential shareholders. They urged management to create a procedure for internal research and development (R&D) that would comply with COVID-19 social distancing. The Head of Digital Transformation was the main sponsor of the initiative. She became intrigued after reading reports about successful fashion shows hosted in metaverses.

Instead of relying on existing metaverses, Alpha decided to open a privately owned metaverse, granting access only to invited designers. Concerns about possible data breaches in the archive of exclusive designs made the proprietary solution preferable. ⁸⁶

The metaverse initiative had three objectives. First, Alpha wished to improve its R&D process, allowing internal designers to collaborate in a virtual setting. Second, product managers needed to be able to visualize previews and share them with prospective customers. Third, Alpha wanted to make its archives accessible to any designer. The first objective was to get the company to consider a metaverse. The other two emerged later on:

We were looking for a solution to our R&D activities but soon everyone jumped on the project. We proposed to extend the tools the company was deploying to update product managers. Later on, colleagues working in the archive asked if the integration of previous collections in the metaverse was conceivable.—Alpha, Innovation Manager

Internal coordination was a fundamental enabler of the exploration process. Complementary capabilities emerged, extending the purpose (i.e., the “why”) of the project. These fundamental aspects limited mistakes and created a more user-friendly virtual world. IT capabilities allowed users to evaluate how the current technological infrastructure could support large data exchange. Designers and developers, already skilled in AR and VR applications, developed 3D versions of artifact mock-ups that were suitable for visualization. The same employees also suggested tools to optimize collaboration with internal archivists. Archivists proposed ways of organizing digital collections to facilitate consistent cataloging and provide a better user experience. The admixture derived from these transversal capabilities created a fecund ground for supporting exploration. This case allowed for the observation of the extemporaneous coupling of capabilities, enabled by limited managerial action. Word-of-mouth attracted several subjects to the idea, forming a new group dedicated to the metaverse. Managerial action was thus related mostly to providing the necessary financial support and formalizing the cross-functional team.

The exploration initially assessed specific needs. It began cautiously, and then extended to a fully running, private virtual world. Alpha explored the possibilities stemming from the development of a specific proprietary metaverse in incremental steps. Existing and newly discovered technological complementarities emerged, paving the way for capabilities co-specialization. ⁸⁷ This co-specialization encouraged the company to continue exploring opportunities beyond the accomplishment of the initial two steps, leading to the development of a fully virtual archive. A third purpose thus emerged, aligned with existing capabilities.

Alpha was able to valorize its intellectual capital, making it accessible to relevant stakeholders by increasing the invited designers’ engagement. Consistently, as of today, about 70% of the designers collaborating with Alpha have used the virtual environment and plan to continue to use it. The success of this project allowed Alpha to better implement strategies for collaborative innovation with designers. Alpha’s current environment in fact requires designers to work with many partners through digital and remote collaboration.

Beta: Exploring Metaverses to Manage HR Onboarding and Training Activities

Beta is frequently contracted to repair telecommunication systems and towers—a complex activity that requires appropriate safety practices. To nurture internal competencies and improve safety, Beta funded an internal academy. The internal academy is one of the key assets of the company, as it fosters a positive work environment.

Metaverse exploration began post-pandemic, as decision-makers needed to find innovative solutions to allow them to deliver mandatory training. On-field training in a virtual world that could replicate real conditions seemed an appropriate solution. However, the trigger to investigate this came from a videogame club established within the company by the youngest employees. The Managing Director, who was the sponsor of the project, recalls:

Being a gamer myself, I’ve always encouraged video games. When one of the guys unconsciously noticed that virtual worlds may have helped in preventing accidents, I was thrilled. In the past, virtual worlds were extremely complex and expensive, but not today. I shared my thoughts with the board of directors. We said: why not?—Beta, Managing Director

The turning point of the project was the Managing Director’s involvement. The fact that an idea coming from employees was feasible, timely, and relevant made them confident and engaged. Their participation was accordingly active, and they willingly provided insights about their competencies. The Managing Director interpreted the available complementary capabilities and resources and supported the team.

