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Competing with Dual Business Models – A Contingency Approach

Article  in  Academy of Management Perspectives · August 2004

DOI: 10.5465/AME.2004.14776164

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姝 Academy of Management Executive, 2004, Vol. 18, No. 3

........................................................................................................................................................................

Competing with dual business

models: A contingency
approach
Constantinos Markides and Constantinos D. Charitou

Executive Overview
How can a company adopt two different business models in the same market? This
question has become particularly pressing for an increasing number of established
companies that have recently come under attack from “strategic innovators”— companies
that attack the established players by using radically different business models. The
success of these attackers in gaining market share has created a big dilemma for
established companies. On the one hand, by embracing the new business models that the
innovators have introduced in their markets, established companies can potentially take
advantage of a great growth opportunity. On the other hand, because the new business
models often conflict with the established ones, companies that try to compete by
adopting both of them risk mismanaging both and destroying value.
How, then, can established companies embrace the new business models without
diluting and destroying their existing models? Our research explores this question and
offers a contingency solution to this problem. We show that the challenge for companies
is to balance the benefits of keeping the two business models separate while at the same
time integrating them enough so as to allow them to exploit synergies with one another.
We describe four possible strategies that companies can use to achieve such a balance
and identify what separates success from failure for each strategy.
........................................................................................................................................................................

Consider the following cases: (by setting up Continental Lite), British Airways
(by setting up GO), and KLM (by setting up Buzz)
• In February 1989, Singapore Airlines established to compete in the low-cost, point-to-point seg-
a low-cost subsidiary to compete in the low-end, ment of the airline market have all ended in
point-to-point segment of the airline market. failure.
Originally named Tradewinds but renamed Silk- • In 1992, in an attempt to compete against low-
air in 1992, the low-cost operator has thrived in
cost PC clones, IBM launched Ambra—its own
the last ten years. Silkair currently has a fleet of
clone sold at low prices without overt IBM brand-
9 aircraft and operates 117 services a week to 26
ing. Ambra was intended to mimic Dell’s direct
regional destinations. Despite competing with a
selling model without alienating resellers. At its
strategy (or business model) which is fundamen-
tally different from the hub-and-spoke strategy launch, Ambra president David Middleton
of its parent and despite inherent conflicts be- claimed that Ambra would capture at least 10
tween the activities of the two companies, Sin- per cent of what was a $10 billion market. IBM
gapore Airlines has been successful in making management dismissed fears of sales cannibal-
Silkair a profitable and integral part of its net- ization, arguing that Ambra personal computers
work strategy. This success stands in stark con- would appeal to a different customer segment
trast to the attempts of numerous other airline than the customers buying IBM-branded PCs.
companies to do the same thing. For example, in Yet, Ambra turned out to be a classic example of
the last decade, efforts by Continental Airlines Porter’s (1980) argument that a company trying to
22
2004 Markides and Charitou 23

play a differentiation and a low-cost game at the attempting to manage two different business mod-
same time will find itself stuck in the middle. els in the same market is that the two models (and
Prompted by declining sales, a conflicting brand their underlying value chains) could conflict with
portfolio, and an overburdened cost structure, one another. For example, by selling its tickets
IBM closed Ambra in 1994. IBM’s failure to play through the Internet just like its low-cost competi-
the differentiation and low-cost games simulta- tors, British Airways risks alienating its existing
neously stands in stark contrast to the success of distributors (the travel agents). Similarly, if Uni-
several other companies who have done exactly lever moves aggressively into private label, it risks
that. Companies such as Toyota (with its Lexus damaging its existing brands and diluting the or-
car), Mercedes (with its Mercedes A-class), VW ganization’s strong culture for innovation and dif-
(with is Skoda and SEAT brands), Intel (with its ferentiation. The existence of such trade-offs and
low-cost Celeron chip), the Gap (with its Old conflicts means that a company trying to compete
Navy brand), SMH (with its Swatch brand), and in both positions simultaneously risks paying a
Nestle (with its Nespresso subsidiary) are all huge straddling cost and degrading the value of its
examples of organizations that have found ways existing activities.
to compete successfully through both differenti-
ation and low-cost strategies.
• In early 1989, the small Danish bank Lan & Spar The challenge with attempting to
introduced a low-cost direct (phone or fax) arm to manage two different business models in
attract price-sensitive customers. The direct the same market is that the two models
bank was set up to compete head to head with (and their underlying value chains) could
the bank’s existing branch network by offering
low-interest loans to those customers who inter-
conflict with one another.
acted with the bank by phone. By 1997, Lan &
Spar bank had evolved into the world’s first on- The primary solution that has been offered on
line real time PC bank, serving its customers how to solve this problem is to keep the two busi-
through its branch network, the Internet, and the ness models (and their underlying value chains)
phone. While operating three different concepts physically separate in two distinct organizations.
proved difficult, the bank succeeded in tripling This is the “innovator’s solution” that is primarily
its market share in ten years and is now one of associated with Clayton Christensen’s work on
the most profitable banks in Denmark. This suc- disruptive innovation,2 but other academics have
cess once again contrasts sharply with the advocated it as well.3 Even Michael Porter has
failed attempts by several banks to develop an come out in favor of this strategy. Despite arguing
Internet banking service over the last ten years. that most companies attempting to compete with
Prominent banks such as NatWest in the UK and dual strategies will likely fail, he has also pro-
Bank One in the USA have found it difficult to posed that: “companies seeking growth through
operate their existing branch networks while broadening within their industry can best contain
serving their customers through the Internet as the risks to strategy by creating stand-alone units,
well. each with its own brand name and tailored activ-
ities.”4
What explains the different fortunes of these The rationale for this solution is quite straight-
companies in competing with dual strategies? For forward. The presence of conflicts means that the
example, why have most airline companies in the existing organization and its managers will often
world found it next to impossible to compete in the find that the new business model is growing at
low-cost, point-to-point segment of the airline mar- their expense. They will therefore have incentives
ket while Singapore Airlines has made this same to constrain it or even kill it. Therefore, by keeping
challenge look so easy? Why have so many com- the two business models separate, you prevent the
panies in the fast-moving consumer goods (FMCG) company’s existing processes and culture from suf-
business (such as Unilever and P&G) found it so focating the new business model. The new unit can
difficult to compete against low-cost private-label develop its own culture, processes, and strategy
competitors while other companies (such as SMH, without interference from the parent company. It
the Gap, and VW) have succeeded in competing can also manage its business as it sees fit without
with differentiation and low-cost strategies at the being suffocated by the managers of the estab-
same time? lished company who see cannibalization threats
We aim to answer this question in this article. and channel conflicts at every turn.
According to Michael Porter,1 the challenge with As sensible as this argument might be, the sep-
24 Academy of Management Executive August

