Editor's Note: Take a look at our featured best practice, Business Model Innovation (30-slide PowerPoint presentation). Innovative business models can reshape industries and drive tremendous growth. However, many organization find business model innovation difficult. The framework outlined in this presentation is based on the HBR article "Reinventing Your Business Model," authored by Clayton Christensen, [read more]
Business Model Diversification
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Strategic objectives of all businesses are to propel growth and performance, while simultaneously creating value for customers.
While it is customary for managers to emphasize financial performance, effective managers pursue new opportunities in order to create added value.
Business Model Diversification allows creation of value, if managed astutely, and can aid managers enhance performance and expand the goal of the enterprise.
At the foundation of any sustainable organization is its Business Model—the system of symbiotic organizational pursuits to generate and capture value.
For organizations desirous of sustaining a Competitive Advantage in today’s highly competitive business environment, Business Model Diversification—employment of multiple Business Models for value creation and revenue generation—has become a necessary pursuit.
Organizations achieving breakout growth in their industries diversify their Business Models using approaches like Business Model Innovation (BMI)—a tool that concurrently brings about reciprocally supportive changes in value proposition to customers as well as to the core Business Model.
BMI is a powerful, yet underleveraged, tool that can drive breakout growth within an organization’s core business.
According to Michael Porter, strategic diversification is about combining activities that efficiently relate to and mutually reinforce one another, forming a system of activities, as opposed to a collection of isolated activities.
Judging which activities can fit together within a Business Model and at the same time be synergistic across Business Models, is a complicated and delicate endeavor requiring a structured approach.
Research by MIT Sloan Management Review brought forth a framework for analyzing efficacy of diversifying Business Models. The framework assisted in studying Formula 1 auto racing industry, the multiple businesses run by Amazon Inc., and almost 50 other companies.
This research study was based on the following 3 questions:
- What considerations should be taken into account when contemplating Business Model Diversification?
- How can value assessment and optimization of a new Business Model be conducted that is intended for inclusion in the portfolio?
- How can the Business Model portfolio be improved with the passage of time?
In order to answer these questions an 8-step framework was developed that envisages the complementarities in a Business Model portfolio. The 8 steps allow separation and analysis of the numerous activities that comprise the Business Model Portfolio. Following steps go into creation of the visual map for a Business Model Portfolio Analysis:
- Identify Business Models
- Identify Key Resources
- Identify Key Capabilities
- Identify Key Performance Indicators (KPIs)
- Connect Model to Resources & Capabilities
- Identify Interconnected Resources & Capabilities
- Analyze
- Monitor & Maintain
These steps enable visualization of relationships among the various means and competences, and their influence on Performance, thus amplifying the correspondence across a Business Model portfolio.
Discussed below are some details of a few steps integral to developing a robust Business Model Portfolio:
- Identify Business Models
- Foremost step in the 8-step process is to itemize the company’s Business Models.
- Identify Key Resources
- Ascertain the significant resources each Business Model produces e.g., financial resources, user data.
- Identify Key Capabilities
- Determine the essential capabilities resulting from each Business Model e.g., technological capabilities, sales capabilities.
Interested in learning more about framework for Business Model Diversification? You can download an editable PowerPoint on Business Model Diversification here on the Flevy documents marketplace.
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The Business Model Canvas is a versatile tool that can be used to describe, discuss, design, choose, challenge, improve, innovate, pivot or invent a business model.
The document provides an overview of the business model canvas and how it links to strategy analysis and development. It offers [read more]
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About Mark Bridges
Mark Bridges is a Senior Director of Strategy at Flevy. Flevy is your go-to resource for best practices in business management, covering management topics from Strategic Planning to Operational Excellence to Digital Transformation (view full list here). Learn how the Fortune 100 and global consulting firms do it. Improve the growth and efficiency of your organization by leveraging Flevy's library of best practice methodologies and templates. Prior to Flevy, Mark worked as an Associate at McKinsey & Co. and holds an MBA from the Booth School of Business at the University of Chicago. You can connect with Mark on LinkedIn here.
