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What to Do Against
Disruptive Business Models
(When and How to Play
Two Games at Once)
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HOW TO paying a significant straddling cost: damaging their We have also found that competing successfully
INTEGRATE existing brands and diluting their organizations’ with two different and conflicting business models
SEPARATE
UNITS cultures for innovation and differentiation.2 involves more than creating a separate unit. Several
Companies operating with His view was that a company could find itself years ago, we studied the experiences of 68 compa-
two business models use a
variety of integrating mech- “stuck in the middle” if it tried to compete with nies that faced the challenge of competing with
anisms to exploit synergies both low-cost and differentiation strategies.3 dual business models.8 Our main finding was that
between the models. only a handful of companies that created separate
The Case for Separate Units
1 Appoint a common gen-
eral manager overseeing
both the established and The primary solution proposed to solve this prob-
units were successful in playing two games. Many
had created separate units and still failed, suggest-
the new business lem is to keep the two business models (and their ing that separation in itself was not enough to
underlying value chains) separate in two distinct ensure success.
2 Allow different cultures
to emerge but unite the
parent with the separate
organizations. That is the “innovator’s solution” If separation is not sufficient, what else should
unit by a strong shared vi- that Clayton Christensen proposed and that has companies do? From 2007 to 2009, we studied 65
sion been supported by others. 4 Even Porter has ac- companies that attempted to compete with dual
cepted this organizational solution.5 The rationale business models in their markets (see “About the
3 Put in place targeted
but limited integrating
mechanisms
for this approach is straightforward: Managers at Research”). By comparing the experiences of the
the established company who feel that the new businesses that did so successfully with those that
4 Nurture strongly shared
values that unite the
people in the two busi-
business model is growing at their expense would failed, we have identified five key questions that
want to constrain or even kill it. By keeping the two companies need to consider if they are to improve
nesses
business models separate, you prevent the compa- the odds of success in competing with dual busi-
5 Appoint an active and
credible integrator
ny’s existing processes and culture from suffocating
the new business model. The new unit can develop
ness models in the same industry.
requires its own dedicated business model. company, similar products, different organizational
Companies are being asked to make similar deci- decisions on the same challenge!
sions in other industries. Consider the emergence of The issue of whether a new set of customers is
price-sensitive customers in the auto industry. To another segment or a different market is so subjec-
tap into the low end of the market, established car- tive that some companies treat it both ways. In the
makers are weighing whether to sell new brands to United Kingdom, Waitrose Ltd. treats home distri-
the low end using their existing business model or bution of groceries as both a segment and a market.
develop a separate business model. With the excep- On the one hand, it offers home delivery through
tion of India’s Tata Motors Ltd., most car companies its existing supermarkets. On the other hand, a new
have chosen to stay with the existing business model. unit called Ocado Ltd. caters to the needs of online
Airlines are weighing a similar issue: Should they customers using a targeted business model.
develop separate business models to serve price- Why does a company decide to treat new custom-
conscious consumers (as Southwest Airlines and ers as a totally different market rather than as another
easyJet have done), or can they cater to this market segment of the existing market? Two important con-
segment by offering cheap seats and no frills on their siderations are the size of the new market and its
existing planes? Many airlines (including Continen- growth potential. The bigger the new market, the
tal, BA, KLM and United) began with the former, more likely the company is to be aggressive and to at-
but now most are shifting to the latter. tack it as a separate market. Another compelling
In making this decision, the question is: Do the reason to approach it as a different market is that the
new customers represent an entirely different mar- new market is so strategically distinct from the exist-
ket requiring a different set of value chain activities, ing market that the business model doesn’t apply. Still
or are they just another segment that can be served another reason may be that serving both established
with the existing business model? The way most and new customers with one business model may be
banks approached Internet banking suggests that so difficult that another solution is necessary.12
they looked at the new customers as just another However, the most important factor is top man-
segment that could be served with their existing agement’s attitude toward the newly created market.