aration solution is not without problems and risks. Four Strategies for Managing Dual Business
Perhaps the biggest cost of keeping the two busi- Models
nesses separate is failure to exploit synergies be-
This discussion suggests to us that rather than
tween the two. For example, a recent study by a
adopting an either/or perspective, we may be bet-
group of McKinsey consultants found that “the sim-
ter off approaching the issue from a contingency
ple injunction to cordon off new businesses is too
perspective.8 Specifically, the existing literature
narrow. Although ventures do need space to de-
velop, strict separation can prevent them from ob- suggests that two key variables influence how a
taining invaluable resources and rob their parents firm should manage two business models simulta-
of the vitality they can generate.”5 Similarly, a neously: (1) how serious the conflicts between the
team of MIT researchers reported that “spinoffs two businesses are— because this determines
often enable faster action early on, but they later whether a separation strategy would be especially
have difficulty achieving true staying power in the beneficial or not; and (2) how strategically similar
market. Even worse, by launching a spinoff, a com- the new market is perceived to be to the existing
pany often creates conditions that make future in- business— because this determines how important
tegration very difficult.”6 For these reasons, sev- the exploitation of synergies between the two will
eral academics have argued in favor of keeping be.9 When we plot these two dimensions in a ma-
the new business model integrated with the exist- trix (Figure 1), we end up with four possible strat-
ing organization. To achieve such a difficult task, egies for competing with two different business
firms need to develop an “ambidextrous” organi- models.10
zational infrastructure.7 Separation is the preferred strategy when the
As these two perspectives demonstrate, there is new market is not only strategically different from
no “right” answer to the problem. If the firm keeps the existing business but also when the two mar-
the two business models separate, it gives the new kets face serious tradeoffs and conflicts. On the
model a fighting chance to survive without inter- other hand, no separation is necessary when the
ference from the parent company, but it also de- new market is very similar to the existing business
nies the new model valuable assets, resources and and presents few conflicts that need managing. In
knowledge that reside in the parent company. On such a case, embracing the new business model
the other hand, if the two business models are through the firm’s existing organizational infra-
integrated, the new model benefits from the re- structure is the superior strategy.
sources and knowledge of the parent but also risks An interesting scenario emerges when the new
inappropriate interference and mismanagement market is strategically similar to the existing busi-
from the parent. ness, but the two face serious conflicts. In such a

FIGURE 1
Different Strategies for Managing Dual Business Models
2004 Markides and Charitou 25

case, it might be better to separate for a period of The Separation Strategy

time and then slowly merge the two concepts so as
The bigger the conflicts between the two business
to minimize the disruption from the conflicts. An-
models and the lower the possibility that the two
other interesting scenario arises when the new models can share any synergies among them, the
market is fundamentally different from the exist- more appropriate is the separation strategy.
ing business, but the two are not conflicting in a
serious way. In such a case, it might be better to
first build the new business inside the organiza- Nestlé and Nespresso
tion so as to leverage the firm’s existing assets and This is the strategy that Nestlé decided to adopt
experience (and learn about the dynamics of the when it set up a separate unit called Nespresso to
new market) before separating it into an indepen- sell espresso coffee to young urban professionals
dent unit. in the early 1990s. Although the new business in-
However, deciding when to separate and when volved selling coffee, something for which Nestlé
to keep the new business inside is only part of the is a market leader, the company’s top management
solution. We know of companies that separated the decided early on that the similarities between the
new business model and were successful (e.g., Sin- two businesses were more illusory than real.
gapore Airlines) but also of companies that did the Whereas Nestlé was selling instant coffee (Nes-
same thing and were unsuccessful (e.g., Continen- café) to the mass market, Nespresso specifically
tal Airlines). Similarly, there are companies that targeted wealthy and young urban professionals
integrated the new business model and were suc- and positioned itself as an upmarket brand.
cessful (e.g., SMH) but also companies that did the Whereas Nestlé sold Nescafé through supermar-
same thing and were unsuccessful (e.g., HMT In- kets, Nespresso chose an exclusive club to act as
ternational). Therefore, once a firm decides which its distributor. And whereas Nestlé followed a typ-
of these strategies it will adopt (based on its own ical fast-moving consumer goods (FMCG) business
circumstances), the key question that must be ad- model, Nespresso adopted a business model more
dressed is: “What differentiates the successful akin to a luxury goods manufacturer.
firms in each quadrant?” Not only were the two business models different,
but they also conflicted with each other. Nespresso
coffee was in effect cannibalizing the sales of Nes-
Deciding when to separate and when to café, and the values and attitudes of the Nespresso
organization were the exact opposite of those in
keep the new business inside is only part the traditional Nestlé organization. For these rea-
of the solution. sons, Nestlé set up the new unit in a totally differ-
ent town in Switzerland, assigned one of its rising
stars as its CEO, and gave it the freedom and
In the Appendix, we describe in detail the re- autonomy to compete in its market as it saw fit. The
search that we have undertaken to explore this strategy proved to be a great success, and Ne-
question. Below, we report our major findings. It is spresso is now one of the most profitable units
important to stress here that even though we will within Nestlé.
focus our discussion on the differences in perfor-
mance within each quadrant of Figure 1, we also
found performance differences across quadrants. HSBC Midlands and First Direct
Specifically, through regression analysis we found HSBC Midlands bank in the UK adopted a similar
that, on average, the fewer the conflicts and the strategy when it set up First Direct in the late
more similarities between the two business mod- 1980s— one of the most successful direct (tele-
els, the better the performance in managing the phone) banks in Europe. According to Graham
two. This is consistent with Porter’s argument that Picken, the person entrusted to develop First Di-
pursuing two different business models that have rect, the decision was made early on to keep the
inherent conflicts and market dissimilarities is new unit as separate from the established bank as
problematic and likely to fail. However, there are possible so as to minimize conflicts and prevent
exceptions to this general finding, and our discus- the parent’s existing processes and culture from
sion from here on focuses on these exceptions. Our suffocating the new business model. Picken said:
goal is to understand how these companies man-
aged to overcome the inherent tradeoffs in manag- The question is not whether conflicts exist
ing dual business models. between the traditional retail banking busi-
26 Academy of Management Executive August