Beta developed an ad hoc metaverse for staff training. Soon after, the company metaverse was also used by the HR department for onboarding. ⁸⁸ According to the managers, the project was successful because of the different capabilities that were activated. For example, IT capabilities were fundamental in supporting the infrastructure and its new integrated tools. Likewise, the AR/VR capabilities of the electrical engineers’ division fostered the development of virtual environments to replicate real ones. The HR department pushed the exploration of metaverses beyond the initial goals, suggesting that tools be added to measure users’ stress levels and simulate workplace injuries. Through these tools, this metaverse was not a simple videogame anymore. Users could even gain insights into what an electric shock felt like. The HR department set procedures to collect feedback from users, and this contributed to the internal knowledge base.

The co-specialization occurring between technical and organizational capabilities made full metaverse exploration possible. Replicating reality facilitated proper training, made users feel more comfortable, and enhanced the company’s knowledge repository. About 220 employees use the metaverse on a monthly or bi-monthly basis for training. Likewise, some of Beta’s customers approached the company to provide feedback on their metaverse’s initiative.

Beta is currently improving its operation context. The company is capable of providing more specific training to its employees, reducing injuries in the workplace, and better fitting normative requirements. Communication tower maintenance efficiency also increased, as employees were presented with more complex scenarios during simulations.

Chi: Exploring Metaverses to Commercialize New Products and Generate New Revenue Streams

Chi is a winemaker. Recently, the company needed to find a channel to sell luxury wine bottles while keeping them in its cellars at the customers’ discretion. Not all customers’ cellars were appropriate for ensuring a proper aging process. To maintain their original taste, extremely high-priced bottles needed to be preserved in environments with consistent temperature and humidity.

Chi was looking for a solution that would allow customers to own the bottle (which they could obtain upon request), keep it safe in Chi’s cellars, trace possible future re-sales by customers, and avoid counterfeiting. The sale of non-fungible tokens (NFTs) corresponding to real bottles hosted in the company’s cellars seemed the most suitable solution:

We were in a difficult situation. Customers were complaining. Some top bottles were not aging properly because their cellars were not appropriate . . . this was difficult to explain. We came across some research reports about NFTs . . . we were also scrutinizing what our most advanced competitors were doing, so we concluded NFTs were the best solution.—Chi, Brand Manager

Chi started exploring possible partners and platforms. It transpired that one of the distributors had already created a virtual store to sell real bottles to gamers using Sandbox and Roblox platforms. According to Chi’s Marketing Manager, any investment to create a proprietary metaverse store would not have yielded a positive short-term return:

Managing a store in a virtual world, not just opening, was expensive. It required hiring new staff and implied solving several possible internal issues. We believed it was easier and cheaper with a partner that could provide a platform [i.e., a virtual store]. As we were already using blockchain protocols, the start of the project required marginal efforts from IT and marketing. However, our needs required us to customize the new channel accordingly.—Chi, Digital Marketing Manager

The initial exploration began through a corner in the virtual store of a distributor, whose customers could be easily targeted by the company. The primary exploration was not challenging, but the later stages required joint efforts by internal teams. Blockchain capabilities were customized from the supply chain, as blockchain allowed for traceability and managed transactions with consumers. Organizational capabilities—together with design thinking, product innovation, and IT capabilities—were crucial to developing NFTs, embedding enhanced graphical features, and making digital bottles pleasant in a human-friendly store. ⁸⁹ Complementarities among existing capabilities proved fundamental to fully exploiting internal blockchain protocols and strengthening relationships with distributors and their customers. In Chi’s case, the consideration of an external, trustable partner with some of the enabling technology in supply chain management was fundamental. Internal collaboration between employees and functional managers was vital, as it ensured the emergence of capabilities, but managerial orchestration of the internal and external sides made the difference between success and failure. At the end of the exploration, NFTs were used to sell a new bundle, offering a product with higher margins and an intangible product that guaranteed several benefits. Owners and managers perceived the brand to be more protected using this schema, as counterfeiting risks were mitigated. Internal reports showed that the brand was perceived as more valuable by consumers as the company was able to ensure proper aging post-purchase. Chi thus started to adhere more to consumers’ requests and better fit with changing markets. In a similar fashion, the implementation of a metaverse-based strategy allowed Chi to better align with the strategies of its key distributor.

