Protecting the Core While Something New Grows: The Innovator’s Dilemma

Why the core business leaves no room for the new

Many mid-sized businesses have one offering that has brought in most of the profit for years. It runs smoothly, customers are loyal, processes are established. Next to it is an idea for something new: a digital service, a new product line, a different customer segment. The idea is discussed regularly and rarely moved forward. Every time things get tight, and they often do, the best people go back to the core business.

So the question is: how does a mid-sized business protect its core while building something new, without one stifling the other? To answer it, we first clarify the terms, then introduce Christensen’s innovator’s dilemma as a mental model, weigh two answers from research, separating and integrating, and finally derive a rule that fits a small business.

The core business is not the enemy of the new. It is its financier, which too often also wants to be its supervisor.

Terms: core business, cannibalization, exploring and exploiting

The core business here is the offering or group of offerings that carries most of the contribution margin and on which the business’s reputation rests. In the BCG matrix, a mature field with a high market share is called a cash cow. Its core idea is that mature fields finance the development of growing fields. But the article BCG matrix for small businesses also shows that the scarcest resource of a small business is usually not money but working time. That applies to this essay in particular.

In marketing, cannibalization means that a new offering takes customers and revenue away from the company’s own existing offering. James March (1991) distinguished two ways in which organizations learn: exploitation of existing capabilities through refinement, efficiency, and execution, and exploration of new possibilities through search, experimentation, and risk-taking. Both compete for the same resources. Research calls the ability to do both at once ambidexterity.

The mental model: Christensen’s innovator’s dilemma

In his 1997 book ‘The Innovator’s Dilemma,’ Clayton Christensen described an uncomfortable observation. Well-run companies often fail not because they make mistakes but because they do the right thing. They listen to their best customers, improve their products for those customers’ demands, and invest where margins are highest. Christensen, Raynor, and McDonald (2015) therefore describe disruptive innovation not as any shake-up of an industry but as a specific path. Established providers improve their products for their most demanding and profitable customers and overlook others in the process. A newcomer starts at one of these overlooked points with a simpler but good-enough offering and works its way up from there.

The dilemma is that the new business initially looks worse by every metric of the core business. It brings little revenue, low margins, small customers, and a lot of uncertainty. Anyone who evaluates it by the standards of the core business rightly shelves it, until it is too late. The portrait Heinz Nixdorf shows what such a newcomer can look like; his computers for mid-sized firms were initially exactly such a simpler offering.

Research’s first answer: separate

Charles O’Reilly and Michael Tushman (2004) studied how companies that both improve existing businesses and produce fundamentally new ones solve the dilemma. Their answer is the ambidextrous organization. These companies separate their new, exploratory units from their traditional, exploitative ones. The new units may have their own processes, structures, and culture. But at the top, both remain tightly linked, and leaders must understand the needs of very different businesses and make difficult trade-offs.

Separation protects in both directions. The new business is not crushed by the routines and metrics of the core. And the core is not disrupted by experiments that unsettle its customers. The case study Netflix shows what happens when this fails: after a price change of around 60 percent for the combined offering and the announcement that the DVD-by-mail business would be split off, the company lost around 800,000 U.S. subscribers in one quarter in 2011.

O’Reilly and Tushman’s answer comes from large companies. Few mid-sized businesses can afford a separate unit with its own management, its own people, and its own culture. But its core remains transferable: the new business needs its own rules, and someone at the top has to hold both worlds together.

Research’s second answer: integrate

Lubatkin, Simsek, Ling, and Veiga (2006) asked how small and mid-sized firms become ambidextrous when separate units are too expensive for them. They note that larger firms can manage exploitation and exploration through structurally separate business units, but small and mid-sized firms usually lack this option. There, the leadership team itself has to process the contradictory demands.

Their survey of CEOs and executives from 139 small and mid-sized firms supported two assumptions. First, ambidexterity was closely linked to the behavioral integration of the top team, meaning how openly it shares information, how well it collaborates, and how jointly it makes decisions. Second, ambidexterity was associated with better performance relative to competitors.

