The Sleep of Reason Produces Monsters (detail), Francisco Goya (Courtesy: The Nelson-Atkins Museum of Art, Kansas City, Missouri)
Ideas for Leaders #716

How to Fight Off an Upstart with a New Business Model

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Key Concept


Faced with a new competitor with a new business model, incumbents can respond with different strategies based on sharing (co-deployment) or moving (re-deployment) their resources.

Idea Summary

The appearance of a new competitor with a new business model can disrupt an industry and knock down a once dominant incumbent. A classic example of this type of disruptive competitor is Netflix, which entered the movie rental industry with a brand new business model (first DVDs through the mail, later streaming videos), and put the once market-leading Blockbuster out of business.

How should future Blockbusters — successful incumbents in an industry attacked by upstarts with new business models — respond? According to Gautam Ahuja of Cornell’s Johnson School of Business and Elena Novelli of Cass Business School, many incumbent companies have multi-business model strategies. An airline company, for example, may have a low-cost business model (no meals, short-haul flights to secondary airports) and a more high-end business model (more spacious seats, meals, flights to primary airports). 

As a result, Ahuja and Novelli suggest that companies faced with a dangerous upstart newcomer look for response strategies based around resource co-deployment (shared among business models) and re-deployment (moved from one business model to another). 

For example, if the incumbent recognizes that the new business model has rendered its own model obsolete, the incumbent would move resources from the old model to the new one (what Ahuja and Novelli call a ‘start-over’ strategy). Alternatively, the incumbent could use the ‘strengthen’ strategy, in which the incumbent marshals additional resources to strengthen its business model.

Several factors will enter into the decision of which response strategy to follow. For example, while there are benefits to co-deployment and re-deployment of resources, there are also costs. For example, co-deployment will have coordination costs and potential conflict costs (between competing business models). Re-deployment also entails costs, such as the costs of transferring the resources to another business model (including the cost of time).  

Other factors include: 

  • Whether or not the new business model is better than the incumbent’s business model (and, consequently, whether or not the new business destroys the value of the old business model’s assets, e.g. the value of Blockbuster’s retail stores).
  • Whether or not the new business model poaches customers from the incumbent or, on the other hand, attracts new customers to the industry.
  • Whether or not the incumbent has prior history or expectations that hamper new strategies (Kodak’s long and profitable history in film processing led it to expect that their business model would continue to generate high profits).

Business Application

Taking into considerations the factors above, Ahuja and Novelli offer six potential countering strategies for companies facing a new business model challenge from a disruptive newcomer:

Status Quo Strategy: the incumbent continues doing business as it always has, rejecting the new business model. This choice would be recommended if the new business model is unlikely to replace the incumbent’s model, the incumbent’s assets are valuable only with the current business model, and co-deployment and re-deployment costs are high. 

Strengthen Strategy: the incumbent rejects the new business model, but strengthens its own business model to ensure that it remains competitive. This strategy should be considered if the incumbent business model can compete against the new business model and retain its profit, and if the incumbent’s customers are unlikely to migrate to the new model (which will attract, instead, new customers with different preferences).

Straddle Strategy: the incumbent retains the original business model but in parallel adopts the new one. For single-business firms, this strategy is hard to justify. The costs of co-deploying or re-deploying resources between the parallel business models would have to be low and the parallel business model would have to attract a significant number of new customers.

Synthesis Strategy: the incumbent fuses elements from their business model with elements from the newcomer’s business model. This strategy might be interesting if the newcomer introduces an attractive feature that could be adapted to the incumbent’s model — especially if the feature is attracting new customers to the industry.

Switch Strategy: the incumbent decides to abandon its previous business model and switch to the new business model. This strategy would be pursued if the new entrant’s business model is clearly an improvement over the current business model. Having the company’s assets exclusively focused on the business model (i.e., they are not spread out among other products) and lower redeployment costs would also encourage this choice. 

Scoot/Start Over Strategy: the incumbent exits the business or starts with a completely new business model. The primary reason to pursue this strategy is that the incumbent decides its business model is no longer viable in the face of the new entrant’s business model. Whether to scoot or start over depends on factors such as the incumbent’s number of related businesses (related businesses could lead to a new business model), and whether its current assets can be used in a new business model.

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Authors

Institutions

Source

Idea conceived

  • October 2016

Idea posted

  • October 2018

DOI number

10.13007/716

Subject

Real Time Analytics