Here is an excerpt from article written by Constantinos C. Markides and Daniel Oyon for MIT Sloan Management Review. To read the complete article and check out other resources, please click here.
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Fighting against a disruptive business model by rolling out a second business model is one option for companies to consider. But to make that work, you need to avoid the trap of getting stuck in the middle.
INCREASINGLY, ESTABLISHED COMPANIES in industries as diverse as airlines, media and banking are seeing their markets invaded by new and disruptive business models. The success of invaders such as easyJet, Netflix and ING Direct in capturing market share has encouraged established corporations to respond by adopting the new business models alongside their established ones. Yet, despite the best of intentions and the investment of significant resources, most companies are unsuccessful in their efforts to compete with two business models at once.
According to Michael Porter and other strategy theorists, managing two different business models in the same industry at the same time is challenging because the two models (and their underlying value chains) can conflict with each other. 1 For example, airlines selling tickets through the Internet to fight back against their low-cost competitors risk alienating existing distributors (the travel agents). Similarly, established newspaper companies that offer “free” newspapers to respond to new entrants risk cannibalizing their existing customer base. By attempting to compete with themselves, Porter argued, companies risk paying a significant straddling cost: damaging their existing brands and diluting their organizations’ cultures for innovation and differentiation.2
THE LEADING QUESTION: Should companies adopt a second business model in their main market?
1. Responding to a disruption by adopting a second business model in the same market can be an effective strategy.
2. Your second business model should be different from your existing one and different from that of the disrupter.
3. Keep the two separate enough to avoid conflicts, but leverage potential synergies.
4. His view was that a company could find itself “stuck in the middle” if it tried to compete with both low-cost and differentiation strategies.3
The Case for Separate Units
The primary solution proposed to solve this problem is to keep the two business models (and their underlying value chains) separate in two distinct organizations. That is the “innovator’s solution” that Clayton Christensen proposed and that has been supported by others.4 Even Porter has accepted this organizational solution.5 The rationale for this approach is straightforward: Managers at the established company who feel that the new business model is growing at their expense would want to constrain or even kill it. By keeping the two business models separate, you prevent the company’s existing processes and culture from suffocating the new business model. The new unit can develop its own strategy, culture and processes without interference from the parent company.
Sensible as this argument seems, the separation solution is not without problems and risks. Perhaps the biggest problem is that you can’t exploit the synergies between the established company and the separate unit.6 In recognition of the need to exploit the
synergies, some academics have suggested an alternative: the creation of separate business units that are linked by a number of integrating mechanisms. Several studies have now identified a number of integrating mechanisms that successful companies have put in place to exploit synergies (see “How to Integrate Separate Units”).7
Why Separation May Not Be Enough
Although the idea of creating separate business units has received a lot of attention, this approach by itself does not ensure success. In fact, there are many examples of companies that have pursued this strategy and failed (such as British Airways with its Go Fly subsidiary and KLM with its Buzz subsidiary) while other companies, such as Nintendo and Mercedes, have succeeded in playing two games without creating separate units.
We have also found that competing successfully with two different and conflicting business models involves more than creating a separate unit. Several years ago, we studied the experiences of 68 companies that faced the challenge of competing with dual business models. Our main finding was that only a handful of companies that created separate units were successful in playing two games. Many had created separate units and still failed, suggesting that separation in itself was not enough to ensure success.
If separation is not sufficient, what else should companies do? From 2007 to 2009, we studied 65 companies that attempted to compete with dual business models in their markets (see “About the Research”). By comparing the experiences of the businesses that did so successfully with those that failed, we have identified five key questions that companies need to consider if they are to improve the odds of success in competing with dual business models in the same industry.
[Here are the five questions.]
1. Should I enter the market space created by the new business model?
2. If I do enter the new market space, can I do it with my existing business model or will I need a new one?
3. If I need a new business model to exploit the new market, should I simply adopt the invading business model that’s disrupting my market?
4. If I develop a new business model, how separate should it be organizationally from the existing business model?
5. Once I create a separate unit, what are the unique challenges of pursuing two business models at once?
Markides and Oyon respond to each of these questions, offering both insights and suggestions that can help leaders make appropriate decisions. To read the complete article, check out the notes, and obtain information about a subscription, please click here.
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Constantinos C. Markides is the Robert P. Bauman Professor of Strategic Leadership at London Business School. He is the author or co-author of several books, notably Game-Changing Strategies, All the Right Moves, and The Future of the Multi-national Company.
Daniel Oyon is a professor of management at HEC, Université de Lausanne, in Switzerland.