Building a Winning Business Model Portfolio
Many companies today are operating several business models at once. But despite the potential that business model diversification has for generating growth and profit, executives need to carefully assess the strategic contributions of each element of their business model portfolio.
Across many industries, companies are using innovative business models as a basis for competitive advantage.1 In recent years, for example, we have seen upstarts such as Uber Technologies Inc. and Airbnb Inc. use multisided business models to leverage ordinary resources against established competitors that rely on unique resources.2 Increasingly, organizations are adopting two or more business models at once.3 Multiple business models provide companies with a diversification vehicle that enables them to tap into resources and capabilities that aren’t available through other means. By definition, a company diversifies into a business model portfolio when it engages in at least two ways of creating and/or monetizing value.4
To illustrate how business model diversification can work,5 consider Netflix Inc. Netflix deployed two distinct business models (DVDs by mail and online streaming) to challenge Blockbuster and other movie rental incumbents.6 Although its rapid market penetration and growth are indisputable, Netflix did not initially depend on traditional approaches to diversification. In fact, the company offered U.S. customers essentially the same movies through both its DVD by mail and online streaming services, but it offered different subscription prices, a choice of physical versus digital rentals, and value-added services online, including tailored recommendations. Netflix’s business model diversification helped it to expand its U.S. market share, which provided a springboard for extensive international expansion as well as an expanded product portfolio that now includes original content.
Although Netflix’s success shows how multiple business models can work to make organizations more competitive, such success stories are, more often than not, specific to a particular company’s circumstances. However, there can also be industry-wide patterns. When we studied various business model configurations in the Formula One automobile racing industry, we found that certain configurations of business models were associated with higher performance than others. We concluded that the higher-performing business model configurations generally led to better results because there were complementarities between the two business models chosen that helped companies both learn faster and further develop key business capabilities.7
As companies attempt to diversify into portfolios of business models that achieve higher performance than other configurations, they need to match their own resources8 and capabilities9 to the external opportunities they face.
References
1. D.J. Teece, “Business Models, Business Strategy, and Innovation,” Long Range Planning 43, no. 2-3 (April-June 2010): 172-194; R. Amit and C. Zott, “Value Creation in e-Business,” Strategic Management Journal 22, no. 6-7 (June-July 2001): 493-520; and C.C. Markides and D. Oyon, “What to Do Against Disruptive Business Models (When and How to Play Two Games at Once),” MIT Sloan Management Review 51, no. 4 (summer 2010): 25-32.
2. F. Fréry, X. Lecoq, and V. Warnier, “Competing With Ordinary Resources,” MIT Sloan Management Review 56, no. 3 (spring 2015): 69-77.
3. C. Markides and C.D. Charitou, “Competing With Dual Business Models: A Contingency Approach,” Academy of Management Executive 18, no. 3 (2004): 22-36; and Markides and Oyon, “What to Do Against Disruptive Business Models.”
4. P. Aversa and S. Haefliger, “Business Model Portfolio Diversification,” working paper, Cass Business School, London, 2017; and S. Timo and G. Vroom, “Mergers and Acquisition Revisited: The Role of Business Model Relatedness,” Advances in Mergers and Acquisitions, forthcoming.
5. Among others, see P. Aversa, S. Furnari, and S. Haefliger, “Business Model Configurations and Performance: A Qualitative Comparative Analysis in Formula One Racing, 2005-2013,” Industrial and Corporate Change 24, no. 3 (June 2015): 655-676; G. Ahuja and E. Novelli, “Incumbent Responses to an Entrant With a New Business Model: Resource Co-Deployment and Resource Re-Deployment Strategies,” in “Resource Redeployment and Corporate Strategy (Advances in Strategic Management, Vol. 35),” ed. T.B. Folta, C.E. Helfat, and S. Karim (Bingley, United Kingdom: Emerald Group Publishing, 2016), 125-153; and Markides and Charitou, “Competing With Dual Business Models.”
6. For an analysis of the Netflix business model, see Ahuja and Novelli, “Incumbent Responses to an Entrant With a New Business Model”; and Teece, “Business Models, Business Strategy, and Innovation.”