ness and direct banking. They do exist and namic environments had to be highly differenti-
are important. The key question is how well ated, a condition that would make it more difficult
the company manages these conflicts, which to maintain the required state of integration. On
will ultimately determine its success in com- the other hand, firms operating in stable environ-
peting in the two different businesses. Our ments could achieve the appropriate level of inte-
bank [HSBC Midland Bank] decided to form gration more easily. All this meant that successful
First Direct as a stand-alone company and firms used a different combination of devices for
gave it the freedom to set up its own pro- achieving integration: the firms in dynamic envi-
cesses, organizational structure, incentive ronments used more integrating devices (and more
and control mechanisms, and to create its elaborate ones) than the firms in stable environ-
own distinct culture . . .. We felt that giving ments. But both sets of firms used integrating de-
the new unit total autonomy was more impor- vices, no matter how small the need for integration
tant that trying to share resources or cross- was.
sell to customers.... this is an arrangement
that worked for us—it does not mean it would
Determinants of Success
work for others.
This is exactly what we found in our study as well.
To highlight what we mean, consider the 42 sam-
Potential Synergies ple firms that separated the new business model
But simply separating the new business model into an independent unit. Of these, 10 were classi-
from the parent is not enough to ensure success. fied as successful and 32 as not successful. Using
Even when separation was the preferred strategy, this sample, we ran multiple regression analyses
the successful companies that we studied did not to identify the determinants of success. We found
give up on synergies altogether. Despite deciding the following results:
that the two businesses were strategically dissim- • on average, the higher the degree of autonomy
ilar and that there was little scope for exploiting that corporate headquarters gave the new unit
synergies, successful companies put in place pro- to make financial and operational decisions, the
cesses and mechanisms to exploit any synergies more effective was the firm in its response;
whenever they arose. Obviously, the potential for • on average, the more differentiated the budget-
synergies varied by company (depending on how ary and investment policies of the new unit rel-
strategically similar the two markets were). This ative to the parent, the more effective was the
meant that the level of integration needed varied firm in its response. On the other hand, firms
by company as well. As a result, different compa- were (on average) less effective in competing in
nies put in place different levels of integrating the two strategic positions when they adopted
mechanisms. But the important point to note is that different evaluation and incentive systems in
the successful companies found ways to exploit the new unit (compared to the established busi-
synergies, no matter how small or limited they ness);
were. • on average, firms that assigned an insider to be
the CEO of the new unit were more effective in
their response than firms that used outsiders;
Simply separating the new business • on average, firms that allowed the new unit to
model from the parent is not enough to develop its own culture were more effective in
ensure success. their response than firms that didn’t.
What these results suggest is that successful
This finding is consistent with the work of Law- firms give much more operational and financial
rence and Lorsch on how companies achieve inte- autonomy to their units than unsuccessful firms.
gration and differentiation simultaneously.11 In They also allow the units to develop their own
their seminal study, they found that compared to cultures and budgetary systems and to have their
unsuccessful companies, successful ones were own CEOs. These are all policies consistent with
able to achieve high degrees of both integration the notion that the new units need freedom to op-
and differentiation. They also found that the level erate as they see fit in their own environment.
of differentiation needed in each firm was a func- Note, however, that this autonomy did not come at
tion of the external environment facing the firm the expense of synergies. The parent still kept
(i.e., dynamic environments require more differen- close watch over the strategy of the unit, and co-
tiation). This meant that firms operating in dy- operation between the unit and the parent was
2004 Markides and Charitou 27

encouraged through common incentive and re- For example, the Internet and online distribution of
ward systems. In addition, the CEO of the units computers was certainly a challenge for Dell, but
was transferred from inside the organization so as the new way of selling computers was not partic-
to facilitate closer cooperation and active exploi- ularly disruptive to Dell’s existing business model.
tation of synergies. In these cases, embracing the new model through
The survey results found strong support in our the firm’s existing organizational infrastructure
field research. For example, a senior executive at a may be the optimal strategy. This is especially the
major U.S. office supplies firm commented as fol- case when, in addition to the absence of conflicts,
lows: the two business models serve strategically simi-
lar businesses and so stand to gain from exploiting
I refused to have a P&L for the dot.com oper- synergies among them.
ation and a different P&L for the main busi-
ness. This could only have created frictions
Edward Jones
and political infighting. All the VPs are mea-
sured on our consolidated sales, not the sales Consider for example Edward Jones, one of the
of the parent versus the unit. And no matter leading brokerage firms in the US retail brokerage
what method the customer uses to place an industry.13 The firm decided right from the start
order [phone, Internet, store], the salesperson that it would not respond to online trading by cre-
responsible for the region will get the credit ating a separate unit. According to the current
for it. managing partner, Doug Hill, the reason was sim-
ple: “We have elected not to follow the crowd. We
Similarly, the strategy director of a major European think online trading is for speculators and enter-
airline company suggested the following: tainment. We are not in the entertainment busi-
ness. We are in the ‘peace of mind’ business.”
It makes absolutely no sense to create a sep- How then is Edward Jones responding to the
arate low-cost subsidiary and not give it the online threat? By purposely focusing on its estab-
freedom to decide what to do in its market. lished business model and using the Internet as an
But it is equally silly to ignore that we have opportunity to improve its existing value proposi-
been in the airline business for more than tion to its targeted customers. This means looking
half a century. Surely our subsidiary can at the Internet as simply another distribution chan-
learn something from us! nel and using it to offer customers better service
and more information. Jones’s value proposition is
face-to-face personal dealings with clients to offer
The question that needs to be asked is them long-term, conservative investment advice.
not: “Should we separate or not?” but As a result, the Internet is used not for online
rather: “What activities in our value trading but as a way of enhancing the relationship
chain do we separate, and what with the customer. As the ex-CEO John Bachmann
reiterated in a recent article in Fortune magazine:
activities do we keep integrated?”
“You will not buy securities over the Internet at
Edward Jones. That’s going to be true as far as I
All in all, our results explain why we argued above can see into the future. . . . If you aren’t interested
that separation is neither necessary nor sufficient in a relationship and you just want a transaction,
to ensure success. Even if a firm decides to sepa- then you could go to E*Trade if you want a good
rate the new business model, it must still find ways price. We just aren’t in that business.”14
to exploit its existing strengths (such as its brand
name, financial resources, and industry experi-
ence) in the new unit. In this sense, the question Another Example: Merrill Lynch
that needs to be asked is not: “Should we separate Merrill Lynch is another company that responded
or not?” but rather: “What activities in our value to online trading with an integrated strategy. The
chain do we separate, and what activities do we company launched an online trading channel
keep integrated?”12 within the traditional business and adjusted its
processes and incentives accordingly so that the
online business could co-exist seamlessly with the
The Integration Strategy
existing business. The company developed two
Often, the new business model presents few con- new products—Unlimited Advantage and Merrill
flicts with the existing business model of a firm. Lynch Direct— both of which were integrated with
28 Academy of Management Executive August

