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Wednesday, May 25, 2016

Managing Tensions Between New and Existing Business Models05-25

The search for new business models forces established companies to experiment with organizational designs — and leads to tensions that should be anticipated and carefully managed.

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Exploring new business models is a recognized way for mature companies to renew their competitive advantage. Companies explore new value propositions, deploy value propositions in new segments, change the value chain, or experiment with alternative revenue models — all in a search for a different logic for value creation and capture. Sometimes this exploration goes far beyond the existing business model and requires the creation of a new business unit.

A sometimes unexpected consequence is the difficulty of fitting this new business unit into the existing organizational structure. While business model experimentation may be the raison d’être of many startup ventures, established companies typically face strong organizational rigidities that lead to tensions. Predicting these tensions and being open to experimentation with organizational structure can be the keys to a smoother business model exploration process. In this article, we report on a study of the European postal industry, in which we examined the organizational challenges that affect incumbent organizations in mature industries as they react to disruptive changes in their environment by seeking new business models.

Although the Romans had a type of postal service, the European postal industry as we know it today has existed for the past 500 years or so — one of the oldest, in Portugal, traces its history to 1520. For close to two centuries, established operators have been using essentially the same business model, pioneered in 1837 in the United Kingdom. In that model, senders pay a postal operator (usually through the purchase of a stamp) to bring a piece of mail or a parcel from A to B, with pricing dependent on some combination of distance, size, and weight. However, the postal industry has recently faced a rapid decline in physical mail as a result of digital substitution, while regulatory liberalization has boosted the level of competition in postal markets. Many postal operators have reacted by exploring new opportunities in the digital marketplace.

By interviewing managers and reviewing relevant information, we studied Danish, Portuguese, and Swiss postal operators to find out how they have dealt with the challenge of exploring new business models since the turn of the millennium. The organizations we studied strived to maintain their core business while at the same time incubating new ventures. Managers at all of the organizations felt there were potential new business models that they could benefit from developing, but when exploring the building blocks of these business models, they found that tensions emerged in their organizations. It required a separate process of organizational experimentation to find out how to organize for business model exploration.

Managing the Tensions

Our research points to three key areas of tension almost any existing business will face if it attempts to discover entirely new business models. Whether management succeeds in handling those tensions will determine their success in identifying and implementing new business models.

1. Don’t settle too quickly on structure. Top management is typically trained to see organizational structure as a means of executing strategy. As the business historian Alfred D. Chandler put it, “structure follows strategy.” In the case of business model exploration, however, our research suggests it’s a mistake for management to settle too quickly on a strategy and structure for the new business. In 2006, the Danish postal service, Post Danmark A/S, acquired Strålfors, an information logistics company, and subsequently positioned some of the company’s other innovative ventures within this subsidiary. It was thought there were possible synergies in merging products, but the fit was less than perfect, and as one manager put it, ultimately the business units “moved a bit around over the years.” The Danish and Swedish posts subsequently merged to form a new company, now called PostNord AB. PostNord at one point signaled to the market that Strålfors was for sale but then, in the fall of 2015, announced that it would retain ownership of Strålfors, after all. A manager from another postal operator offered a similar account of the struggle with how to fit a new venture into an old company, pointing out how that operator had to “constantly learn and modify … how we organize ourselves.”

The lesson for any organization wanting to explore new business models is to not settle too quickly on a structure for the new business. In fact, the organizational structure can more usefully be thought of as one of the essential building blocks of the business model — that is, as an aspect of the new business that needs to be fully explored and experimented with before you can learn what works best.
2. Balance top management support and experimentation. Exploring new business models is a strategic decision aimed at adapting the company’s activities to an evolving business landscape and discovering new revenue streams. At the postal operators we studied, this involved numerous initiatives. For example, the Swiss Post decided there might be an opportunity to expand its partnerships with online retail businesses beyond picking up and delivering parcels. The Swiss Post could leverage its established, trusted brand by selling secure sockets layer (SSL) certificates, digital signature solutions, and email certificates to online retailers and other businesses. However, setting up the new business unit involved the creation of new capabilities, both on the IT and the sales sides. It was recognized that this new business unit would be very different from the organization’s existing core business. The solution involved acquiring a startup that had developed some core solutions in this space and then building the business with a mix of management and staff hired from outside as well as transferred from the core business.

Management clearly identified a need to protect the fledgling business from above. The new business unit was a strategic initiative and as such needed to be shepherded by top management. As one manager told us, “We really managed to make sure that from the top … these organizations were protected. You need to have ownership by the CEO; otherwise, this is destroyed extremely quickly.” However, it was also gradually recognized that top management should not try to steer the new business unit. As one manager said, “It is clearly an advantage if people [in the new business unit] are a little bit remote of the headquarters. The headquarters has an existing way of doing business … you develop much more successfully if you give these people space and distance to the core.” This implies a balancing act for top management between protecting and coaching, on the one hand, and leaving the new business unit to experiment, on the other.

3. Expect a power struggle for resources. Any new business model has to grow and coexist with existing business models that may be stagnating but still provide the lion’s share of revenues for the company. Managers of such existing business models can be powerful and may have turf to protect in the internal struggle for resources. They and their employees may feel threatened if the new business unit becomes too successful. Furthermore, the new business model may not be profitable for a long time, leading to the risk that needed investments are diverted from more profitable parts of the business. One manager told us that this “has perhaps been the biggest barrier — that we are competing and working to get access to the same IT resources within the company.”

Top management needs to manage this potential competition for resources between the new business and the old core business. One way to achieve this is to accept multiple business logics, as well as multiple performance management and measurement systems. As one manager explained, “We quite successfully managed to convince the internal management that, for the moment, revenue streams shall not be the most important performance indicator.” Alternative metrics could include the estimated market potential, for example.

A point to consider is the importance of communicating across the company why it is engaging in business model exploration and how this will benefit the company in the long term. Conflicts for scarce resources within the organization cannot be avoided completely, but they can be softened if employees across business units build a shared understanding of the objectives of the business model exploration.

The Organizational Dimension

The business model canvas framework developed by Alexander Osterwalder and Yves Pigneur has become a very popular way to understand the potential building blocks of business models. The canvas highlights nine such building blocks: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure. However, organizational designs and the associated organizational tensions that emerge during the process of business model exploration are not well addressed by the existing tools. Companies exploring new business models may not fully recognize that these tensions will almost inevitably emerge and thus may be ill-prepared to manage them.

Understanding these tensions should help in managing the challenges of concurrent business models.
The tensions we highlight imply that the design of an organizational structure that accommodates both new and older business models needs to be considered an intricate part of business model innovation. Organizational design has to be questioned and experimented with as part of the exploration. A top management team that is prepared for such exploration and aware of the organizational dimension of business model exploration may well be more likely to succeed at business model innovation.

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