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 (23)
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.