7. Aversa, Furnari, and Haefliger, “Business Model Configurations and Performance.”
8. J. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17, no. 1 (March 1991): 99-120.
9. D.J. Teece, G. Pisano, and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic Management Journal 18, no. 7 (August 1997): 509-533.
10. W.C. Lawler, “Understanding the Financial Footprints of Strategy,” in “Strategy, Innovation, and Change: Challenge for Management,” eds. R. Galavan, J. Murray, and C. Markides (Oxford, United Kingdom: Oxford University Press, 2008), 69-96.
11. M.E. Porter, “What Is Strategy?” Harvard Business Review 74, no. 6 (November-December 1996): 61-78. Porter argues that “competitive strategy entails a deliberate choice of a specific set of activities aimed at delivering a unique mix of value.” For a strategy to remain sustainable, trade-offs with other competitors’ positions must exist, thus making certain activities incompatible with others, due to “inconsistencies in image,” “inflexibilities in resources,” or “limits on internal coordination.” Yet it is the very existence of such positioning trade-offs that can instigate the erosion of a company’s competitive advantage for those that deploy multiple — and, in his view, conflicting — business models.
12. Ibid. Porter argues that “fit locks out imitators by creating a chain that is as strong as its strongest link.”
13. C. Zott and R. Amit, “Business Model Design: An Activity System Perspective,” Long Range Planning 43, no. 2-3 (April-June 2010): 216-226; A. Afuah and C.L. Tucci, “Internet Business Models and Strategies: Text and Cases” (New York: McGraw Hill Higher Education, 2001); and Amit and Zott, “Value Creation in e-Business.”
14. R. Casadesus-Masanell and J. Tarziján, “When One Business Model Isn’t Enough,” Harvard Business Review 90, no. 1-2 (January-February 2012):132-137. The authors investigated LAN Airlines and its joint adoption of three business models. The latter configuration generated greater value together than apart, thus “turning otherwise unviable possibilities into profitable opportunities.”
15. V. Sabatier, V. Mangematin, and T. Rousselle, “From Recipe to Dinner: Business Model Portfolios in the European Biopharmaceutical Industry,” Long Range Planning 43, no. 2 (April 2010): 431-447.
16. Aversa, Furnari, and Haefliger, “Business Model Configurations and Performance.”
17. B. Wernerfelt, “A Resource-Based View of the Firm,” Strategic Management Journal 5, no. 2 (April-June 1984): 171-180; and Barney, “Firm Resources and Sustained Competitive Advantage.”
18. C. Baden-Fuller and M.S. Morgan, “Business Models as Models,” Long Range Planning 43, no. 2 (April 2010): 156-171; C. Baden-Fuller and V. Mangematin, “Business Models: A Challenging Agenda,” Strategic Organization 11, no. 4 (November 2013): 418-427; and C. Baden-Fuller and S. Haefliger, “Business Models and Technological Innovation,” Long Range Planning 46, no. 6 (December 2013): 419-426.
19. Fréry, Lecoq, and Warnier, “Competing With Ordinary Resources”; see also D. Leonard-Barton, “Core Capabilities and Core Rigidities: A Paradox in Managing New Product Development,” Strategic Management Journal 13, special issue (summer 1992): 111-125.
20. “AWS Customer Success,” 2017, https://aws.amazon.com.
21. J. Bort, “Amazon’s Massive Cloud Business Hit Over $12 Billion in Revenue and $3 Billion in Profit in 2016,” Feb. 2, 2017, www.businessinsider.com; and A. Levy and A. Balakrishnan, “Amazon Sinks as Revenue Misses, Guidance Disappoints,” Feb. 2, 2017, www.cnbc.com.
22. B. Darrow, “Amazon Unveils New AI Services for Cloud Devotees,” Nov. 30, 2016, http://fortune.com; and “Amazon Lex,” 2017, https://aws.amazon.com.
i. See classification schemas in Baden-Fuller and Mangematin, “Business Models: A Challenging Agenda”; and Baden-Fuller and Haefliger, “Business Models and Technological Innovation.”