The bigger the conflicts between the two business models and the lower the possibility that the two models can share any synergies among them, the more appropriate is the separation strategy.

Nestle and Nespresso

This is the strategy that Nestle decided to adopt when it set up a separate unit called Nespresso to sell espresso coffee to young urban professionals in the early 1990s.

Although the new business involved selling coffee, something for which Nestle is a market leader, the company’s top management decided early on that the similarities between the two businesses were more illusory than real. Whereas Nestle was selling instant coffee (Nescafe) to the mass market, Nespresso specifically targeted wealthy and young urban professionals and positioned itself as an upmarket brand. Whereas Nestle sold Nescafe through supermarkets, Nespresso chose an exclusive club to act as its distributor. And whereas Nestle followed a typical fast-moving consumer goods (FMCG) business model, Nespresso adopted a business model more akin to a luxury goods manufacturer.

Not only were the two business models different, but they also conflicted with each other. Nespresso coffee was in effect cannibalizing the sales of Nescafe, and the values and attitudes of the Nespresso organization were the exact opposite of those in the traditional Nestle organization. For these reasons, Nestle set up the new unit in a totally different town in Switzerland, assigned one of its rising stars as its CEO, and gave it the freedom and autonomy to compete in its market as it saw fit. The strategy proved to be a great success, and Nespresso is now one of the most profitable units within Nestle…

But simply separating the new business model from the parent is not enough to ensure success… Despite deciding that the two businesses were strategically dissimilar and that there was little scope for exploiting synergies, successful companies put in place processes and mechanisms to exploit any synergies whenever they arose. Obviously, the potential for synergies varied by company (depending on how strategically similar the two markets were). This meant that the level of integration needed varied by company as well. As a result, different companies put in place different levels of integrating mechanisms. But the important point to note is that the successful companies found ways to exploit synergies, no matter how small or limited they were.