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Do you have a strong portfolio of business models? One business model that is currently succeeding isn’t enough, warns Kay Plantes.

Do you have a strong portfolio of business models? One business model that is currently succeeding isn’t enough.

Kodak, the company that fueled the growth of the photography industry, is selling its patents. Not the patents for intellectual property related to the industrial age’s film photography. According to the Wall Street Journal, Kodak is trying to sell more than 1,100 patents for capturing, storing, organizing and sharing digital images.

Yes, Kodak’s that hard up for cash. Why? Because its leaders failed one of the most important tests of strategic leadership – building a balanced portfolio of business models.

Most companies, except very small or simple ones, have or should have multiple business models, one for each segment of customers that it serves. A company therefore 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. They sometimes suffer from a lack of management attention, as they don’t generate the same levels of revenue and profitability as mature businesses. If you don’t nurture their growth, you’ll find yourself stuck without alternatives when your mature businesses are being commoditized into decline.

Emerging businesses are experimental in nature, typically based on new innovations and new market opportunities. These do not generate much current revenue, and may 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.

What happened to leave Kodak in so much debt that it has to sell off valuable patents? Based on those patents, it appears Kodak could have been much more of a leader in digital photography, creating a faster-growing and more profitable portfolio today. My guess is that Kodak’s executives starved the company’s emerging and growth non-film businesses in order to support the traditional film business longer than they should have, a delay that resulted in later-than-desired entry into digital markets.

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 that delivered their Wall Street numbers, avoiding the far harder task of squeezing today’s cash cow mature business 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 identify ways to turn their mature business into brand new growth businesses through innovation or divestiture (with reinvestment elsewhere).

Today Kodak is left with too many businesses demanding cash (like its printer business) and too few generating cash. What a shame, as it appears it had the patents to avoid this situation. AT&T and Verizon are next on the block in my predictions.

How strong is your portfolio of business models?

MIT-trained economist Kay Plantes is a strategy consultant and author of Beyond Price: Differentiate Your Company in Ways that Really Matter (Greenleaf Book Group, 2009). She writes a blog on business model innovation at http://www.plantescompany.com/blog.

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