Delta: Exploring Metaverses to Target New Consumers and for Brand Co-Creation

Delta is an apparel distributor that is extremely active on social media and digital channels. Nevertheless, brick-and-mortar stores account for about 70% of Delta’s revenue.

In the wake of the hype, the marketing unit began exploring the metaverse. The initial goal was to test younger customers’ reactions to products in a digital showroom inside Nintendo’s Animal Crossing. Due to the success of this trial, the digital showroom became a virtual store, selling customized digital sweatshirts for avatars. Later on, it sold customized real-world products, which customers could receive at home or pick up in a physical store. Delta has since opened showrooms in Roblox and Decentraland.

We jumped on the Metaverse bandwagon as everyone was talking about it and we were afraid to become laggards. While our core business is, and always will be, brick-and-mortar, we were afraid of losing touch with younger consumers. After the COVID-19 pandemic, our financial resources were limited, so we decided to proceed step by step.—Delta, Junior Marketing Manager

The goal was to establish a new touchpoint with young customers through video gaming. Initial success was measured through interactions with brand content, which pushed Delta to increase its commitment. Around 2 million users visited the virtual showroom in two years. At first, Delta relied principally on its marketing and digital communication capabilities, using virtual worlds for advertising. Soon, Delta began to explore the sale and distribution of products in a metaverse. It also considered how it could leverage insights for new products and audiences populating this environment. ⁹⁰ This required the involvement of other sectors of the company. The manager in charge of the initiative was given free rein by the owners and was able to select members according to his experience and their individual skills, which made the coupling between capabilities easier. According to the IT manager, the process unfolded as follows:

We were asked by a marketing manager how we could let people design new customized products in a virtual shop. We thought our skills—notably, in coding, AI, and blockchain—were appropriate. We contributed to the project by setting up the virtual space and defining how to manage transactions. We needed to cooperate with other internal units to define products’ specifications, and new capabilities were needed to operate the store. As we were targeting new consumers in new markets, it was also necessary to include experts from other areas in the project.—Delta, Senior IT Manager

Later stages of exploration centered around deploying existing assets through co-specialization. Capabilities in digital management from IT and finance were coupled with marketing capabilities. The virtualization capabilities of product developers already using AR/VR were combined with customer service capabilities to support customers in the development of new ideas. Team members played a relevant role in identifying colleagues who might be helpful for the project. However, even in this case, managers were fundamental in supporting and institutionalizing team activities. In the first stage, hard capabilities deriving from IT played a principal role in the evaluation of technological constraints. This importance was eventually matched by soft capabilities, merging technology with marketing. The Senior IT Manager stressed that developing a dialogue between engineers or programmers and marketers was initially difficult, but the process got easier when team members became aware of the complementarity between their skills. The coupling of different capabilities concerning metaverses facilitated reengineering and product innovation. The hyperrealism of high-quality rendering in virtual worlds encouraged customers to co-create new digital products. ⁹¹ Delta’s virtual space soon became the perfect place to engage customers in brand-promoted activities and nurture brand communities. Delta explored metaverses through incremental steps, during which different capabilities were realized. Ultimately, the metaverse was observed as a tool for product co-creation, in conjunction with consumers. Some products developed in such a way that they obtained favorable feedback both in the form of NFT and real-world product sales. The percentage of consumers increased by around 15% in one year. This process allowed Delta to identify new assets and develop actionable knowledge over time. The company is now widely recognized by competitors as a pioneer of metaverses. Delta’s marketing strategies now align with the new markets the company wishes to target.

Between-Case Analysis: Legacy Companies’ Exploration of Metaverses

The case studies we examined shed light on why legacy companies started exploring metaverses, how the process of exploration unfolded, and what the results of this exploration were.