Nintendo developed the
Wii specifically to target business models. On the other hand, banks like A recent academic study found that new markets
families, a strategy that
caught the disrupters (Sony ING (with ING Direct) and HSBC (with First Di- are made up of two types of customers: customers
and Microsoft) by surprise. rect); airlines like Singapore Airlines (with SilkAir) of the established companies that desert it for the
and Qantas (with Jetstar); and various companies new value proposition, and new customers entering
including Tata Motors (with the Nano) and Dow the market for the first time.13 Therefore, the ques-
Corning (with Xiameter) have all looked at price- tion that all established companies need to answer
conscious customers not just as another segment is: Is my goal to limit the cannibalization of my ex-
but as a fundamentally different market that re- isting market or to exploit the new one? If the goal is
quired a dedicated business model. to pursue the new opportunity aggressively (rather
Obviously, there is no “right” way to look at the than defend against the threat), the company will
new customers — a lot depends on how aggressive likely choose to approach it as a new market that re-
a company wants to be. Consider Nestlé S.A. To quires its own business model.14
reach affluent coffee drinkers, Nestlé created a new
unit called Nespresso and gave it the freedom to de- Question #3: If I need a new business model to
velop its own business model. Nespresso operates exploit the new market, should I simply adopt
more like a luxury-goods manufacturer than a the invading business model that’s disrupting
high-volume consumer goods company. Nestlé has my market?
since developed a new line of coffee makers for dis- Once a corporation decides to enter a new market
cerning coffee drinkers at the low end of the using a new business model, it faces a make-or-break
spectrum. But rather than create another business issue: exactly what business model to adopt. The
model, it manages the new line (called Dolce Gusto) temptation is to mimic the business model of the
as part of the established Nescafé division. Same disrupters — after all, if that business model worked
low the same logic that disrupters used to attack Edipresse Free newspapers Launched its own free
daily paper
them. The disrupters succeeded in attacking the
SMH Seiko and Timex Formed a separate unit to
main market because they used a disruptive busi- launch Swatch
ness model. If the established corporations want to British easyJet Created a separate unit called
have the same success, they also need to utilize a Airways Go Fly to compete in the low-
cost market
disruptive business model to enter the market that
the disruptive business model has created. In a AXA Index trading Acquired Rosenberg Group and
Investment moved into quantitative funda-
sense, they need to “disrupt the disrupter,” as Nin- Managers mental equity management with
tendo did in response to Sony and Microsoft in the a hybrid business model
video games console market. Instead of targeting Guardian Online news Set up an Internet business to
Media provide its content online for free
teenagers and young men as Sony and Microsoft Group
did, Nintendo developed the Wii specifically to tar- Waitrose Online distribution Set up an online distribution arm
get families. Instead of emphasizing functionality, (Waitrose Direct) and created a
new company called Ocado to
speed and superior graphics (as the PlayStation and compete in this market
Xbox did), the Wii stressed ease of use and simplic- Nintendo Sony, Microsoft Developed the Wii and targeted
ity. It was a strategy that caught the disrupters (Sony a different customer segment
and Microsoft) by surprise and catapulted Nin- Estée Lauder Body Shop Developed the brand Origins
tendo to industry leadership. to move into the natural
cosmetics area; acquired
To appreciate why established companies need to Aveda to move into
adopt a business model that is different from the one herbal-based cosmetics
That suggests that if an established player (1) Nespresso) or should the name be totally different
has decided to enter the market space that the in- (as BA did with Go Fly)?
vading disruptive business model has created on Equity. Should the unit be a wholly owned sub-
the periphery of the main market; and (2) has de- sidiary of the parent or should the parent own only
cided to use a business model that is different from a certain percentage of the equity?
the one it’s using in the established market, then it Value chain activities. Which value chain activi-
should design a business model that is fundamen- ties should the unit develop on its own and which
tally different from the one the disrupters employ. should it share with the parent? Frequently, compa-
Although that will not guarantee success, it will in- nies allow the new unit to develop its own dedicated
crease the probability that the established company customer-facing activities while sharing back-office
will compete with its disrupters successfully. functions with the parent. That, however, may not
always be the best solution, so companies should ex-
Question #4: If I develop a new business model, amine this on a case-by-case basis.
