Mutual exclusivity. It’s when two things can’t happen at the same time. It’s when two propositions can’t both be true. It can also be when a business unit is told to both extend its parent company’s core franchise while also being a new growth effort. You’ve been warned.
Companies launch two kinds of businesses. We’ll call the first kind “old-core-extending.” These businesses live to extend, perpetuate, assist or otherwise enable existing flagship products and services. For example, Intel makes motherboards so that it’s easier for the world to use their mainstream processors. The motherboards are old-core-extending.
Let’s call the second kind of business “new-core-creating.” Rather than extending old core businesses, new-core-creating efforts exist to generate truly new, diversified revenue streams. They march boldly into new markets in search of growth. They aren’t made to perpetuate an old core, they exist to create new cores so the parent company doesn’t become brittle. They’re about portfolio diversity. For example, Intel bought Mcafee (an online security software market leader) and operates it as a wholly owned subsidiary. You can use Mcafee software on any processor, not just Intel processors. Mcafee rises or falls independently of Intel’s mainstream business – it’s new-core-creating.
Let’s be clear, every company wants to have it both ways. They want innovations to extend old cores and to create new cores at the same time. They want both synergy and diversity in one fell swoop. Sometimes they even pull it off – or at least they can appear to. Yet before we all run off and try to get the best of both worlds there’s an important lesson. More often than not, the demands of extending an old core and creating a new core become – in practice – mutually exclusive.
This mutual exclusivity can be as fundamental as “should you give away your products… or not?” If a business is old-core-extending it can be a good idea to heavily discount or give away its wares to sell more of its parent company’s flagship offerings. Intel develops and gives away massive amounts of software to sell more processors. Google gives away tons of stuff (ex. Google Analytics) to sell more ads. It can also make sense for old-core-extending businesses to do things like avoiding cannibalization of the parent company’s products, to avoid conflicts with the parent’s customers, to not upset the parent’s distribution channels, and to give the parent company preferential exclusivity agreements. If you’re old-core-extending, this all makes sense.
If you’re new-core-creating, this is hogwash. You have a business to run. An empire to build. A market to compete in. You’d never dream of discounting or… for goodness sake… giving away your wares unless it somehow led your sales to grow, regardless of anyone else’s. You’d compete with anyone threatening your business, regardless of cannibalization or offending your parent’s channels. You’d probably get your own channels anyway! You’d never dream of giving preferential exclusivity unless it somehow maximized your P&L.
The question becomes: under what circumstances can companies have it both ways? How can we manage a balance between synergy and diversity in the face of profound, mutually exclusive choices that inevitably arise?
The answer boils down to primacy. Make a decision. Choose. Is your business primarily old-core-extending or new-core-creating? While synergy and diversity are both nice things to have, what’s the primary goal? You have to decide, in advance, which objective trumps the other when the two come into conflict… and they will come into conflict.
Take Cisco’s recent shutdown of Flip as a cautionary example. After spending $590 million to buy Pure Ditital (Flip’s maker) a couple years ago, Cisco closed Flip down – a market leader with more than $300 million in 2010 sales. When Cisco first bought Flip the rationale was largely new-core-creating. Cisco has traditionally sold switches and routers to large enterprise customers, and Flip was an attempt to diversify. It was all about Cisco’s “major assault on the consumer electronics market.” However when Flip was shut down, the complaint was that Flip wasn’t sufficiently old-core-extending. As CEO John Chambers put it,“we are making key, targeted moves as we align operations in support of our network-centric platform strategy… As we move forward, our consumer efforts will focus on how we help our enterprise and service provider customers…” That’s code for “Flip didn’t help our core business so we killed it.” So Flip was bought to be new-core-creating, but killed because it wasn’t old-core-extending. Huh?
In other words, it’s well and good to pursue both goals to the extent possible. Yet when there’s a choice to be made – when decisions are mutually exclusive – you have to decide in advance what the primary goal is. Choose what side of the fence you’ll always land on. Pick a story and sick with it. When it comes to mutually exclusive choices, organizations need a tie-breaker – and that tie-breaker must be loud and consistent. Proclaim the primary objective.
This is called strategic clarity. Without it there can be little operational excellence because your teams will have mutually exclusive charters. Not even the best of us can row a boat in mutually exclusive directions and be expected to get anywhere. By refusing to explicitly decide if the prime directive of an innovation is old-core-extending or new-core-creating, you’re inadvertently condemning your team to endless thrash, confusion and sub-optimized results. Shame on you. Don’t let mutual exclusivity kill promising innovation just because you won’t choose. The only way to have it both ways is to realize that you can’t.