At first glance, the reasoning behind the exploration seems obvious. The exploration began between September 2020 and December 2021, during the COVID-19 pandemic. However, concluding that this was the only reason for this decision would be highly inaccurate. The COVID-19 pandemic accelerated processes that were already in place, and legacy companies mobilized internal capabilities to assess whether or not an exploration of the metaverse was possible and what the most promising directions might be. ⁹² Managers from these companies reported that exploration by other firms in their industry was highly limited. As the pandemic impacted all firms with no exception, we can argue that opportunities offered (as perceived) by metaverses intersected the knowledge repository of the companies.

All companies began exploring metaverses in an attempt to find a possible solution to an issue: how to reconfigure R&D in line with environmental constraints (Alpha); how to deliver mandatory training (Beta); how to solve a customer issue (Chi); and how to engage with new customer segments (Delta). Searching for a solution through metaverses leveraged their existing capabilities. In the case of Alpha, a project to extract value from intangible assets through digital technology was already in place and, in the case of Beta, the internal community of gamers was instrumental in allowing the firm to explore virtual environments. Only in the case of Chi was a metaverse introduced with little previous complementary capabilities. The need to resolve a customer issue prompted Chi to inspect the industry to find possible solutions. Nevertheless, all case studies suggest that the companies’ exploration stemmed from a clear reason and was, at first, limited.

To explore the selected metaverses, the legacy companies initially relied on specific units and distinguishable capabilities. They assumed that a metaverse was mainly (if not exclusively) a technological concern. For example, Alpha assigned the project to the internal digital unit; Beta relied on the IT department; and Delta relied on digital and marketing capabilities. Chi was an intriguing exception: it used a supplier’s existing experience in a metaverse as a testbed to find a solution to a customer issue (how to preserve wine and guarantee ownership) that resulted in a partial business model reconfiguration.

Soon afterward, companies realized that they needed to mobilize other internal capabilities to make their exploration of metaverses possible. Mobilized capabilities varied according to the decisions companies made about proprietary (Alpha and Beta) versus non-proprietary (Chi and Delta) metaverses. Exploration of a proprietary metaverse made specific technical capabilities, such as VR and AR, critical for management, while in the case of non-proprietary metaverses, marketing and product capabilities were of the utmost importance. In both cases, it was necessary to mobilize additional internal capabilities for two main reasons: first, soon after a metaverse project had been institutionalized, uninvolved units wanted to take part in the project; second, it became clear that the metaverse project had a clear impact on many activities and could not be considered solely technological. ⁹³

For Alpha, digitalization of the archive made internal processes faster and more accurate. For Beta, virtual representations of real worlds made training more effective. Chi created a virtual store and a new marketing channel. Delta shed light on specific customers’ preferences. After their initial exploration, the companies identified new paths in their metaverses. This happened as different internal capabilities merged: Alpha mingled internal R&D capabilities with archivists’ capabilities to facilitate a reconfiguration of the company’s offerings; Beta combined on-field technical capabilities and HR capabilities to make the analysis of training conditions more accurate; for Chi, marketing and product capabilities were mobilized to help find appropriate solutions to customers’ contradicting expectations; and, for Delta, customer relationship capabilities were merged with product innovation capabilities to exploit customer engagement. ⁹⁴

Initially, two groups emerged in our analysis. In the first group (Alpha and Delta), expectations were not specific. For these two companies, exploring metaverses was experimental as it could offer new revenue streams, mainly via NFTs and virtual sales options. This provided a new understanding of the market’s evolution. The second group (Beta and Chi) initially had more focused goals, like leveraging a metaverse for internal, pre-existing activities (Beta) or experimenting with virtual presence (Chi). The realized outcomes, not surprisingly, differ from the expected ones. For Beta and Delta, the difference between the activities carried out before and after exploring a metaverse was limited, even if the process changed and the internal capabilities were used differently. For Alpha and Chi, the distance between the activities carried out before and the activities that were made possible after exploring metaverses are relevant.