HOW TO
INTEGRATE
SEPARATE
UNITS
Companies operating with
two business models use a
variety of integrating mechanisms to exploit synergies
between the models.
1Appoint a common gen- eral manager overseeing
both the established and
the new business
2Allow different cultures to emerge but unite the
parent with the separate
unit by a strong shared vision
3Put in place targeted but limited integrating
mechanisms
4Nurture strongly shared values that unite the
people in the two businesses
5Appoint an active and credible integrator
6Emphasize “soft” le- vers such as a strong
sense of direction, strong
values and a feeling of
“we are in this together”
7Develop incentives that encourage cooperation
between the two units
8Integrate the activities that cannot be done
well if they become independent
9Allow the unit to bor- row brand name,
physical assets, expertise
and useful processes
10Let an independent executive from outside the business unit
secure an internal champion to manage the unit
and provide oversight
11Give the unit opera- tional autonomy but
exercise strong central
strategic control
12Allow the unit to dif- ferentiate itself by
adopting a few of its own
value chain activities but
exploit synergies by ensuring that some value chain
activities are shared with
the parent
paying a significant straddling cost: damaging their
existing brands and diluting their organizations’
cultures for innovation and differentiation. 2
His view was that a company could find itself
“stuck in the middle” if it tried to compete with
both low-cost and differentiation strategies. 3
The Case for Separate Units
The primary solution proposed to solve this problem is to keep the two business models (and their
underlying value chains) separate in two distinct
organizations. That is the “innovator’s solution”
that Clayton Christensen proposed and that has
been supported by others. 4 Even Porter has accepted this organizational solution. 5 The rationale
for this approach is straightforward: Managers at
the established company who feel that the new
business model is growing at their expense would
want to constrain or even kill it. By keeping the two
business models separate, you prevent the company’s existing processes and culture from suffocating
the new business model. The new unit can develop
its own strategy, culture and processes without interference from the parent company.
Sensible as this argument seems, the separation
solution is not without problems and risks. Perhaps
the biggest problem is that you can’t exploit the
synergies between the established company and the
separate unit. 6 In recognition of the need to exploit
the synergies, some academics have suggested an
alternative: the creation of separate business units
that are linked by a number of integrating mechanisms. Several studies have now identified a number
of integrating mechanisms that successful companies have put in place to exploit synergies (see “How
to Integrate Separate Units”). 7
Why Separation May
Not Be Enough
Although the idea of creating separate business
units has received a lot of attention, this approach
by itself does not ensure success. In fact, there
are many examples of companies that have pursued
this strategy and failed (such as British Airways
with its Go Fly subsidiary and KLM with its
Buzz subsidiary) while other companies, such as
Nintendo and Mercedes, have succeeded in playing
two games without creating separate units.
We have also found that competing successfully
with two different and conflicting business models
involves more than creating a separate unit. Several
years ago, we studied the experiences of 68 companies that faced the challenge of competing with
dual business models. 8 Our main finding was that
only a handful of companies that created separate
units were successful in playing two games. Many
had created separate units and still failed, suggesting that separation in itself was not enough to
ensure success.
If separation is not sufficient, what else should
companies do? From 2007 to 2009, we studied 65
companies that attempted to compete with dual
business models in their markets (see “About the
Research”). By comparing the experiences of the
businesses that did so successfully with those that
failed, we have identified five key questions that
companies need to consider if they are to improve
the odds of success in competing with dual business models in the same industry.
Question #1: Should I enter the market space
created by the new business model?
Despite popular perception, the markets that get created by new business models are not necessarily
more attractive than existing markets. Nor are the
new customers who are attracted to the new business
models the kinds of customers that established corporations should necessarily pursue. For example,
consider the huge market that Internet brokerage
created in the United States. There’s no question that
it’s a big and growing market. But is it a market that
all established brokers ought to go after? Probably
not. Consider Edward D. Jones & Co. L.P., one of the
leading companies in the U.S. retail-brokerage industry. As John Bachmann, a former partner,
commented: “You will not buy securities over the Internet at Edward Jones. That’s going to be true as far
as I can see into the future.… If you aren’t interested
in a relationship and you just want a transaction,
then you could go to E*Trade Financial Corp. if you
want a good price. We just aren’t in that business.” 9
The decision to enter the market space that a
new business model has created is not (and should
not be) automatic. Before jumping in, an established company needs to assess the “attractiveness”
of the new market and whether it’s a market worth