the company’s existing operations and IT infra- Viewing the new model as an opportunity influ-
structure. The online products were integrated enced the firms’ actions in two ways: (a) how they
with the company’s existing products so that cus- approached it; and (b) what they actually did to
tomers— old or new— could choose from a menu of take advantage of it.
choices what level of advice they needed and what Consider, for example, the following two quotes
kind of trading they wanted to undertake. The com- from senior managers at two US firms. The first is
pany’s compensation policy was also adjusted so VP at a major office supplies firm, whose company
that brokers are now compensated on the value of was rated as very successful in adopting Internet
the total assets they manage, no matter how these distribution:
assets were acquired (i.e., online or via the estab-
lished network). We got onto the Internet long before anybody
else knew what the Internet was. In fact, our
biggest problem for the first two years was
Opportunity Framing
persuading our customers to use it! But we
But as with the separation strategy described persisted because I knew in my bones that the
above, we found that simply integrating the new Internet was it. This new technology was go-
way of competing into the existing infrastructure is ing to be the future. It would be the medium
not enough to ensure success. The most successful that would allow us to do great new things.
firms in our sample were those that not only inte-
grated the new business model (thus leveraging The second quote is from the CEO of a major book-
the existing business’s competences and knowl- seller whose company was rated as unsuccessful
edge) but also treated the new way of competing in adopting online distribution of books:
as a wonderful new opportunity to grow the busi-
ness. As a result, they made sure that the strengths We were late in implementing it but not in
of the traditional business were leveraged but also evaluating it. And our evaluation was that
took extreme care not to suffocate the new busi- this thing did not make sense. Yet, every time
ness with the firm’s existing policies. A good ex- I tried to explain our reasons why we wouldn’t
ample of this is Merrill Lynch’s decision described do it to Wall Street, my share price went
above to change its incentive systems so that its down! Even in 1997 when online distribution
brokers would have an incentive to support online of books went from zero to 6%, superstores
trading. increased their share from 10% to 22%—yet
The successful firms’ decision to protect the new our stock price dropped by 40%. So in the end,
way of competing from the existing firms’ policies we decided we had to do something.
and mindsets was based on their belief that the
new way was more of an opportunity than a threat. Why is the framing of the decision as an opportu-
This is important because, as categorization theory nity so important? The rationale given to us is that
argues, framing an external development as an by looking at it as an opportunity, the firm ap-
opportunity results in greater involvement in the proaches the task in a proactive, strategic manner
process of resolving it as well as participation at rather than as a hasty knee-jerk reaction to a prob-
lower levels of the organization and actions di- lem. The new market is evaluated in a reasoned
rected at changing the external environment.15 and deliberate way, and necessary resources are
Clark Gilbert and Joe Bower make a similar allocated to exploit and grow the opportunity.
point.16 They argue that when an organization first More importantly, the most respected managers in
confronts a conflicting business model, it is better the organization are assigned to the task, and the
to look at it as a threat rather than as an opportu- project receives high-level attention and care. Fi-
nity. Framing it as a threat will generate serious nally, looking at it as an opportunity encourages
commitment in the organization to respond to the the firm to take a long-term view of the investment.
threat aggressively. However, when the organiza- This ensures resources and long-term commitment
tion is ready to actually create a new business even when the initial results are not encouraging.
model to exploit the new market, it is better to look But the main reason why it was important to
at it as an opportunity. This way, old models and view the new way of competing as an opportunity
assumptions will be set aside, and the new model was that it allowed managers to put old models
will be evaluated on its own merits. According to and assumptions aside and approach the opportu-
Gilbert and Bower, recognizing the need to man- nity in a creative and entrepreneurial way. This in
age competing frames simultaneously is the key to turn allowed them to put in place strategies that
effective response. not only took advantage of the opportunity but also
2004 Markides and Charitou 29

put on the defensive the very companies that in- process of doing this, established companies coun-
troduced the new models in the industry. In a terattack their own attackers.
sense, the established companies found ways to
attack their attackers.
SMH and Swatch
The main reason why it was important to Consider, for example, the SMH story again. In the
view the new way of competing as an early 1960s, the Swiss dominated the global watch
opportunity was that it allowed industry. This dominance all but evaporated in the
managers to put old models and 1970s when companies such as Seiko (from Japan)
and Timex (from the US) introduced cheap watches
assumptions aside and approach the
that used quartz technology and provided added
opportunity in a creative and functionality and features (such as the alarm func-
entrepreneurial way. tion, date indication, etc). The Swiss share of
global world production declined from 48 per cent
To understand how they did this, it is important in 1965 to 15 per cent by 1980. In response, the Swiss
to remember that often the new business models introduced the Swatch. Not only did the new watch
create markets that have much lower margins than introduce style as a competitive dimension, but
the traditional markets. This suggests that even in more importantly, it was sold at a price that was on
the best-case scenario when an established com- average three times higher than the average Seiko
pany is successful in embracing the new model, price. Since its launch in 1983, Swatch has become
the end result will be cannibalization of existing the world’s most popular time piece with more
sales and much lower margins! Consider, for ex- than 100 million sold in over 30 countries.
ample, the following comment from a VP at a major The secret of this success lies in two areas. First,
fast-moving consumer goods company: note that the established competitors (the Swiss)
were selling their product on the basis of perfor-
mance when they suddenly came under attack.
The issue is not whether we can respond to
The attack took the form of: “Our watches are good
the private label threat successfully. I believe
enough in performance and superior to the Swiss
we can do it, either internally or through a
in price.” What the Swiss did was to turn this
separate unit. But what is the purpose of do-
rationale on its head. They sold their Swatch on
ing this if the end result is to destroy the
the following premise: “Our watches are good
industry? I don’t want to play their game.
enough in price and superior to the Japanese in
What we need to do is to find a response that
performance (i.e., style).” This sounds easy but it
builds on our competences and restores the
requires a fundamental (dare we say revolution-
margins in this business.
ary?) change in mindset! Instead of adopting the
attackers’ mindset that said: “Minimize price sub-
The logic of this argument was echoed in another ject to a performance which is good enough,” the
comment that an SMH executive made to us to new mindset needed is one that says: “Maximize
explain the reasoning behind the development of performance subject to a price that is good
the Swatch back in the early 1980s: enough.”
Second, it is one thing to say this and another to
We had to defend the low end of the market do it. In effect, what the Swiss did was to produce
against cheap Japanese watches. But we did something that delivered low cost and differentia-
not want to simply compete on price . . . . We tion at the same time—managing two conflicting
had to find a way of producing something that strategies simultaneously. They achieved this end
was cheap enough [emphasis added] but was by eliminating many product attributes that they
still Swiss quality. thought were unnecessary (thus cutting costs)
while enhancing certain other product features
Both of these comments point to what we believe is like style and design (thus building differentia-
the key to the success of the companies that chose tion). They also found ways to cut other costs (in
the integration strategy: embracing the new busi- manufacturing and in materials used) and to build
ness model in a creative way that builds upon the differentiation in other ways (for example, through
competences of the established competitors and the Swatch Club). The end result was a strategy
restores the margins in the business to a higher that embraced the key features of the new busi-
level than the attacking companies have. In the ness model in such a creative way that the original
30 Academy of Management Executive August

