Research from Dr Philip Stiles, Senior Lecturer in Corporate Governance at Cambridge Judge Business School, reveals the secrets of successfully running existing and new business models in parallel.
Introducing a new business model is notoriously tricky – get the timing or the management wrong and it’s curtains. Ask Kodak.
Not only is there the difficulty of a new model gradually swallowing up the tried and tested way of working, there’s also the other challenge of the new model having to co-exist with the old one, relying on traditional ways while simultaneously “cannibalising” them until they are no more. So how do you manage that process? Don’t ask Nokia.
“There are numerous examples of companies who adopted a new business model that had to work alongside and ‘cannibalise’ another,” says Cambridge Judge Business School lecturer Dr Philip Stiles. “Some managed this extremely successfully – Apple, YouTube – and others famously did not. It’s about finding the secret of how to successfully run very conflicting models in parallel.”
Stiles, Senior Lecturer in corporate Governance, studied how a Wall Street investment bank replaced its traditional phone-based trading model with an online one, by skilfully balancing procedural rationality with political expediency.
“Cannibalisation by necessity means reducing the actual or potential value of the company’s investments in assets and organisational routines,” he says. “To optimise the opportunities of new directions it must be willing to shed its commitments to its existing resources.”
The bank’s model did more than switch its modus operandi from phone to internet – in doing so it changed the act of investing itself from a method which used a go-between to match buyers with sellers, to one which enabled them to deal directly with each other through an e-platform.
“We identified three phases,” says Stiles, “intelligence, design and choice. Intelligence is about identifying where the business is stalling and the opportunities that might flow from change. In the design phase the management focused on selling the benefits of the new model to stakeholders, letting those take root and grow incrementally, and throwing the potential changes to the primary market into the shadows. And the third phase considered a series of alternative new models, giving the company a choice. Then you need procedural rationality, which the bank achieved by gathering different perspectives.”
This was made easier by the bank’s team-based approach to problem-solving which, said one of the 40 senior managers interviewed by Stiles and his co-author, University of Cambridge engineering lecturer Chander Velu, involved staff at all levels of the business to create what he called “structured conflict”.
“Crucially, the landscape was there within the business that enabled them to consider and embrace opportunities for change,” says Stiles. “Within this they consulted widely within the organisation – back office, admin, technology – to ensure they understood all aspects of the innovation. They also looked at three different options for change, so they were able to evaluate the merits of each option.”
But all of these phases still need to balance rationality with office politics – and for that to happen, openness is crucial.
“In some organisations there will always be influences – people whose career paths are perhaps tied to a particular product or business model,” says Stiles. “But in our case study the bank had created an environment where everyone saw themselves as part of a collective, without anyone standing out as a star. Everyone brings a different experience and perspective – it fuelled healthy, constructive open discussion. The secret is getting the best out of all of these for the common good. And in giving everyone a choice and a say, minority interests were seen to be taken into account.”
The bank’s eventual successful jettisoning of its primary business model is an object lesson to other organisations, says Stiles. “It was a perfect example because the industry considered the innovation disruptive – the new model was likely to threaten the old one and the bank’s leadership team disagreed about whether to adopt it at all.”
Some companies get it right – many get it wrong. Kodak notoriously clung on so loyally to its glorious film past that, by the time it changed, the digital boat had sailed. In contrast, Apple and IBM have the capacity to evolve and adapt with apparent ease. Is that because their market is moving so fast? Does successful cannibalisation depend on the core nature of the business?
Not necessarily, says Stiles. “It’s true that tech companies are the exemplars because of their ability – and their customers’ expectations – that they will promptly discard old products and move on,” says Stiles. “And much of the complexity of running parallel business models is tied up in notions of business identity – older firms in older industries are more likely to have to overcome the challenge of ‘this is who we are, why would we change?’
“But with the advent of social media – the more direct and more immediate public response to your business – every organisation is changing. Even the most traditional manufacturing company is an information company now, needing a much stronger service element than they once did, which means reviewing their business models.
“But it is a fine line – the road is littered with organisations who tried to change and perished in doing so. The timing is crucial. Experiment too fast and the market’s not ready. Wait too long and you miss the boat. But it’s hard to make that judgment. Times change and you have to move with them – it’s knowing when and how to make that move and how to deal with those two conflicting business models. You have to get it right – you don’t want to be the board that crashed.”