Managing Decision-Making and Cannibalization for Parallel Business Models

This paper examines how a firm can manage the decision-making and cannibalization processes when a new and an existing business model need to be run in parallel. We present an in-depth longitudinal case study of a major bank in the US corporate bond trading market that launched a disruptive business model and ran it alongside its existing well-established and successful business model. The study shows how the firm conducting a staged decision making process that balanced procedural rationality and political expediency facilitates and helped resolve the paradoxes involved in running conflicting business models. We contribute to the decision making literature by showing how the mechanisms for balancing procedural rationality and politics facilitated the management of the decision-making and cannibalization processes and so enable existing and disruptive business models to run in parallel.

Introduction

A business model summarizes the architecture and logic of a business (Baden-Fuller and Morgan, 2010), and several recent studies have found that competitive pressures have pushed business model innovation to the top of CEOs' priorities (IBM Global CEO Study, IBM, 2008, GE Global Innovation Barometer, 2013) not least because a firm's choice of which business model to adopt has been shown to be an important determinant of its performance. But incumbent firms often face challenges when trying to innovate their business models. In particular, there has been a long discussion in the academic and practice based literature about whether a firm can run two business models simultaneously. This paper aims to show how a firm can successfully change its business model and run two such models simultaneously, with the intention of one cannibalizing the other.

Consider a canonical example, in which an incumbent (such as Enterprise Rent-A-Car) is forced to wrestle with how to defend its market share in the face of the emergence of new competitors such as Zipcar, whose business model innovation enables customers to pay an annual subscription and then rent cars by the hour. Zipcars are stationed around cities and near residential neighbourhoods, and the firm charges lower prices (with gas and insurance included) than conventional car rental firms. Eventually, Enterprise was forced to launch WeCar, which also allowed customers to rent cars by the hour (The Wall Street Journal, 2008) – but then faced the possibility that this new business model might cannibalize its traditional car rental business (based on day-rental). Should Enterprise try to run the two business models in parallel? – or to manage a process whereby the newer model eventually displaced the older?

Logically, it is clear that if a firm cannot run two business models in parallel, changing its existing business model – while possible – is potentially very problematic. This point has been emphasized by a number of scholars (e.g., Chesbrough, 2010) and was reinforced by Sosna et al.'s (2010) study of business model change, which emphasized that experimentation and leadership of organizational transformation are required in order to alter an existing business model and assemble a new one. However, the question of how to run two business models that conflict with each other simultaneously has not been fully resolved. Some scholars (e.g., Magretta, 2002, Teece, 2010) have emphasized the need to choose one model over the other, while others (including Casadesus-Masanell and Tarzijan, 2012, Markides and Oyon, 2010) have found that it is possible to run two business models in parallel – but the conditions that would be conducive for making a success of parallel activities are not well spelled out, particularly in the context of business model change. Given that firms are often reluctant to replace an existing business model until a new one has shown itself to be a viable alternative, the challenge for the top management team is how to run two business models in parallel when that situation involves the cannibalization of the older model, and thus how to manage the process of cannibalization.

Cannibalization occurs when the adoption of a new proposition – in the form of a product, service or business model – reduces the value of a firm's existing assets and organizational routines (Chandy and Tellis, 1998). Assets can be in the form of tangibles, such as equipment for creating a product or service, or intangibles, such as the firm's knowledge and skills (Henderson and Clark, 1990), while organizational routines are the established procedures it uses to deliver its day-to-day activities (Nelson and Winter, 1982). The rate of cannibalization is usually measured in terms of loss of sales or market share of the old model over time due to the adoption of the new proposition (Srinivasan and Dekimpe, 2010): such losses are taken as being accounted for by changes in the primary demand for the new product or service proposition and switching within and between categories.

