The Idea in Brief
Few strategic moves—major acquisitions, decisions to serve new markets—deliver their promised benefits. Why? In making these moves, many companies start dabbling in a business model that conflicts with their dominant model. But an organization can excel at only one of two models:
- Volume operations—serving many consumers through frequent, low-price transactions; for instance, Amazon.com, Procter & Gamble, and Microsoft.
- Complex systems—serving a few large enterprises through infrequent, high-price, customized solutions; for example, Cisco and Goldman Sachs.
These models require polar-opposite tactics at each link in the value chain. For example, at the selling link, volume-operations firms purvey their offerings through compelling packaging and point-of-sale displays. By contrast, complex-systems companies use months of “high-touch” techniques to appeal to the numerous constituents involved in each purchasing decision.
Fusing or switching between the two models spawns trouble. Take acquisitions: When companies acquire new businesses, they often impose their model on the acquired parties—which may have long used the opposing model. Forced to adopt value-creation tactics incompatible with their long-standing model, the acquired parties underperform. For example, volume-operations firms, which succeed through efficient processes and cost-effective products, lack the funds required to develop varied offerings carefully tailored to highly demanding customers.
To avoid such scenarios, keep models separate. General Electric, for instance, treats its lightbulb business (volume operations) and aircraft engine business (complex systems) as autonomous organizations. When you separate business models, your strategic moves deliver as promised.
The Idea in Practice
Polar-Opposite Business Models
Volume-operations and complex-systems companies approach the value-creation process differently:
Avoiding Mixed-Model Failures
To avoid mixed-model failures:
- Resist the temptation to enter a new market by acquiring a company with a different business model. Instead, acquire or merge with companies that use the same business model you use.
- Determine whether your company competes in a two-tier industry. For example, health insurance companies have to take a complex-systems approach (high-tech, patient building of customer relationships) to sell employee benefits programs to large corporations. But these same organizations must also use a volume-operations approach (process efficiency and cost-effectiveness) to service those programs as client companies’ employees utilize them.
This scenario creates profit-sapping conflict within the company. For instance, managers from the two parts of the business may disagree over how best to cultivate customer relationships or determine prices for their products and services. To avoid conflict in such situations, it’s often best to establish separate, autonomous business units for the parts of your company that must use different models.
- Also consider partnering externally for services required from your nondominant business model. For instance, the health insurance company could partner with a volume-operations company to service benefits programs it sells to corporations.
Oscar Wilde once wrote, “Men marry because they are tired; women, because they are curious. Both are disappointed.” We can repurpose that statement to shed light on the business of strategic acquisitions: Simply substitute acquired and acquiring companies for the principals involved, and then add investors to round out the list of the disappointed.