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?
Findings
- Responding to a disruption by adopting a second business model in the same market can be an effective strategy.
- Your second business model should be different from your existing one and different from that of the disrupter.
- Keep the two separate enough to avoid conflicts, but leverage potential synergies.
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:
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This is an intriguing article but could it have been applied in Kodak’s film vs. digital camera 30-year struggle? Even George Fisher could not convince middle management that ” digital will not cannibalize film”, which of course it has! Likewise, the book and newspaper publishing industry is terrified that Steve Jobs will do to them what he did to the music industry with iPod and iTunes. Do our authors have to specify when their prescription will not work, period?
Agree with Walter. Very stimulating and comprehensive analysis. Apart from size and growth, analysing emerging markets on dimensions such as consumer need, (total) cost, convenience might be more meaningful as it would overcome the temptation to look at these merely as ‘low cost’ options – wherein lies the problem.
Great input for discussion! We face these questions frequently when identifying opportunities for innovation in new market spaces or “blue oceans”. Quite often such opportunities cannot easily be integrated into established businesses.
Cheers
Martin
Thank you for your inputs. I believe that established companies have a number of response options available to them and adopting a second business model is only one of them. One option might be to focus on the established business model and try to improve it so as to make it a better alternative to the disruptive one (something that British Airways is currently doing against easyJet). Another option is to “disrupt the disruptor” by counter-attacking the disruptive business model with their own (disruptive) business model (something that both Swatch and Nintendo did quite successfully). Adopting a second business model is just one of the options available and every company must decide which option is best given its own specific realities. If a firm chooses this option, then the issue that Martin raises becomes relevant–how to integrate the new way of doing things into the established business. Simply creating a separating unit is not enough. The trick is to create enough separation so that the established business does not suffocate the new unit; but keep the two close enough together so that they can exploit synergies.
The article primarily considers situations in which an established company has already been challenged by a competitor’s disruptive model and now needs to find ways to counter the disrupter’s new model.
My question is: How should an established company that has itself identified potential disruptive models to its main business (before any competitor has) proceed with defending its main business model?
- Should it actively try to attack its own model by allowing the creation of the disruptive model it has envisaged? (either from within the same company or from a different entity controlled by the company)? – And in this way always keep itself on its toes..
- Or should it start building counter measures to its main model that would be able to thwart the potential disruptive model? – Would that always be possible?
The solution is, as Mahesh alluded, to focus the organization on serving the CONSUMER’s stated desires. If the company was run by consumers, they would have avoided these disruptions.
Too many company’s track dollars, instead of usage. When I worked at Google, one thing that shocked me was how all their metrics were focused on usage. Also more companies need to encourage internal debates. Someone in the company is seeing the demise, but rather than argue, they leave for the competitor.