Managing the transition to a dual business model

The rapid pace of development in global business creates constant change. To remain competitive, companies must constantly review and revise their established business models, adapting to environmental, social and political factors.

Globalisation and digitalisation have enabled successful Western manufacturing companies to supplement traditional product-based offerings with service-based models. These dual business models can, in theory, generate new revenue streams, boost competitiveness and help to ensure survival in an unstable business environment.

But the goals, practices and outcomes of a service-based model differ greatly from those of an established product model. These conflicting strategic goals and demands mean the transition to a dual business model is rarely smooth. In 2019, a study of 421 global manufacturing companies revealed that while 82% of the companies surveyed explored the product-service business model, fewer than 5% successfully completed the transition.

Ivanka Visnjic (Esade), Marin Jovanovic (Copenhagen Business School) and Sebastian Raisch (University of Geneva) examined the practices and processes which present barriers to success and identified three key stages that help to facilitate a successful transition to a dual business model.

Managing the Transition

There are many examples of organisations that successfully operate a dual business model – social enterprises, for example, manage the conflicting demands of key stakeholders with very different priorities. But what works for one organisation cannot simply be replicated in another, not least because the fundamental offerings of product versus service are hard to reconcile.

“Service businesses strive to extend their products’ lifecycle, whereas product businesses aim for faster product-replacement cycles,” explain Visnjic, Jovanovic and Raisch. “Service businesses require a customer-centric approach, which interferes with the product-engineering. These contradictions create tensions, but there are also interdependencies between these businesses - products such as industrial equipment are the basis of services, such as data analytics.

Service businesses require a customer-centric approach, which interferes with the product-engineering

“Moreover, providing services strengthens the customer relationship and facilitates product sales. In many industries, the ability to bundle products and services for integrated customer solutions is a competitive advantage. Consequently, companies transitioning to a product-service business model have to manage tensions that arise from the two businesses’ conflicting, yet interdependent, goals.”

To address these issues, the researchers traced the activities of four subsidiaries of a long-established, multinational manufacturing company. Two of the subsidiaries successfully transitioned to a dual business model, and two experienced challenges along the way. By examining the processes and practices of each, researchers identified three key stages for success.

• Exploring tensions

In the successful transitions, the “comprehensive probing experience” of leaders helped them to understand the interdependent, dynamic and persistent nature of tensions created by the transition. The leaders’ deeper understanding and willingness to explore paradoxical practices motivated a change in approach.

By contrast, the insufficient probing experience of the general managers contributed to difficulties to adequately explore or understand the tensions. The general managers’ attempts to standardise practices by delegating decisions to inexperienced line managers contributed to tensions and created a belief that “only one side could win”.

• Experimenting with solutions

Senior managers in the successful subsidiaries, experienced in conflict resolution, worked with both parties together rather than talking to them independently. They developed social and relationship-building activities, addressed anxiety and negative feelings and encouraged discussion. This series of positive measures created a collaborative space and encouraged integration.

Senior managers in the successful subsidiaries worked with both parties together rather than talking to them independently

Objectives such as customer satisfaction and overall subsidiary performance were introduced to re-frame the perspective of each party in favour of common, achievable goals. This approach to managing tension helped individuals to gain solution experience, promoting a positive transition.

The subsidiaries which struggled to integrate successfully did not adopt a similar approach to solutions. While conflict resolution did take place, the focus was on managing specific issues as they arose rather than creating an inclusive, collaborative environment.

• Establishing routines

In the successful subsidiaries which transitioned to a dual modality, senior managers created processes for managing recurrent tensions. Formal activities including problem-solving workshops, surveys and role-plays provided a backdrop for teams to proactively deal with tensions. An established framework of standard rules and procedures gave individuals autonomy over decision-making, and senior managers were supportive, helping line managers to develop the skills needed to manage tensions.

Where existing routines failed to offer guidelines, senior leaders would use the approach in the ‘exploring tension’ phase, modifying routines and changing rules to resolve newly identified issues.

Lessons for Leaders

With companies increasingly moving towards dual business models, the pressure is on managers to not only adapt to new practices but also to equip others with the skills they need to embrace the transition.

The successful subsidiaries followed an evolutionary approach, with senior leaders addressing and adapting to tensions, and adopting new practices accordingly. The subsidiaries that didn't transition became overwhelmed by the resulting tensions.

The successful subsidiaries followed an evolutionary approach, with senior leaders addressing and adapting to tensions, and adopting new practices accordingly

“Early on, these [successful] subsidiaries used simple trade-off practices, which maintain the product and service logics, in order to explore the tensions that the dual orientation creates,” say the authors of the research.

“Although these practices caused conflict, working through it increased the managers’ understanding of the tensions, allowing them to experiment with more comprehensive paradox solutions that transcend the product and service logics.

“The initial focus on understanding the tension makes way for the subsequent experience of solutions, and with routinization needing to be complemented with continued experimentation to complete the transition successfully. Our findings suggest that managers should consider these processes and practices when looking for ways to transition to a dual business model,” they conclude.