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Building portfolios
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(Note: this article is an excerpt from Agile Strategy:
Designing Successful Companies in an Open World. You can download
the full PDF book here).
In the 20th century, most companies competed within large, protected
markets and thought of themselves as being in a single business. Many
people used the terms “company” and “business” interchangeably, and were
unclear about the difference. Further, executives felt strongly that
their companies should just focus on one business. Even in the recent
business model literature, some have argued that companies, including
large ones, should have just one business model.
We believe that in today’s open markets, it is very important
to distinguish between a company and the businesses it owns and operates.
As we have discussed elsewhere, even small companies today serve multiple
granular markets. Given each granular market needs a distinctive business
model, most small companies are actually in multiple businesses. Large
corporations may be in far more businesses than they realize.
Being in multiple businesses is a positive, not a negative. Because of
the fragmentation and volatility of today’s markets, companies must not
rely on just one business model, but must build a continually evolving
portfolio of businesses. This portfolio must be continually reviewed
in light of rapidly changing market conditions, with the objective of
building the optimal portfolio to maximize company value. To achieve
this, companies need to:
- build the portfolio by beginning with a core business and then moving into adjacent businesses
- manage their portfolio of businesses according to their lifecycle stages
- build a balanced portfolio of businesses.
Build core then adjacent businesses
Companies get started by creating an initial successful business model. Normally this first business model is the result of a lot of early experimentation with a range of different business model options until one begins working (satisfying customers and stakeholders, and generating cash). This business model fuels the initial growth of the company, and becomes its core business.
Once its core business gets real traction and begins growing, the company can begin exploring moving into adjacent businesses based on the core. This means it begins looking at additional business models that are close to and can leverage its core business model. For example, it might look to go after an adjacent customer group with similar offerings and processes as its core model, or it might develop new products for its existing customers.
To do this well, the company must first define the full business model needed for each adjacent business, and then explore to what extent it can leverage elements from the core business model in the new business model. While the goal is to leverage as much of the core business as possible, each adjacent business must have its own business model, designed specifically for its target customer group, otherwise it will not properly meet customer needs and will fail.
By building new businesses adjacent to the core, the company begins to build a portfolio of businesses, so that it is no longer wholly dependent on the core, and it can improve overall performance and manage risk across a range of granular markets. As discussed above, the company should continually review its market selections, and ensure that it is creating adjacent businesses in high growth markets while monitoring existing businesses for slowing market growth.
At some point, the original core business itself may begin to decline, and the company will need to transition to a new core. This is a difficult balancing act, requiring a lot of skill and good judgment. Many companies have failed through giving up too quickly on their core businesses. Similarly, many others have failed by sticking to their core businesses for too long.
In order to succeed, companies must treat all their businesses, even their core businesses, as part of the portfolio, each to be continually judged and evaluated on its merits and future potential, in the context of external market behavior.
Managing your portfolio across the lifecycle
As you build your core and adjacent businesses, you need
to think about the stages of growth that each of these businesses is
moving through, and manage each of them according to its stage of growth.
There are four primary stages: innovation, creation, growth and maturity
(Exhibit 4). From a business model design perspective, during the first
two stages you are designing a new business model, and during the latter
two you are refining an existing business model. Early stage companies
may have just one core business at the innovation, creation or growth
stage. More established companies will have one or two core businesses
and a number of adjacent businesses spread across all four stages.
Exhibit 4: Business portfolio across the lifecycle
The critical point about these lifecycle stages is that each has different
goals and requires different resources, and as a result should be managed
differently. Companies should not have just one management approach and
set of metrics for all of their businesses. Rather, they need to understand
each of the lifecycle stages, group each of their core and adjacent businesses
into these stages, and then manage each according to its stage of the
lifecycle.