attackers had to find their own response to the The Phased Integration Strategy
Swiss counterattack!
Under certain circumstances, the most appropriate
strategy is to either separate or integrate the new
way of competing but not right from the start. For
Gillette example, when the new business model serves a
market that is strategically similar to the existing
Another example of the same strategy is Gillette’s
business but the two ways of competing face seri-
response to the disposable razor threat in its busi-
ous conflicts between them, the firm faces a diffi-
ness. Disposables entered the razor market on the cult challenge: on the one hand, it stands to benefit
premise that: “Our products are good enough in if it integrates the two and exploits the synergies
performance and superior to Gillette’s in price.” between them; on the other hand, integration
How did Gillette respond to this threat? By build- might lead to serious internal problems because of
ing upon the premise that: “Our disposables are all the conflicts. In such a case, it might be better to
good enough in price and superior to other dispos- separate for a period of time and then slowly
ables in performance.” merge the two concepts so as to minimize the dis-
Rather than debate whether to manufacture a ruption from the conflicts. This is the phased inte-
cheaper disposable or not, Gillette chose to tackle gration strategy.
the threat in a creative manner. By adopting the
mindset: “We need to maximize performance sub-
ject to a price that is good enough,” they developed Under certain circumstances, the most
a number of innovative disposable products that appropriate strategy is to either separate
competed not on price but on performance. For or integrate the new way of competing
example, in 1994 they introduced the Custom Plus but not right from the start.
line that was a disposable with a lubricating strip.
In late 2002, they introduced a new line of dispos-
able razors with proprietary technology. By success- Lan & Spar Bank
fully adopting the low-cost and differentiation strat-
The Danish bank Lan & Spar is a good example of
egies at the same time, Gillette has managed to
a company that followed the phased integration
maintain a 45 per cent market share in disposables.
strategy. When it decided to set up a Direct Bank
The lesson from these success stories is simple:
alongside its branch network, it kept the two con-
it is possible to manage two conflicting strategies
cepts separate for three years before merging them
without keeping them apart. But to do so requires
into one. CEO Peter Schou explained their strategy
creativity and a willingness to go beyond simply
as follows:
imitating a new business model. By focusing only
on finding ways to accommodate a new model so It was a difficult situation to have two con-
as to minimize potential conflicts, established cepts at the same time. We couldn’t really
companies may be missing an opportunity to ex- afford to merge the two concepts from the very
ploit the new model in ways that leverage their beginning because we would have suffered a
unique competences and restore their markets to huge cannibalization cost. Our interest mar-
higher levels of profitability. gin at the branch was 10 per cent a year
It is important to stress here that it is one thing to whereas at the Direct Bank it was only 3 per
say that companies such as Swatch and Gillette cent a year. If we had allowed all of our cus-
adopted a low cost and differentiation strategy tomers to switch overnight from traditional
and another to suggest that they were the best banking to direct banking, we would have
differentiator and the cost leader at the same time! lost a lot of money. We had to manage the
The key thing to remember here is that both transition carefully.
Swatch and Gillette stuck to their basis of compet-
itive advantage (differentiation) but found a way to As with the separation strategy described above,
do it better (at a lower cost). They did not adopt a the challenge that the firm faces in the phased
cost leader’s strategy, which is based on skills in integration strategy is to keep the new business
the manufacturing process, and, therefore, chose model protected from the mindsets and policies of
not to compete head on with their attackers (where the existing business while at the same time trying
they would no doubt lose). Instead, they built their to exploit synergies between the two businesses.
new strategy on unique design and marketing skills, But there is an added complication: The firm
playing the game differently than their attackers. knows that the separation is only temporary and
2004 Markides and Charitou 31

that the new unit will have to be integrated sooner it into an independent unit. This is the phased
or later with the existing organization. The chal- separation strategy.
lenge is to keep the new unit separate but also Preparing a unit for marriage is the challenge
prepare it for the eventual marriage. facing companies that choose the phased integra-
Companies can use a number of tactics to tion strategy. By contrast, the challenge facing
achieve this. For example, Lan & Spar separated companies that choose the phased separation
the Direct Bank from the rest of the organization strategy is to prepare a unit for divorce.
but made sure that the IT infrastructure that sup-
ported the telephone bank was compatible with
the established bank’s IT systems. Furthermore, Preparing a unit for marriage is the
the bank made sure that the employees developed challenge facing companies that choose
common values and a common culture by insisting the phased integration strategy. By
that employees from both parts of the organization contrast, the challenge facing companies
meet regularly, attend the same company-wide that choose the phased separation
events, and have similar experiences with the se-
strategy is to prepare a unit for divorce.
nior managers of the bank. Managers from the
main bank were transferred into the Direct Bank,
and the decisions on how to merge the two banks
Tesco and Tesco.com
were taken in meetings between the managers of
both units. The two concepts were finally merged This is exactly how Tesco, the UK’s biggest and
three years after the creation of the Direct Bank, most successful supermarket chain, is approach-
and all financial indicators suggest that the ing its online distribution arm, Tesco.com. The
merger has been a great success. company’s home delivery service was started in
the mid-1990s under the name Tesco Direct. The
first trials involved one store in west London send-
Charles Schwab and e.Schwab ing small deliveries to pensioners who couldn’t get
to the store. The home shopping idea developed
Another company that followed the phased inte-
over the years, first with customers placing orders
gration strategy was Charles Schwab. It had orig-
from a paper catalogue, then from a take-away
inally set up e.Schwab, its online brokerage busi-
CD-ROM, and eventually through the company’s
ness, as a separate unit. But it prepared e.Schwab
website. By 2000, Tesco’s Internet arm was taking
for eventual integration by having it report directly
10,000 orders a week, mostly in the greater London
to co-CEO David Pottruck and by staffing it with
area. By 2003, orders were up to 110,000 per week,
senior managers from the existing retail organiza-
and the home delivery service covered all the main
tion. In addition, e.Schwab’s technology platform
stores throughout the UK.
was designed to integrate with Schwab’s IT sys-
Over time, the online distribution business de-
tems, and the new unit’s product and pricing poli-
veloped a life of its own. According to Nick Lans-
cies were designed to be compatible with the par-
ley, the Tesco IT technologies manager:
ent’s policies. The eventual merger of the two
concepts was again judged to be a great success.
We started by offering a narrow range of gro-
cery items, but by the summer of 1996 we
wondered why we shouldn’t sell every item in
The Phased Separation Strategy
a Tesco store online. Why not books and
When the two business models do not conflict with clothes and electronic items? We could either
each other in any serious way but the markets they mess about by adding one product group to
serve are fundamentally different, the firm faces another or putting everything on there. We
another interesting challenge. On the one hand, decided to sell everything. It was a huge leap,
given the lack of conflicts, it could integrate the but we felt it was now or never. We weren’t
new model with the existing organization without worried about competitors. Only Sainsbury
much difficulty. On the other hand, integration will was a possible rival, and they weren’t doing
not bring many benefits and might even constrain anything that we knew about. But we won-
the development of the new way of competing into dered how to do this. Go to the Board and ask
a viable business for the firm. In such a case, it for millions of pounds to build dedicated de-
might be better to first build the new business pots and logistics systems? We looked at
inside the organization so as to leverage the firm’s other models that we already had developed
existing assets and experience before separating in-house at Tesco stores.
32 Academy of Management Executive August