One of the barriers to business model innovation comes from the challenge of managing this cannibalization process, when firms find themselves unable to reconfigure their assets to support the new business model due to conflicts with the existing business model (Chesbrough, 2010). The challenges of business model change which involves running two models in parallel are both cognitive and economic. It is cognitive because the business model is a cognitive conception (Doz and Kosonen, 2010, McGrath, 2010, Teece, 2010) and so management has to hold two seemingly opposing conceptions of the world simultaneously. But it is also economic because the business model is a description of the underlying routines and architecture of the business (Casadesus-Masanell and Ricart, 2010, Zott and Amit, 2010), and when there are two opposing business models these routines and architectures are likely to be in conflict. Firms transitioning from an existing to a new business model need to develop a strategy to manage such conflicts and, hence, the process of cannibalization. The literature on business model innovation emphasizes the advantages of replicating a business model, the benefits of experimentation, the need for ambidexterity and the importance of the leadership of senior management in effecting such transformations (Dunford et al., 2010, McGrath, 2010, Raisch and Birkinshaw, 2008, Smith et al., 2010, Doz and Kosonen, 2010) – but the extant business model literature has not addressed how to manage the process of cannibalization when a new and an existing business model need to run in parallel.

Managing the process of cannibalization has implications for change management that begin with the strategic decision making process and continue through to implementation. Although the change management literature discusses ways of managing conflict, it is relatively silent on how to manage the cannibalization of an existing business in business model innovation (Sosna et al., 2010). The strategic decision making literature also discusses the need to manage paradoxes, for example by balancing the competing perspectives of procedural rationality – where decision making reflects the best interests of the organization – and politics, where individuals try to protect their own material interests and positions (Dean and Sharfman, 1993, Elbanna and Child, 2007, Pettigrew, 1973). However, the extant literature on strategic decision making is silent on which mechanisms can facilitate business model change when a new and existing business models conflict with one another, but when they need to be run in parallel. This study examines the strategic decision making process in the context of business model innovation to address the following research question: ‘How should a firm take decisions to manage the process of cannibalization of an existing business model in order to change to a new model when both serve the same customers?’

We present a longitudinal and in-depth single case study (based on over 40 interviews with senior management) of a well-known (but anonymous) banking firm (hereafter ‘the bank’) that was an industry leader in the US corporate bond trading market. In particular, the case study examines how this large dealer bank innovated its business model to implement a new business model – for trading bonds on the Internet – that was disruptive of its traditional phone-based model, and how it managed the process of cannibalizing the latter. The study describes how the bank successfully changed its business model by first recognizing the need for change, and second creating a new parallel business model for the same customers which ran alongside the old one for a significant period, but with the eventual intention of rendering the old one obsolete. It explicates the bank's staged decision making process that balanced procedural rationality and political expediency to facilitate this outcome, and proposes that it was this approach that enabled the paradoxes and tensions between the two opposing business models to be resolved both cognitively and economically, allowing the firm to change a well-established and successful business model. We explain how this balancing of procedural rationality and political expediency also challenges some well-known preconceptions in the decision making literature about how these two tensions should be managed.

The study makes two contributions. First, it sheds light on some of the conditions that can facilitate a firm in changing an extant, once successful but now threatened business model to a new one that was more likely to be acceptable to its future customers, and how it can integrate two very differently configured models that serve the same customers simultaneously. As noted, those conditions relate to management's approach to balancing procedural rationality and political expediency in the decision making process. Second, the study contributes to the literature on decision making generally and on the management of the tensions between rationality and politics in particular, suggesting that these disparate forces can be managed rather than seen as incompatible opposites. We do so by showing the mechanisms that act as levers for duality, and so render stability and change compatible. Such mechanisms help ensure differentiation of the new business model while simultaneously leveraging synergies with the existing model which facilitate the management of the cannibalization process by enabling the two to be run in parallel.

The next section reviews the relevant literature, while the section following that describes the data and method adopted for the case study and uses the empirical evidence to extend the theory on strategic decision making. The section following that discusses the managerial and theoretical implications and the final section concludes.