Turning the Tables on Disruptive Innovators

Over the past 10 years, disruptive innovators (DIs) have taken on established industries like banking, airlines and media  – and have won.  By targeting unmet consumer needs or introducing breakthrough operational innovation, DIs can significantly alter the competitive landscape, industry margins and product offerings.  Unencumbered by institutional factors, DIs pose a major threat to market leaders because of their ability to quickly capture share, drive down pricing and reset the consumer’s value perception.  In many cases, traditional firms have had a difficult time fighting back due to their legacy strategies, financial requirements, and organizational environment. 

One common strategy is to launch a similar business model as the DI.  In effect, the new model competes against the DI in the low cost segment while the traditional model continues to fight it out in the core market.  This strategy, despite considerable effort and resources, is generally not successful in defending against DIs. In particular,  managing two different business models in the same industry at the same time is extremely difficult.  Furthermore, a dual business model plan is loaded with economic contradictions and frequently leads to insufficient investment and focus on one of the units.   Some management gurus like Michael Porter and Clayton Christensen believe it is possible to fight DIs with two business models if executives get certain things right.  These prerequisites include autonomously structuring and operating the business units with each choosing its value chains and go-to-market approach. As well, executives would need to integrate the units where they can coordinate strategies, reap scale economies and capture synergies in areas like finance, purchasing and channel management.  Who is right?

A study recently published out of MIT’s Sloan School of Business looked at what worked and what didn’t work with a dual business model strategy.  Sixty-five public and private companies were analyzed between 2007 and 2009. The authors concluded that running the units autonomously may not be enough in making a dual unit strategy work.  To successfully defend against DIs, the study recommended firms consider 5 fundamental questions before committing to any strategic moves:

  1. Should the company enter the market space created by the new business model?  Incumbents may correctly choose not to defend in the short term.  The new market may not be attractive or be a good fit with the firm’s competencies.
  2. If the firm wants to enter the new market, should it do it with the existing business or a new unit?  There is no simple answer to this question.  The decision will be based on which strategy best serves the customers and delivers the highest profitability. Furthermore, companies may decide to get into the market without adopting the DI’s model (e.g., an acquisition or strategic partnership).
  3. If a new model is required, should the company follow the same strategy as the DI?  The research indicates that incumbents will not be able to beat DIs at their own game.  Instead, firms should look to ‘disrupt the disruptor’ with a better business model, where they could better leverage their strengths in areas like scale, talent and relationships. 
  4. If a new business model is developed, how much should be leveraged from the parent company?  The question is not whether units should be separate or apart but rather which assets or activities should be run together and which should be run separately.  The decision should be based on careful deliberations around 5 factors:   1) name/brand 2) location 3) equity 4) value chain activities and 5) organizational environment.
  5. If a new model is formed, what are the specific challenges of managing both of them at the same time?  Not surprisingly, winning companies tended to give much more financial, organizational (e.g., culture, incentives and processes) and strategic autonomy to the new business unit.

Ultimately, the most successful companies are the most pragmatic and ambidextrous, basing their approaches on their unique circumstances and capabilities.

 For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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