By 2001, Tesco Direct was reorganized as a full No Single Best Way

subsidiary of Tesco and was renamed Tesco.com—
At least in the academic literature, there have
the first step in the divorce proceedings. The online
been disagreements about whether and how a
arm redefined its mission from online grocery dis-
company could manage two different and conflict-
tribution to online retailer of anything (books, CDs,
ing business models at the same time. Some have
other non-food items), and senior managers were
argued that because of conflicts between the two
hired to lead the new business in the future. In
business models, a company ought to keep them
2003, the Tesco board told Tesco.com management
physically separate so as to protect the new model
that if everything went well, they planned to spin
from interference by the managers of the estab-
off the unit as a limited company. The online arm
was now such a different business that it made lished business. Others have proposed that such a
little sense to keep it under Tesco management. It solution deprives the two business models of the
had to be given the freedom and autonomy to de- opportunity to exploit synergies between them.
velop as it saw fit. They have therefore argued in favor of an inte-
According to an analyst who covers Tesco, the grated strategy.
evolution of Tesco.com into a separate business In this article we have proposed that under cer-
was understandable: tain circumstances the separation strategy is pref-
erable to the integrated strategy, but under certain
Online is seen as a complement to and not a other circumstances, the integrated strategy might
competitor of the traditional offline experi- be preferable to separation. Specifically, we have
ence. The online business is allowing Tesco argued that separation is the preferred strategy
to expand into diversified goods such as CDs when the new market is not only strategically dif-
and books and is providing additional ferent from the existing business but also when the
growth. This diversification is going on in an two business models face serious tradeoffs and
ad hoc manner. There are obviously teething conflicts. On the other hand, no separation is nec-
problems with this development. Buying mu- essary when the new market is very similar to the
sic or books online at Tesco.com is a very poor existing business and presents few conflicts that
experience and is not integrated with the core need managing. In such a case, embracing the
grocery business. They seem to be experi- new business model through the firm’s existing
menting in public view. Why are they doing organizational infrastructure is the superior strat-
this? Food online does not provide great mar- egy. We have also described the circumstances
gins so they want to expand into higher mar- when a firm might prefer to separate (integrate) the
gin areas. What is critical for them is the new business model at first before integrating it
behaviour of consumers—will they prefer to with (separating it from) the existing business. We
shop for these items in dedicated sites (e.g., have therefore proposed that the best way to ap-
Amazon) or one that provides integrated prod- proach the issue is through a contingency per-
ucts and services (e.g., Tesco.com)? They are spective.
using third party suppliers for these products Furthermore, we have argued that simply sepa-
(which now include mobile phones and bank- rating or integrating the new business model is not
ing services) as a way to minimize inventory enough to ensure success. If the preferred strategy
risk. They haven’t ironed out their ‘going to is separation, the company must still find ways to
market’ strategy. This is a big challenge for exploit its existing strengths (such as its brand
them. Customers want a seamless shopping name, financial resources, and industry experi-
experience. ence) in the new unit without constraining it. Sim-
ilarly, if the preferred strategy is integration, the
As with the integration strategy described company must still strive to protect the new busi-
above, the challenge that firms face in the phased ness model from excessive interference or mis-
separation strategy is to get the two businesses to management by the parent, all in the name of
exploit any synergies between them while keeping exploiting synergies. In this sense, the question
the new business model protected from the exist- that needs to be asked is not: “Should we separate
ing business. But there is an added twist here: (integrate) or not?” but rather: “What activities in
preparing the new unit for eventual separation. As our value chain do we separate, and what activi-
the Tesco example shows, there is no set way of ties do we keep integrated?”
doing this. But the challenge remains: how to Thus, our study suggests that the decision-
coexist with something that you will divorce making process that executives must go through
eventually. involves three steps. First, the question: “Should
2004 Markides and Charitou 33

we adopt the new business model or not?” should from a nuanced contingency approach to compet-
be asked. The answer to this question depends on ing with dual business models can be great.
the specific circumstances of each firm. If the de-
cision is made that the firm ought to adopt the new
business model, the second question that must be
asked is: “Should we separate or integrate the new Appendix
business model, or should we follow one of the
phased strategies?” The answer to this question
will most likely depend on the two key variables
Research Design and Sample
that we identified above that define the axes of
Figure 1. Finally, once the separation/integration Our main research question was: “What differen-
decision is made, the question arises: “Given our tiates the successful firms in each quadrant of
choice, how can we manage the new unit success- Figure 1?” To answer this question, we had to carry
fully?” out four basic tasks: (1) identify enough estab-
Our article has focused on the last question and lished firms that have adopted a second business
has identified several variables that can influence model in their markets; (2) map each firm on our
how well a second business model is managed in two-by-two matrix (according to the conflicts and
each of the four quadrants of Figure 1. For exam- synergies that each saw in their second business
ple, we have found that companies that adopt the model); (3) identify the successful and unsuccessful
separation strategy will do better if they: firms in each quadrant; and (4) examine what dif-
• give operational and financial autonomy to their ferentiates the successful firms in each quadrant.
units but still maintain close watch over the We first tried to identify a sample of established
strategy of the unit and encourage cooperation firms that have adopted a second business model.
between the unit and the parent through com- We decided to look for these firms in a number of
mon incentive and reward systems; European and US industries where we knew that
• allow the units to develop their own cultures and new business models had made inroads in the last
budgetary systems; few years. Specifically, we examined the following
• allow each unit to have its own CEO who is industries: banking, general insurance, life &
transferred from inside the organization (rather health insurance, brokerage, supermarkets, air-
than hiring an outsider). lines, FMCGs, bookstores, office supplies, and
electronic trading systems. The new business mod-
Similarly, we have found that companies that els introduced in these industries were: direct
adopt the integration strategy will do better if they: (telephone or Internet) banking; direct general in-
• treat the new business model as a wonderful surance; direct life and health insurance; online
new opportunity to grow the business (rather brokerage trading; home ordering and delivery of
than see it as a threat); groceries; low-cost, no-frills airline service; private
• leverage the strengths of the traditional busi- label in FMCGs; online distribution of books; on-
ness to find ways to differentiate themselves line distribution of office supplies; and screen-
(rather than imitating the strategies of their at- based electronic trading systems.
tackers); We then interviewed ten established companies
• approach the task in a proactive, strategic man- in Europe and the US. The interviews were con-
ner rather than as a hasty knee-jerk reaction to a ducted in person (mainly at the company’s head
problem; office) and usually lasted between two and four
• take extreme care not to suffocate the new busi- hours depending on the number of people inter-
ness with the existing policies of the firm. viewed in each company. Following the inter-
views, we prepared several short case studies de-
Notwithstanding the success stories described in scribing the various insights that were generated.
this article, our large-sample regression results Using the ideas developed from the fieldwork
also show that simultaneously pursuing two busi- and the relevant streams of literature, we then
ness models that have inherent conflicts and mar- prepared a detailed questionnaire addressing our
ket dissimilarities is extremely problematic and research questions. A thirteen-page questionnaire
likely to fail. In this article we have focused on the specific for each industry was sent to 740 estab-
outliers. Firms that are considering whether to lished companies in the sample industries. We
adopt a second business model or not must keep in received 115 completed questionnaires from 98 dif-
mind that the odds are still against them. But as ferent companies.
our study of the outliers has shown, the rewards Our questionnaire attempted to quantify the rea-
34 Academy of Management Executive August

