Leveraging the incumbent's advantage
Companies often launch spinoffs to enter a market quickly. but the more sustainable strategy is to establish a group that is (or will be) integrated with their existing operations.
People often talk about business competition as if it's a short race: Get to market first and you are bound to win. Indeed, the importance of first-mover advantage has been drummed into the heads of many business executives, and some have almost been brainwashed to think that speed is everything. But when a new technology threatens to transform an industry, the companies that are quickest to respond aren't necessarily the ones that reap the greatest benefits. In fact, choosing a fast strategy can lock them into a set of decisions that actually hurt them in the long run. Instead, organizations that choose the right strategy for the entire race -- both for the early and late stages -- will come out ahead. In other words, business competition is a marathon, not a sprint.
For any company faced with an innovation like digital photography or the Internet that could transform its business, one of the fundamental decisions it will need to make is organizational: Should it spin off an autonomous group to respond to the development, or should it instead use a more integrated approach? (1) It must also decide when to act: early, when the innovation is taking shape, or later, when the impact and viability of the new technology is better known. Furthermore, because the nature of competition changes over time, the company must also decide how to evolve its strategy.
In our research, we have found that spinoffs often enable faster action early on, but they later have difficulty achieving true staying power in the market. Even worse, by launching a spinoff, a company often creates conditions that make future integration very difficult. For enduring success, incumbent companies are better off creating a group that is -- or will eventually be -- integrated within their organizations. Only then will they be able to tap frilly into their numerous strengths, leveraging their incumbent's advantage.
In other words, there are just three viable strategies for long-term success. A company can create an autonomous unit that is reintegrated later (the separated-integrated approach) or an internal unit that remains that way (the integrated-leader approach). Or it can wait until the technology converges on a dominant feature set and then respond with an internal effort (the integrated-follower approach). All three strategies end in integration, but they use different ways to get there. Successful companies choose the approach that best matches their strengths, capabilities and market conditions.
The Lure and Dangers of Separation
When faced with an innovation that could shake up their industry, many companies are tempted to respond by spinning off an autonomous venture. After all, radical new innovations are often slowed down or even killed by large, bureaucratic organizations. Spinoffs seemingly offer an easy solution. By separating the innovators, a big corporation can react with speed, agility and focus. Those at the...