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Traditional business models alongside disruptive innovation
During the latest talk in the ESADE Refresher Programme, professor Joaquín Cava discussed how traditional business models face disruptive innovation and the development of new businesses whilst their companies focus on managing their traditional product portfolio.
Cava began by outlining a conceptual framework. First he summed up part of his previous talk about the five possible scenarios in which companies must make business decisions. The three factors that combine to form the five scenarios are: the unpredictability of a sector, the malleability of a sector, and hostility or the ability to survive in a sector. In this talk Cava focused on four of them which he represented in a grid divided into four cells created by combining the axes of unpredictability (vertical axis) and malleability (horizontal axis).
Hence a predictable and not very malleable context, known as traditional, occupies the bottom left cell. Moving up the unpredictability axis, and therefore ceasing to be able to predict future events, is the adaptive context. The cell on the bottom right contains a visionary strategy in which the rules of the game change. And the top right cell contains an unpredictable and malleable context, which Cava calls a configuring context ''where the company creates its own ecosystem to turn unpredictability to its own advantage.''
Exploit and explore
How do traditional big companies deal with this environment? They must do two things. ''They must make the most of their business, customer base and traditional business and, if they want to defend themselves against attacks from other cells or try to seize an opportunity they spot in any of the other sectors, what they must do is explore.'' This is where conflicts of interests can arise in a company: a successful new business or product may mean the demise of its traditional business.
But how can these two activities be dealt with at the same time in a traditional company? Professor Cava mentioned some of the theories by other authors which he has included in his own research: the pessimism of March who believes that traditional companies will be killed off by disruptive companies; Christensen who recommends separate companies to avoid in-fighting; and the ambidextrous organisation proposed by O'Reilly and Tushman.
In search of the ideal model
Cava’s proposal is a combination of several of these theories using, once again, a 2 by 2 matrix featuring the location of these exploration initiatives along one axis (internal / external), and the degree of control by the traditional company along the other (high / low).
As a result, situated in the top left cell are separate companies: their location is external but they are controlled well. Good control by the traditional company plus an internal location means functional designs and transversal teams for functions. Little control plus internal location equals ambidextrous companies. Finally, external companies with little control are what professor Cava calls innovation conglomerates.
As regards which model is the best, the answer is that there are no rules. It is a matter of applying the company’s organisational criteria (organisational structure, human resources policy and management, leadership style, and culture and values) to decide which organisational model is the most effective. It is also important to bear in mind certain factors that affect the business, such as the extent to which the current supply is cannibalised by disruptive innovation, any lack of necessary skills (profiles which are more or less similar in both businesses) and the speed of change required.
Professor Cava illustrated his entire talk with real-life examples. The American newspaper USAToday, for example, created a different company to run its on-line edition. Unfortunately this duplicated the news production process, resulting in very high costs and failure. They swopped to an ambidextrous organization strategy, which cut costs and enabled both editions to exist side by side.
Another example is Pepsico. Their core business is soft drinks but they have created a separate internal entity to test an appliance for making personalised soft drinks at home, along the lines of capsule coffee machines.
Bunge, an agrifood company, has created Bunge Ventures, an innovative conglomerate around the company which aims to be present in any business models that might disrupt it.
One big company mentioned during the talk as an example of several different aspects was Telefónica. To protect itself from Google, for example, it launched several vertical studies (healthcare, education, security ...): a well controlled, totally internal solution that did not operate as part of the company’s strategic plan.
They also decided to buy companies and keep them as separate companies. This was the case of Tuenti, a leading social network for 10-14 year olds. ''But because of its presence on the board of directors, Tuenti’s strategic decisions were not taken by Tuenti but were filtered by Telefónica’s approach and Tuenti was transformed from a social media network into a SIM card vendor for kids aged 10 to 14. The business model’s worth plummeted from €100 million, which is what they had paid for it, to zero,'' explained professor Cava. Their business decisions were affected by a more traditional mindset. He also outlined Amérigo and Wayra, Telefónica’s new businesses.
See you there!
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