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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?
- 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: 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.
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1. M.E. Porter, “Competitive Strategy” (New York: Free Press, 1980); and M.E. Porter, “What Is Strategy?” Harvard Business Review 74 (November-December 1996): 61-78.
2. Porter, “What Is Strategy?”
3. Porter, “Competitive Strategy.”
4. J.L. Bower, and C.M. Christensen, “Disruptive Technologies: Catching the Wave,” Harvard Business Review 73 (January-February 1995): 43-53; R.A. Burgelman and L.R. Sayles, “Inside Corporate Innovation” (New York: Free Press, 1985); C.M. Christensen, “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail” (Boston: Harvard Business School Press, 1997); A.C. Cooper and C.G. Smith, “How Established Firms Respond to Threatening Technologies,” Academy of Management Executive 6, no. 2 (1992): 55-70; and C. Gilbert and J.L. Bower, “Disruptive Change: When Trying Harder Is Part of the Problem,” Harvard Business Review 80 (May 2002): 94-104.
5. Despite arguing that most companies that attempt to compete with dual strategies will likely fail, Porter has also proposed that “companies seeking growth through broadening within their industry can best contain the risks to strategy by creating stand-alone units, each with its own brand name and tailored activities.” See Porter, “What Is Strategy?,” 77.
6. For example, J.D. Day, P.Y. Mang, A. Richter and J. Roberts, “The Innovative Organization: Why New Ventures Need More Than a Room of Their Own,” McKinsey Quarterly 2 (2001): 21 argue that: “the simple injunction to cordon off new businesses is too narrow. Although ventures do need space to develop, strict separation can prevent them from obtaining invaluable resources and rob their parents of the vitality they can generate.” Similarly, M. Iansiti, F.W. McFarlan and G. Westerman, “Leveraging the Incumbent’s Advantage,” MIT Sloan Management Review 44, no. 4 (summer 2003): 58-64 reported that: “spinoffs often enable faster action early on but they later have difficulty achieving true staying power in the market. Even worse, by launching a spinoff, a company often creates conditions that make future integration very difficult.”
7. A variant of the idea of creating separate units that are linked by a variety of integrating mechanisms (spatial separation) is the idea of temporal separation. See J.A. Nickerson and T.R. Zenger, “Being Efficiently Fickle: A Dynamic Theory of Organizational Choice,” Organization Science 13, no. 5 (September-October 2002): 547-566; P. Puranam, H. Singh and M. Zollo, “Organizing for Innovation: Managing the Coordination-Autonomy Dilemma in Technology Acquisitions,” Academy of Management Journal 49 (2006): 263-280; and N. Siggelkow and D. Levinthal, “Temporarily Divide to Conquer: Centralized, Decentralized and Reintegrated Organizational Approaches to Exploration and Adaptation,” Organization Science 14, no. 6 (November-December 2003): 650-669. The idea behind this proposal is that the same unit or company can undertake two seemingly incompatible activities (such as exploitation and exploration) but at different times. For instance, Siggelkow and Levinthal showed through simulations of adaptation on rugged landscape that there are advantages to organizational forms that are initially decentralized but eventually centralized. Similarly, Puranam, Singh and Zollo argued that a company needs to synchronize the shift in organizational emphasis (from exploitation to exploration) with stages of technological development — for example, structural forms that emphasize autonomy tend to outperform structural forms that emphasize coordination during exploration-intensive stages of development.
8. C.D. Charitou and C.C. Markides, “Responses to Disruptive Strategic Innovation,” MIT Sloan Management Review 44, no. 2 (winter 2003): 55-63.
9. E. Kelly, “Edward Jones and Me,” Fortune, June 12, 2000, 145.
10. C. Markides, “To Diversify or Not to Diversify,” Harvard Business Review 75 (November-December 1997): 93-99.
11. Charitou and Markides, “Responses to Disruptive Strategic Innovation.”
12. C. Markides and C. Charitou, “Competing with Dual Business Models: A Contingency Approach,” Academy of Management Executive 18, no. 3 (2004): 22-36.
13. C. Gilbert, “The Disruption Opportunity,” MIT Sloan Management Review 44, no. 4 (summer 2003): 27-32.
14. Other factors that need to be considered in making this decision are discussed in M.W. Johnson, C.M. Christensen and H. Kagermann, “Reinventing Your Business Model,” Harvard Business Review 86 (December 2008): 50-59.
15. Christensen, “Innovator’s Dilemma.”
16. D.B. Audretsch, “Innovation and Industry Evolution” (Cambridge: MIT Press, 1995); P.A. Geroski, “Market Dynamics and Entry” (Oxford, United Kingdom: Basil Blackwell, 1991); P.A. Geroski, “What Do We Know about Entry?” International Journal of Industrial Organization 13, no. 4 (1995): 421-440; and C. Markides, “Strategic Innovation,” Sloan Management Review 38, no. 3 (spring 1997): 9-23.
17. The same point is made by P. Gulati and J. Garino, “Get the Right Mix of Bricks and Clicks,” Harvard Business Review 78 (May-June 2000): 107-114. They argue: “Instead of focusing on an either-or choice — Should we develop our Internet channel in-house or launch a spin-off? — executives should be asking, ‘What degree of integration makes sense for our company?’” (ibid., 108) The same point is raised in C. Smith and A. Cooper, “Entry Into Threatening Young Industries: Challenges and Pitfalls,” chap. 14 in “Building the Strategically-Responsive Organization” (New York: Wiley, 1994).
18. Gilbert and Bower, “Disruptive Change”; S. Ghoshal and L. Gratton, “Integrating the Enterprise,” MIT Sloan Management Review 44, no. 1 (fall 2002): 31-38; C. Gibson and J. Birkinshaw, “The Antecedents, Consequences and Mediating Role of Organizational Ambidexterity,” Academy of Management Journal 47, no. 2 (2004): 209-226; V. Govindarajan and C. Trimble, “Ten Rules for Strategic Innovators: From Idea to Execution” (Boston: Harvard Business Press, 2005); and M.L. Tushman and C.A. O’Reilly III, “Ambidextrous Organizations: Managing Evolutionary and Revolutionary Change,” California Management Review 38, no. 4 (1996): 8-29.
19. Markides and Charitou, “Competing with Dual Business Models.”
20. The notion that the underlying “structure” of the system creates the behaviors in that system has been the subject of a huge literature in the systems dynamics field. See for example, J.W. Forrester, “Principles of Systems,” 2nd ed. (Portland, Oregon: Productivity Press, 1968); and A. Van Ackere, E. Larsen and J. Morecroft, “Systems Thinking and Business Process Redesign,” European Management Journal 11, no. 4 (1993): 412-423. For a more managerial angle, see C.A. Bartlett and S. Ghoshal, “Rebuilding Behavioral Context: Turn Process Reengineering into People Rejuvenation,” Sloan Management Review 37, no. 1 (fall 1995): 11-23.