The study measures relationships at one point in time and relies on respondents’ assessments. For an owner-managed business, its finding is nevertheless revealing. Where there is no leadership team, integration rests with the owner alone. He is then both guardian of the core and sponsor of the new. The case study Nokia describes how dangerous it becomes when information does not travel upward in such a situation: according to Vuori and Huy (2016), shared fear led management to overestimate its own capabilities.

Two readings: separate or integrate?

The first reading considers separation indispensable. If you run the new business in the same team with the same people, you will sacrifice it to day-to-day business as soon as a large customer calls. This view is supported by the experience of many businesses in which future projects are in the calendar and disappear in daily work.

The second reading considers separation unrealistic in small businesses and partly harmful. The new business needs the knowledge, the customers, and the reputation of the core. A sealed-off project loses this advantage and becomes a foreign body.

For mid-sized businesses, I consider a mix workable: separate the resources and the yardsticks, keep the people and the decisions connected. The new business does not need its own building, but it needs its own hours that are not negotiable, its own money, and its own metrics. And the same person or the same group decides about both, so that no one quietly starves the new or carelessly neglects the core.

Two accounts, one table: a rule for small businesses

From these findings, I derive a simple rule that I call ‘two accounts, one table.’ The core business and the new business have separate accounts for hours, money, and metrics. Decisions about both are made at one table, on a fixed schedule.

1. Reserve hours

   Decide who works how many hours a week on the new business and enter them in the calendar like customer appointments. If they are needed for the core, make them up in the same week.

2. Limit the money

   Give the new business a fixed budget for one year. It may be spent but not exceeded without a decision at the table.

3. Choose separate metrics

   Measure the new business by evidence rather than revenue: conversations, written statements of intent, paid pilot orders. The evidence ladder from the guide Testing a new service works well for this.

4. Set termination criteria

   Before starting, write down how you will recognize that the new business is not viable, and by when. Otherwise every result will be reinterpreted as a success after the fact.

5. Meet at one table once a month

   One hour in which both accounts lie side by side. This is where you decide whether hours are shifted, budgets increased, or projects ended.

The rule also protects the core business. Its customers should notice nothing negative from the experiments. New offerings are offered to them, not imposed on them, and the proven offering remains available as long as it pays for itself. If you want to place the new offering in a growth direction, the article Applying the Ansoff matrix provides the one-axis rule: change only one axis at a time.

When the new may replace the core

The most uncomfortable part of the dilemma is that the new business may one day replace the core. Chandy and Tellis (1998) showed that companies are more likely to produce fundamentally new things when they are willing to reduce the value of their own investments. This willingness to cannibalize is the opposite of protection, and yet it is part of it. Because if a competitor replaces your core offering, the protection is over anyway.

The limits of the transfer are clear. Christensen’s cases come from industries with rapid technological change, O’Reilly and Tushman describe large companies, and the study by Lubatkin and colleagues measures relationships, not causes. Many trade and service businesses do not experience a sudden upheaval but a slow shift in demand. For them, the grand strategy matters less than the habit of giving the new business a few hours every week.

Conclusion: protection by separating resources, not people

How does a mid-sized business protect its core while building something new? By recognizing that the two follow different logics and giving the new business its own hours, its own money, and its own metrics, while decisions about both are made at one table. The innovator’s dilemma shows that good businesses neglect the new not out of foolishness but because it looks bad by their standards. Research on large companies recommends separation; research on small firms recommends leadership that holds both together. For mid-sized businesses, this means separating resources and yardsticks, not people.

1. This week: Write down how many hours actually went into the new business in the last four weeks.
2. Next week: Decide who reserves how many hours a week from now on, and choose three metrics for the new business.
3. In a month: Hold the first one-hour meeting in which both accounts lie side by side.

You do not protect the core business by keeping the new one small. You protect it by letting the new one grow big enough before someone else does.