sons that prompted an established firm to respond ranged from 1 to 4.44, with an overall mean of 1.91
to the introduction of a new business model in its (Cronbach’s alpha ⫽ 0.87).
market, the nature of the response, and the strate- To measure the strategic similarity between the
gies used to manage two business models simul- two markets that the two business models were
taneously. For the purposes of this article, we were attempting to serve, we followed the logic and
particularly interested in three items from our recommendations of several academic researchers
questionnaire data: (1) the nature and magnitude who have argued that relatedness between two
of conflicts between the established company’s ex- markets should be measured at the strategic asset
isting business model and the newly introduced level rather than the market level.17 We operation-
business model—so as to assess the degree to alized strategic relatedness based on three broad
which a separation strategy between the two mod- categories of strategic assets: (1) customer assets
els might be beneficial; (2) how related the markets (such as service reputation, customer loyalty,
that the two business models were attempting to brand awareness, and good customer relation-
serve were—so as to assess whether exploitation ships); (2) channel assets (such as access to distri-
of synergies between the two was necessary or bution channels and supply networks, and good
beneficial; and (3) how successful the firm was in distribution/network relationships); and (3) process
managing two business models at the same time. assets (such as efficient supply chains for made-
The degree of conflicts between the two business to-order or standardized products and services, hu-
models was estimated based on managerial per- man capital, and the overall skill level of the labor
ceptions of various risks that the established firm force).
might face by competing simultaneously in both Eight different indicators of these strategic as-
businesses. Table A1 lists the ten conflicts or risks sets were identified for each of the eleven indus-
that we measured. tries in the sample. These indicators included:
Respondents were asked to assess the difficulty • the extent to which the company offers personal
of trying to compete simultaneously in the two service support to its customers;
different strategic positions in their industry based • the extent to which the company offers technical
on these underlying risks. A five-point (Likert) service support to its customers;
scale was used to measure the extent (or size) of • the degree to which the product or service offer-
each of the risks, ranging from “Not at all” (⫽1) to ing must be customized or not;
“Very much” (⫽5). The scores for the ten items were • the extent to which the purchase was a major or
averaged to provide a mean value of the degree of minor one for the customer;
conflicts for every established firm in the sample. • media advertising;
The higher the value was, the higher the degree of • push marketing (i.e., the importance of main-
conflicts between the firm’s existing business and taining a high level of marketing expenditures
the new way of competing in the industry. Values on distribution channels and the associated in-
frastructure);
• the overall skill level of the labor force (i.e., the
Table A1 importance of maintaining an employee base of
Potential Conflicts Between Two Different high-skilled staff);
Business Models • the importance of having low-cost staff.
Risk of cannibalizing the existing customer base Respondents were asked to rate the importance
Risk of destroying or undermining the value of the existing of these strategic-asset indicators in order to com-
distribution network pete effectively in (a) the traditional business and
Risk of compromising the quality of service offered to
customers (b) the new business. A five-point scale was used,
Risk of undermining the company’s image or reputation and ranging from “Not important at all” (⫽1) to “Very
the value associated with it important” (⫽5).
Risk of destroying the overall culture of the organization To measure the degree of strategic relatedness
Risk of adding activities that may confuse the employees and
between the two businesses (i.e., the extent to
customers regarding the company’s incentives and
priorities which the two businesses emphasize the same
Risk of defocusing the organization by trying to do everything strategic assets), we created a variable counting
for everybody the number of strategic-asset indicators consid-
Risk of shifting customers from high-value activities to low- ered by the responding executives to be “Impor-
margin ones
tant” or “Very important” for each of the two busi-
Risk of legitimizing the new business, thus creating an
incentive for other companies to also enter this market nesses (i.e., those indicators that were rated either
‘4’ or ‘5’ on the scale for both the traditional busi-
2004 Markides and Charitou 35