how separate should it be organizationally Organizational environment. Should the unit
from the existing business model? be allowed to develop its own culture, values, pro-
Once an established company has decided to enter cesses, incentives and people, or should some of
the newly created market space by using its own these be shared with the parent? Many organiza-
disruptive business model, it must determine how tions allow a unit to develop its own culture while
separate the new and established business models having some common shared values. But that also
should be. We found that asking “Should we sepa- needs to be considered on a case-by-case basis.
rate the new business model or should we keep the Obviously, there are no “right” answers. Contrary
two together?” is the wrong way to approach it. A to what many academics have proposed, separate units
more useful question is, “Which activities do I op- don’t need to have their own names or their own dis-
erate separately and which can I operate together?” tinct value chain activities. We know of many
The logic for this approach is straightforward. companies that did not do this and yet succeeded in
Proponents of running two separate operations operating two different and conflicting strategies at the
point to the benefits of keeping the two business same time. The trick is to find the company-specific
models apart, the most important being that it al- answers that enable the corporation to separate the
lows the new unit to develop its own strategy, unit but not isolate it. In that way, it succeeds in balanc-
culture and processes without interference from ing unit independence while helping it with the skills,
the parent. It permits the new unit to manage its knowledge and competences of the parent company.
business without being swayed by people who
might worry about cannibalization threats and Question #5: Once I create a separate unit, what
channel conflicts. While these benefits are real, sep- are the unique challenges of pursuing two busi-
aration is by no means cost-free. Perhaps the biggest ness models at once?
cost is not being able to exploit synergies between In addition to deciding which activities to separate
the two businesses. We think there has to be a bal- and which to keep the same, the business must also
ance: separate enough to avoid conflicts but not so decide how to manage the separate unit to exploit
separate as to prevent exploitation of synergies. potential synergies and achieve true ambidexterity.
That balance can be only achieved if the corpora- Several academics have explored this issue and, as a
tion thinks creatively about what activities to result, we now have a long list of ideas and sugges-
separate and what not to.17 tions on what companies ought to be doing.18
This decision on the appropriate degree of sepa- In an earlier research project, we explored this
ration must be made for at least five areas: issue ourselves.19 Specifically, we examined 42 com-
Location. Should the separate unit be located panies that had created a separate unit to compete in
close to the parent company or somewhere else? the new market. Of these, 10 were successful, while 32
Name. Should the separate unit adopt a name failed. We compared the two groups on three dimen-
similar to the parent name (as Nestlé did with sions: (1) the amount of strategic, financial and
own CEOs. These are all policies consistent with That suggests that to develop an organization
the notion that the new units need freedom to op- that’s capable of competing with dual business
erate as they see fit. However, we also found that models (what we call an “ambidextrous organiza-
autonomy did not come at the expense of syner- tion”), we must first ask and answer the question:
gies: The parent still kept close watch over the “What kind of culture, structures, incentives and
strategy of the unit; cooperation between the unit people do we need to put in place in our organiza-
and the parent was encouraged through common tion to promote and encourage ambidextrous
incentive and reward systems; and the CEO tended behaviors on the part of our employees?” There
to be transferred from inside the organization to are many possible answers. Every company aspir-
facilitate closer cooperation and active exploita- ing to manage two business models at the same
tion of synergies. time must ask the question and find the answers
Our results and those of other researchers sug- that are appropriate for its own specific context
gest that there are many tactics that companies can and circumstances.
use to manage the two business models effectively.
But rather than prescribing a laundry list of steps Constantinos C. Markides is the Robert P. Bauman
companies can take, we prefer to suggest a way of Professor of Strategic Leadership at London
thinking that managers can apply to their specific Business School. Daniel Oyon is a professor of
management at HEC, Université de Lausanne,
circumstances. in Switzerland. Comment on this article or contact
One of the most fundamental principles of the authors at smrfeedback@mit.edu.
management is that the underlying organizational
environment creates the behaviors in a company.20 REFERENCES
By “organizational environment,” we mean four
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— executives should be asking, ‘What degree of integra-
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vard Business Review 75 (November-December 1997): Copyright © Massachusetts Institute of Technology, 2010.
93-99. All rights reserved.