FAVOUR YOUR DOMINANT HAND

Focus on the optimal business model

BY Jayashantha Jayawardhana

Despite meticulous planning, long deliberations in boardrooms, fruitful negotiations, regulatory approvals, due diligence, millions of dollars or stock grants and media coverage, many acquisitions simply fail.

This is because they fail to deliver promised synergies, competitive advantages and shareholder value. Time and again, business strategists eye new territory that seems fecund but is not so.

However, most realise this only in hindsight.

Consider celebrated but egregious corporate marriages between PC maker Compaq and mainframe vendor Digital Equipment Corporation; retail broker Charles Schwab and institutional banker U.S. Trust; and entertainment giant Time Warner and internet marketer AOL (formerly America Online).

Why did they fail so badly in the end despite all the astute business brains they had in the first place? What did they miss? And did they fail for a lack of opportunity or were they strategic misfits?

In his enlightening article ‘Strategy and Your Stronger Hand,’ Geoffrey Moore writes in the Harvard Business Review (HBR): “In all cases, the problem was not a lack of opportunity. In fact, these management teams had targeted entities with a great deal to offer in markets where others prospered handsomely.”

“The problem was [that] because of the types of companies Compaq, Schwab and Time Warner were, they were not the ones to exploit those opportunities. Much of the competitive edge of each business was blunted or cancelled when it was fused with an opposing business model,” he asserts.

Indeed, the cleverest strategic moves for a business are those that supplement rather than complement their existing leading business model. In other words, enterprises should favour their dominant hand because there are only two organisational hands to choose between.

Ambidexterity is anything but commonplace – so the typical organisation is likely to be as clumsy with its subordinate hand as it remains adroit with its dominant one.

The first type of entity competes on a ‘complex systems’ model. Corporations such as IBM, Goldman Sachs, Boeing and Accenture among so many others fall into this category. The second type of organisation competes on volume operations – Nestlé, Apple, Hilton, Microsoft and Google among others make up this category.

Most organisations belonging to the first category have large enterprises as their primary customers while many belonging to the second class tend to be consumer oriented.

However, the distinction isn’t as simple as B2B compared to B2C; it is largely rooted in contrasting economic formulae. In the complex systems model, businesses seek to build a customer base of thousands with no more than a few transactions for every customer annually but at an average price for each transaction running into millions of dollars.

Think of Boeing selling to airlines or Accenture doing the same to Fortune 1000 companies. In this model, a thousand enterprises paying a million dollars every year will generate a billion dollars in annual revenue.

By contrast, businesses coming under the ‘volume operations’ model seek to cultivate a customer base of millions of consumers with tens or even hundreds of annual transactions at an average price of a few dollars each. This model requires as many as 10 million customers with each of them spending a little more than US$ 8 every month to post a billion dollars in annual revenue. And the two types have very different operating structures.

One focusses on cultivating relationships and the other on systematising transactions. The two models are polar opposites. For instance, the complex systems model is centred on target customers while in the volume operations model, a business focusses on creating differentiation at scale.

Consider how Condé Nast launches magazines by leveraging its publishing competence into disparate mass markets. An ope­rator of the complex systems model can’t afford to take such liberties for the sake of differentiation; it needs a detailed command of its customers’ requirements.

While the ‘solution sales’ organisation is supported by a layer of consulting and integration services, a volume operations business can’t afford to have such luxuries as it innovates and differentiates at scale for diverse mass markets.

In some businesses, such as the semiconductor sector and pharmaceutical industry, one may discern the elements of both mo­dels at work.

When elements are assembled from within a single model, there’s a decent shot at achieving the expected results. Conversely, if you mix and match across models, you’ll produce unintended consequences – for better or worse.

So pay serious attention to your dominant hand before you decide with whom to merge – where, when and how.