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January 21, 2015
A house divided against itself cannot stand
By: Mark McDonald

Do some executives really believe it is possible to respond to digital disruption by splitting their organizations in half? The executives who segregate digital from their legacy are doing exactly that. Two decades ago many tried the same technique in response to eCommerce. It did not work then, when digital was largely an Internet channel. It is equally unlikely to work now.

Strategies for dividing a company along digital and analog lines go by different names; creating a captive disruptor, or establishing a two speed company. This separation of the new business from the core embodies the concept that one part of the company is the future and the other the present soon to be past. The logic of such a division is appealing in its simplicity and appalling in its superficiality.

Dividing your company in the face of a faster competitor

Becoming like your competition is a standard response to disruptive pressures. Otherwise you face an asymmetric market; one where yesterday’s strengths become today’s weaknesses. Mimicking your competitor’s size, structure, strategy and attitude seem like a reasonable response.

Fighting fire with fire, or in this case focus with focus, becomes the rational for dividing the organization along digital and legacy lines. Digital competitors are smaller, faster, and perceived as more customer centric than their incumbent competitors. In comparison, incumbent organizations can seem old, bloated, slow and unfit for the future. Carving out a svelte set of assets seems like the right thing to do, right?

Outright division into two companies appears the more radical way for executives to put digital Spanx on their incumbent company. There are other typical approaches:

  • Creating separate digital departments in Marketing, IT, or Customer Service to treat digital differently.
  • Engaging in a ‘youth movement’ by hiring talent that is younger and, therefore, apparently more digital, or talent from digital startups to inject new blood into an old organization.
  • Buying a digital company and transferring assets.
  • Launching a digital only channel that has no real connections back to the incumbent.

Each of these actions rests on the fundamental belief that you will not be able to compete with today’s people, processes and resources. They will never be fit for the digital future. So it’s better to carve out the parts that could compete and leave the rest to their inevitable demise.

The description is a bit extreme but the outcome seems likely when pursuing an organizational strategy based on separating digital and legacy resources. Does that approach still make sense?

The superficiality of digital division strategies

For many, changing any organization can be challenging and fraught with uncertainties. That is why radical organization overhauls, i.e. change that redefines the entire company as opposed to mere reorganization, happens infrequently and often in the face of situations that threaten the company’s very existence. These situations apply as digital works its way through the economy and society.

Division would be a sound course of action if it produced repeatable results. In this case the intended result would be that the digital child grows up to become bigger, more profitable and more valuable than its parent over a sustained period of time.

Airlines tried divisions by setting up low cost and full service airlines. Retailers had on and offline stores. Insurance companies have tried setting up separate digital challengers. Often, these situations resulted in a new challenger that consumed and outpaced their parent. More often the challenger found itself re-incorporated into the incumbent or acquired by a competitor who did not divide themselves and their strengths.

So why would you advocate this strategy in the face of digital disruption? I believe because it is easy. In the face of disruption, sitting back and doing nothing is not an option. Division appears as a definite and clear move. Such is the paradox of leadership in digital disruption; the need to act now but the knowledge that fast action leads to fast failure.

Distribute digital strengths to transform the organization

Rather than dividing a house against itself, true leaders define a future for the entire organization. They engage in digital transformation, rather than digital segregation by thinking through how the strengths of new technologies create value and growth opportunities.

Transformation does not mean keeping everything, rather it means keeping the right things for the right reasons. Divestitures, spinouts and restructuring to gain greater market focus or realize current market value remain legitimate when the market is the reason. If a set of resources, products or operations is no longer fit for the future, or could create more value somewhere else, then restructuring is in order. However, declaring one part unfit simply because it has a history, a legacy, a past seems less than well thought out.

Transforming the whole requires hard work, tough decisions and a deep understanding of how the organization works. After all how much more value can you create when the organization’s pace runs faster, when you are more responsive to customer changes, when you use information effectively? The answer and experience indicates a lot more than when you divide your house and hope for the best.

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