ness and the newly created one). The variable was a third measure of success: sector (industry) ana-
coded from 0 (which means that none of the eight lysts from seven fund management companies in
indicators was considered important for both busi- London and on Wall Street were asked to rate each
nesses) to 8 (which means that all eight indicators of our responding firms on an “overall effective-
were considered important for the two businesses). ness” scale. The analysts rated only companies in
The higher the value of this variable was, the the industries that they covered, and they used the
higher the degree of strategic relatedness between same 1-to-6 scale.20
the two businesses.18 Values ranged from 0 to 8, Those companies that rated themselves as 6 on
and the mean was 3.8. the “overall effectiveness” scale or 5 and above on
Having calculated these two variables for each the scale calculated as the mean of the nine per-
firm, we were able to map the firms on our matrix. formance criteria and also received a rating of 6
Since there is no theoretical rationale as to what from the analysts were selected as successful re-
the cutoff points are (between minor/serious con- sponders. This screening procedure produced a to-
flicts and low/high relatedness), we decided to err tal of 17 firms that were deemed to have responded
on the conservative side. As reported above, the successfully to the new business model. Seven of
mean value for conflicts for the whole sample was the successful firms were placed in quadrant A,
1.91 (on a scale of 1-to-5). We therefore classified three in quadrant B, 5 in quadrant C, and two in
any values above 3.5 as “serious” conflicts. Simi- quadrant D. Five of these firms were already the
larly, the mean value of strategic relatedness for subject of the field-based research undertaken be-
the whole sample was 3.8 (on a scale of 0-to-8). We fore the survey questionnaire was sent out. Sixteen
therefore classified any values above 5 as “high” more firms from all four quadrants of our matrix
strategic relatedness. were selected at this stage for further study
Our final task was to assess which firms were through field research. Our goal in talking to man-
successful in competing with dual strategies and agers in these firms was to understand what dif-
which were not. To determine “success” we used ferentiated the successful firms in each quadrant.
three complementary approaches. The insights presented in this article are based
We first asked all responding firms to assess mainly on this field research and partly on our
their own effectiveness in adopting the new busi- analysis of our questionnaire data.
ness model along nine performance criteria. Spe-
cifically, we asked them to assess whether by em-
bracing the new model, they: (a) prevented the new Acknowledgements
business from expanding into the traditional busi- We’d like to thank Sumantra Ghoshal, Erik Larsen,
ness and hurting existing operations; (b) prevented John Morecroft, Freek Vermeulen, the editors of this
existing customers from leaving the company; (c) journal, and the two anonymous reviewers for nu-
attracted new customers; (d) increased revenues merous constructive comments and advice.
and improved profitability; (e) developed new
skills and competencies; (f) improved the quality of
products and services; (g) cut costs; (h) became Endnotes
more competitive overall in the industry; and (i) 1
See Porter, M. E. 1980. Competitive strategy. New York: Free
became part of the new, growing business. A six- Press; and Porter, M. E. 1996. What is strategy? Harvard Business
point scale was used, ranging from “Very ineffec- Review, November-December: 61–78.
2
tive” (⫽1) to “Very effective” (⫽6). A mean score of See Christensen, C. M. 1997. The innovator’s dilemma: When
new technologies cause great firms to fail. Boston: Harvard
the nine items was calculated as the measure for
Business School Press.
statistical analysis. The higher the score was, the 3
See Burgelman, R., & Sayles, L. 1986. Inside corporate inno-
higher the firm’s effectiveness in adopting the new vation. New York: The Free Press; and Gilbert. C., & Bower, J.
business model and competing in the two strategic 2002. Disruptive change: When trying harder is part of the prob-
positions simultaneously. Values ranged from 2.56 lem. Harvard Business Review, May: 94 –101.
4
to 6, with an overall mean of 4.6 (Cronbach’s al- See Porter, M. E. 1996. What is strategy? Harvard Business
Review, November-December: 77.
pha ⫽ 0.72). 5
See Day, J.D., et al. 2001. The innovative organization: Why
Second, we asked the responding firms to give new ventures need more than a room of their own. The McKin-
us an overall assessment (on a scale of 1 to 6) of sey Quarterly, No. 2: 21.
6
how effectively they thought they had adopted the See Iansiti, M., McFarlan, F.W., & Westerman, G. 2003. Le-
veraging the incumbent’s advantage. Sloan Management Re-
new business model. Although self-assessment
view, Summer, 44 (4): 58.
measures such as the ones used here are prone to 7
See Tushman, M. L., & O’Reilly III, C. A. 1996. Ambidextrous
bias, they have also been shown to be reliable.19 organizations: Managing evolutionary and revolutionary
To reduce self-reporting bias, we also employed change. California Management Review, 38 (4): 8 –30.
36 Academy of Management Executive August

8
See Lawrence, P., & Lorsch, J. 1967. Organization and envi- through an extensive network of more than 4,000 branch offices
ronment. Boston: Harvard Business School Press. in all 50 US states.
9 14
We offer precise definitions of “conflicts” and “strategic Kelly, E. 2000. Edward Jones and me. Fortune, 12 June 2000:
similarity” in the Appendix. Conflicts include tradeoffs at the 145
15
value-chain level as well as channel and brand conflicts. Stra- See Dutton, J.E., & Jackson, S.E. 1987. Categorizing strategic
tegic similarity captures market relatedness as well as re- issues: Links to organizational action. Academy of Management
source similarity. Review, 12 (1): 76 –90.
16
10
A similar matrix to help managers determine whether a See Gilbert & Bower, op. cit. June, 94 –101.
17
firm should use a heavyweight (or lightweight) team inside or See in particular Markides, C.C., & Williamson, P.W. 1994.
outside the existing organization to manage a different busi- Related diversification, core competences, and corporate per-
ness model can be found in Clayton Christensen and Michael formance. Strategic Management Journal, 15: 149 –165; and Ver-
din, P.J., & Williamson, P.J. 1994. Core competences, competitive
Overdorf. 2000. Meeting the challenge of disruptive change.
advantage, and market analysis: Forging the links. In Hamel,
Harvard Business Review, March–April: 67–76. Our matrix dif-
G., & Heene, A. (Eds.), Competence-based competition. New
fers from theirs in two important dimensions. First, their model
York: John Wiley & Sons Ltd: 77–110.
takes into consideration only the importance of conflicts (in 18
We also measured relatedness by taking the sum of the
values and processes). By contrast, we argue that the decision
absolute differences between the old and new businesses on
regarding what to do is determined not only by conflicts but
each of the scales. This did not affect the classification of our
also by the possibility of exploiting synergies between the two sample firms in Figure 1.
markets that the two business models are serving. In this sense, 19
See Dess, G. S., & Robinson, R.B. 1984. Measuring organi-
our model builds on the intellectual tradition started by Law- zational performance in the absence of objective measures.
rence and Lorsch. Second, our model takes time into consider- Strategic Management Journal, 5: 265–273; and Venkatraman,
ation; we argue that under certain circumstances, it may be N., & Ramanujam, V. 1986. Measurement of business perfor-
better to separate (integrate) the new business model at first, mance in strategic research: A comparison of approaches.
before integrating it into (separating it from) the existing orga- Academy of Management Review, 11 (4): 801– 814.
nization. 20
The analysts were also asked to identify other firms (not
11
See Lawrence & Lorsch, op. cit. necessarily sample firms) in the industries that they covered
12
See Gulati, R., & Garino, J. 2000. Get the right mix of bricks which, in their opinion, responded to the invasion of the new
and clicks. Harvard Business Review, May–June: 107–114. business model in an effective way. Four additional firms were
13
Edward Jones serves individual investors exclusively identified for further examination through field research.

Constantinos Markides is pro- Contantinos Charitou received

fessor of strategic and interna- his Ph.D. degree in strategic and
tional management at the international management at
London Business School. He re- the London Business School. He
ceived his BA (Distinction) and also earned Honours degrees in
MA in economics from Boston economics and statistics from
University and his MBA and the American University in
DBA from the Harvard Business Washington, DC. He is currently
School. His new book entitled the CEO of N.P. Lanitis Ltd. The
Fast Second: How Smart Com- company has trading operations
panies Bypass Radical Innova- in Cyprus and Greece in prod-
tion to Enter and Dominate ucts such as timber, steel, gas,
New Markets will be published and fertilizers. Contact: costas.
in November 2004. Contact: [email protected].
[email protected].
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