Do you have a strong portfolio of business models?
The news has gone from bad to worse.
The bad news: Kodak, the company that fueled the growth of the photography industry is selling its patents. Not the patents for intellectual property related to film photography, but its more than 1,000 patents for capturing, storing, organizing and sharing digital images, according to the Wall Street Journal.
And the really bad news? Kodak has filed for bankruptcy.
Yes, Kodak was that hard up for cash and did not find it. Its leaders failed one of the most important tests of strategic leadership – building a balanced portfolio of business models. Kodak invested in new business models too late. As film stopped delivering the riches, the printer/cartridge business model demanded too much cash for too many quarters, creating an unsustainable situation.
A company can be viewed as a portfolio of different business models, each using resources specific to the model as well as resources shared by other (and perhaps all) business models. How do you know a strong business model portfolio from a weak one?
First, the business models should be focused on attractive customer segments, where there is an opportunity for the company to either be the lowest cost (and therefore win on price) or offer benefits that are hard for competitors to copy (and therefore earn price premiums). Too often, leaders segment markets on too macro a level, not realizing there are pockets in even the most staid markets that are fast-growth. You want your share of those segments. McKinsey & Company research shows market selection is more important to growth than share gain within served markets.
Second, the business models are synergistic as they leverage solution, process and resource platforms. It is through leveraging these platforms that each business gains distinctive advantages and efficiencies not available to competitors. At the same time, each business should continually contribute ideas and practices to these central platforms, creating further distinctive advantages and efficiencies for the company as a whole.
Third, the portfolio should be diversified, much as we diversify personal investments. Ideally, you will have a mix of mature, growing, and emerging business models.
- Mature businesses generate most of today’s profits and cash. If you can’t re-imagine them through business model innovation, manage them for cash, or exit that segment.
- Growing businesses are typically smaller than mature businesses but with higher growth rates and higher margins and often need more investment than mature businesses. If you don’t nurture their growth, you’ll find yourself stuck without alternatives when your mature businesses are being commoditized or disappear, creating your own Kodak moment.
- Emerging businesses are experimental in nature, stemming from new innovations and new market opportunities. These do not generate much current revenue and require net investment. A healthy pipeline of emerging business opportunities is essential to secure the future of the company.
Finally, the portfolio should be aligned with external trends. Phillip Morris had a great portfolio until the truth about the health issues associated with smoking became apparent.
Like Sears executives supposedly “surprised” by Walmart, Kodak executives claimed to have miscalculated the speed of digital photography’s disruption. For both Sears and Kodak the error was the same: leaders riding the easy horse while delivering their Wall Street numbers and avoiding the far harder task of squeezing today’s cash cow businesses to build tomorrow’s growth engines.
The root cause behind this error: the most powerful voices at the table are the leaders running the current cash cow businesses. They threaten huge market share and cash declines if their spending budgets are cut. Smart CEOs challenge these leaders instead to innovate their mature business or divest them.
Admittedly, the Kodak situation was made doubly hard by cell phones quickly absorbing part of the digital camera market. Kodak’s nemesis, Fuji, was much smarter. It branched into niche non-photo markets, including skin care that leveraged its patents. The company is faring well today. Kodak hired an HP leader, who took the company (surprise, surprise) into the printer market, another commodity market. Were there any synergies between printers and Kodak, Kodak’s board would have been wiser to sell the company to HP.
I view AT&T as next on the block for coming up short when it comes to a healthy portfolio of business models. How do I know? Like big-pharma and banks in the past, AT&T hoped a T-Mobile acquisition would keep its shareholder price from falling. Consolidation delays the moment of truth for commodity-like companies, and makes a pathway to profitable revenue growth that much harder to come by.
How strong is your portfolio of business models?