New business activity, should you integrate it into your company or create a spin-off?
- January 2, 2021
- Posted by: Sebastien Moreews
- Category: Digital Transformation
Thanks to digital transformation and innovation, new business models are constantly being created. These business models are different to the original one of your company. The question is then, what do you do with your new activity? Do you integrate it into the main company to create synergy and save costs or are you better off creating a spin-off in order to avoid interferences from the original company?
Discussions around this topic can become very heated. To avoid this and help those involved in making a decision, the following three frameworks have been developed to facilitate the process:
The framework from the Business Model Generation Book by Alexander Osterwalder & Yves Pigneur
In their book about building and evaluating a business model canvas, Alexander Osterwalder & Yves Pigneur provide an easy-to-use framework.
- Similarity of nine building blocks is about how close to each other the business models of the mother company and the new activity are.
- Potential for synergy is about how likely this is in the future.
- Potential for conflicts is about how likely this is in the future.
What happens if you have average similarities and synergies and high conflicts? Autonomy or separation, this framework doesn’t provide an answer.
Competing with dual business models – A contingency approach by Costas Markides & Constantinos D. Charitou
In their article ‘Competing with dual business models – A contingency approach,’ Costas Markides & Constantinos D. Charitou provide a framework focused on the launch of similar (online) activities. Their framework not only provides a solution for the start of a new activity but also for years to come.
Nature of conflicts between established business and the innovation:
- Risk of cannibalizing the existing customer base
- Risk of destroying or undermining the value of the exiting distribution network
- Risk of compromising the quality of service offered to customers
- Risk of undermining the company’s image or reputation and the value associated with it
- Risk of destroying the overall culture of the organisation
- Risk of adding activities that may confuse the employees and customer regarding the company’s incentives and priorities
- Risk of defocusing the organisation by trying to do everything for everybody
- Risk of shifting customers from high-value to low-margin ones
- Risk of legitimising the new business, thus creating an incentive for other companies to also enter this market
Meeting the Challenge of Disruptive Change by Clayton M. Christensen and Michael Overdorf
In their HBR article, Clayton M. Christensen and Michael Overdorf present an interesting matrix which uses only two parameters but provides four possible outcomes in order to determine which solution is the most suitable for the new business model.
- Fit with organisation’s processes is about how similar or how different the processes of the new business model will be compared to the mother company.
- Fit with organisation’s values is about whether the standards used to make a decision are the same in both companies. For example, do the mother company and the new business model judge a new opportunity with the same metrics on the same scale? A good opportunity for one could be irrelevant to the other. In this case, the fit is poor.
Conclusion
These frameworks have a common logic, they both estimate the synergy and conflict potentials. The framework from the Business Model Generation Book by Alexander Osterwalder & Yves Pigneur has the advantage of being clear but can be easily interpreted in different ways. This is not the case with the framework created by Clayton M. Christensen and Michael Overdorf. The Costas Markides framework has the advantage of showing how things can evolve in time.
To make the right decision, it is advisable to test the new situation with the three different frameworks and to see how close the outcomes are to one another.
To finish, it is important not to forget that:
- Separated doesn’t mean that synergies are not possible
- Integration doesn’t mean the new business shouldn’t be protected
Notes:
- Business Model Generation by Alexander Osterwalder & Yves Pigneur
- Competing with dual business models – A contingency approach by Costas Markides & Constantinos D. Charitou
- Meeting the Challenge of Disruptive Change by Clayton M. Christensen and Michael Overdorf