Purpose: The business model innovation construct is gaining substantive attention in management literature, emphasizing its role for creating and sustaining a firm’s competitive advantage in rapidly changing business environments. However, little advancement has been made toward a holistic, theory-based understanding of the nature of business model innovation, along with its context-specific antecedents and outcomes. Design: Conceptual Paper. Combining the theoretical insights of the literature on organizational routines and ‘activity system’ perspectives on business models, we refine the conceptualization of a business model as a cluster of interrelated routines, with its internal change dynamics determining the process and scope of business model innovation. Findings: First, we refine the conceptualization of business model innovation through the lens of a dynamic cluster of routines. Second, we recognize the roles and relevance of the different components of a firm’s business model innovation, setting the stage for future research scrutinizing these components and their influence on strategic direction and consequent performance. Third, by identifying the conditions under which the components of BMI lead to a firm’s value creation and capture, we bring answers to questions such as “What leads to significant performance differences within an industry?” and “How do firms sustain such differences over time?” Originality / Value: We distinguish between potential and realized business model innovation processes, and derive theoretical propositions regarding external and internal environment, business model innovation, and value creation and value capture.