Every business and business model has a finite life. Products come and go. Customer preferences change. As Rita Gunther McGrath notes, competitive advantage is increasingly a transient notion. The companies that last over long periods of time do so by creating new products, services, and business models to replace yesterday’s powerhouses.
Scott Anthony makes some great points in this piece. I stated in a previous blog how much focus is put on "churn" percentages. In most industries it is very important to watch churn, however to keep customers as a defensive move will always result in long-term demise.
Your customers will churn, this is a proven fact. At what rate and when is always the biggest question. The key is to have customers churn to your next innovation. Apple didn't try to prevent churn in their iPod line as a defensive move, they were always on the offense. Creating new form factors, adding color and video. At some point they were so much on the offense, they destroyed this business with the iPhone, but I would imagine the positive churn of Apple customers is many times greater than if they would have played defense with the iPod line. Compare this to Microsoft which has been playing defense with Windows for many years. They are starting to see that negative churn by only playing defense, which has put them at a distinct disadvantage in mobile. They played defense so much, their mobile strategy is Windows.
Portfolio theory has its naysayers, but few argue with the fundamental idea that diversification decreases risks and increases a portfolio’s potential. Do you remember the most efficient buggy whip manufacturer or the most profitable distributor of packaged ice? Of course not.
I don't fully agree with what Anthony has to say here. Where I disagree is with the size of the portfolio of the business. Diversification is good if it remains within the core competency of the business. Too many times businesses diversify into areas where they have little expertise just to increase the portfolio, which causes a loss of focus on the strength of the business. The best companies diversify within the core, like Apple. I think the proper strategy is to be the company that causes your customers to churn, this way you keep the customers loyal to your brand and you are always trying to be the next product in your industry.