In fire protection, compartmentation refers to the subdivision of a building into smaller compartments using fire-resistant materials in order to control the spread of fire and manage risk. This mental image of compartmentation provides a great metaphor for damage limitation in business model innovation and in career management alike. In this instalment of The Thursday Thought, we will briefly explore both at a high level. (Heavily influenced by my book “Undisruptable“).
A Portfolio of Portfolios
While it is wise to diversify business interests, it is even better to diversify business models. This is an important distinction: a business model is not a product. Many products can enjoy multiple business models. For example, Nestlé is the parent company of both Nespresso and Nescafé. Nespresso sells products coffee pods direct to consumers via a subscription model and branded boutique stores. Meanwhile, Nescafé sells via the traditional method of B2B to suppliers and partners. This means Nestlé enjoys a portfolio of business models, not just a portfolio of brands.
One of my clients is Toyota, a marvellous company that famously disrupted the US market in the 1950s with the Toyota Corona. Toyota did not look to challenge the market-leaders GM and Ford, they targeted the non-consumer, those customers who could previously not afford a car. To the non-consumer, the alternative was no car at all. In time, Toyota built capabilities to topple the giants as it rolled out better and better models in more efficient ways. However, Toyota continues to innovate not with the cars they sell or the way they manufacture these cars. Toyota, like many other car manufacturers, diversified its suite of business models. A prime example is YUKÕ, Toyota’s car club service. With YUKÕ you can book cars by the hour, day or week, with fuel, insurance and on-street parking included. The business model is not about ownership, it is about access, it is pay-as-you-go driving.
In a world of disruption, the difference between diversification and business model diversification is crucial. This is where I draw the analogy to compartmentation. If a business model is disrupted (and experiences a burning platform), the entire organisation does not go up in flames. A portfolio of business models means if one business model is ablaze, the others can keep delivering.
A Slow Burner
For business leaders or sponsors of new business models, it is important to realise that new business models are often painfully slow and unprofitable for long periods of time. The organisation can grow tired of them and view those who lead these new projects in an unfavourable light. However, this is where you must realise that engaging in the new business model is about more than profit in the early stages. In the beginning, it is about building capability. It is about understanding the business model first-hand within your organisation and understanding implicitly how it might work for the DNA of your specific organisation. As a leader, you must protect the fledgling business model, as it will be rejected by the corporate immune system and will earn its fair share of enemies.
In such cases, Machiavelli’s words ring true.
“There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success than to take the lead in the introduction of a new order of things. For the innovator has enemies in all those who profit by the old order, and only lukewarm defenders in all those who would profit by the new order, this lukewarmness arising partly from fear of their adversaries … and partly from the incredulity of mankind, who do not truly believe in anything new until they have had actual experience of it.” – Niccolo Machiavelli – The Prince
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