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Building a Winning Business Model Portfolio

Many companies operate multiple business models simultaneously. This diversification has the potential to generate growth, providing the strategic contribution of each model is carefully assessed. A new paper by Cass Business School academics looks at how contemporary companies deploy business model diversification, and assesses when businesses should consider it and how they should manage it for success.

Author(s): Dr Paolo Aversa - Cass Business School; Professor Stefan Haefliger - Cass Business School; Danielle Giuliana Reza - Cass Business School

We define a business model here as a system of interdependent organisational activities adopted to create and capture value. A company diversifies into a business model portfolio when it engages in at least two ways of creating and/or monetising value. A strategic combination of models may increase the value of individual assets while also contributing to competitive advantage and improved profitability. They enable a business to tap into resources unavailable through other means.

An example of successful business model diversification was seen with the emergence of Netflix as a powerhouse in the media industry. When it took on the dominant incumbent companies in the DVD rental sector, such as Blockbuster, it deployed two distinct business models, that of DVD rental by post and by online streaming. These were complemented by different subscription rates and value-added services online. This diversification enabled the company to achieve rapid market penetration and growth in its home market of the US, which in turn provided the firepower to fund international expansion and even its own content production studio. Netflix is now a byword for home entertainment viewing. Blockbuster, of course, went bankrupt several years ago.

There are also examples where business model diversification has proved successful in certain industries. The researchers found that certain business model configurations found in Formula One were associated with higher performance than others. The higher performing configurations worked because the business models complemented each other more effectively.

Despite such evidence of success, there are examples of business model diversification proving unsuitable for companies lacking the tools to implement them strategically. Business models may conflict directly with each other, with resources diluted or cannibalised as a result. The paper cites the example of many PC manufacturers' response to the direct-sales model developed by DELL in the late 1980s. Companies such as Compaq and IBM tried to copy this successful model, whilst maintaining existing sales strategies. The result was that they actually undermined their own existing competitive advantage.

In light of the examples mentioned, and drawing on studies of Formula One, the various subsidiaries operated by Amazon, and nearly 50 other companies, this paper proposes businesses consider three questions before diversifying their business model portfolio:

(i) What should you consider when thinking about business model diversification? To what extent can resources be shared amongst business models. Will an additional model provide access to assets that will help existing models. The paper looks at how companies in the bio-pharmaceutical and Formula One sectors have tackled this question.

(ii) How can you assess and optimise the value of each additional model? Managers should ask "Does my proposed new business model help maximise the use of my current resource base, while meeting a need in the marketplace?".

(iii) How should you modify the business model portfolio over time? The paper suggests that portfolio synergies be examined regularly, and offers a step by step guide to analysing a portfolio to this effect.

The interrelationships across the business model portfolio require regular and rigorous scrutiny. When a business model is found not to be generating the synergies that were envisioned, managers should move quickly to improve it, if possible, and should not be afraid to divest of it if necessary. Managed correctly however, business model diversification can help bring significant improvements to a company.

The complete article Building a Winning Business Model Portfolio is recently published in MITSloan Management Review.

Dr Paolo Aversa and Professor Stefan Haefliger are part of the CENTIVE (Centre for New Technologies, Innovation and Enterprise) Business Models team. Danielle Reza is a Cass MSc Alumna and Research Assistant.

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