Davenport, Leibold, Voelpel: Expanding your business: the integration strategy

Often, the new business model presents few conflicts with the existing business model of a firm. For example, the Internet and online distribution of computers was certainly a challenge for Dell, but the new way of selling computers was not particularly disruptive to Dell’s existing business model. In these cases, embracing the new model through the firm’s existing organizational infrastructure may be the optimal strategy.

This is especially the case when, in addition to the absence of conflicts, the two business models serve strategically similar businesses and so stand to gain from exploiting synergies among them.

The most successful firms in our sample were those that not only integrated the new business model (thus leveraging the existing business’s competences and knowledge) but also treated the new way of competing as a wonderful new opportunity to grow the business. As a result, they made sure that the strengths of the traditional business were leveraged but also took extreme care not to suffocate the new business with the firm’s existing policies. A good example of this is Merrill Lynch’s decision to change its incentive systems so that its brokers would have an incentive to support online trading.

The successful firms’ decision to protect the new way of competing from the existing firms’ policies and mindsets was based on their belief that the new way was more of an opportunity than a threat. This is important because, as categorization theory argues, framing an external development as an opportunity results in greater involvement in the process of resolving it as well as participation at lower levels of the organization and actions directed at changing the external environment… The new market is evaluated in a reasoned and deliberate way, and necessary resources are allocated to exploit and grow the opportunity. More importantly, the most respected managers in the organization are assigned to the task, and the project receives high level attention and care. Finally, looking at it as an opportunity encourages the firm to take a long-term view of the investment. This ensures resources and long-term commitment even when the initial results are not encouraging.

But the main reason why it was important to view the new way of competing as an opportunity was that it allowed managers to put old models and assumptions aside and approach the opportunity in a creative and entrepreneurial way. This in turn allowed them to put in place strategies that not only took advantage of the opportunity but also put on the defensive the very companies that introduced the new models in the industry. In a sense, the established companies found ways to attack their attackers.

To understand how they did this, it is important to remember that often the new business models create markets that have much lower margins than the traditional markets. This suggests that even in the best-case scenario when an established company is successful in embracing the new model, the end result will be cannibalization of existing sales and much lower margins!…

it is possible to manage two conflicting strategies without keeping them apart. But to do so requires creativity and a willingness to go beyond simply imitating a new business model. By focusing only on finding ways to accommodate a new model so as to minimize potential conflicts, established companies may be missing an opportunity to exploit the new model in ways that leverage their unique competences and restore their markets to higher levels of profitability.

It is important to stress here that it is one thing to say that companies such as Swatch and Gillette adopted a low cost and differentiation strategy and another to suggest that they were the best differentiator and the cost leader at the same time! The key thing to remember here is that both Swatch and Gillette stuck to their basis of competitive advantage (differentiation) but found a way to do it better (at a lower cost). They did not adopt a cost leader’s strategy, which is based on skills in the manufacturing process, and, therefore, chose not to compete head on with their attackers (where they would no doubt lose). Instead, they built their new strategy on unique design and marketing skills, playing the game differently than their attackers.