Strategy and Business Models

Read a 2002 Harvard Business Review article by Joan Magretta titled Why Business Models Matter.  In the article she states “Today, “business model” and “strategy” are among the most sloppily used terms in business; they are often stretched to mean everything—and end up meaning nothing” I think this is still true today. Mark W. Johnson, in his book Seizing the White Space (Business model innovation for growth and renewal) argues that regardless of how familiar the term is, very few people really understand what a business model is or what model their business is currently operating under. Notwithstanding, many of the afore mentioned are managing successful businesses. I figure that this either means that understanding definitions and concept differences don’t count or that the business models and strategies they deploy are simply the accepted norm around which trading these products and services is undertaken. 

 That said, understanding the differences between strategy and business models seem most relevant when:

  1.  You are starting new businesses
  2. Trying to grow existing businesses

In both cases figuring out both how to position the business and what core economic model to utilise can significantly impact the ventures success. To the extent that a new venture is not succeeding at the rate required or an existing business seems to have hit a growth plateau, how do you figure out whether you have a business strategy or business model problem? 

There are many academic papers that debate the definitions of each and a few that cover the differences in far more detail. This post offers a very tertiary look at a fairly sophisticated subject. My take on the two definitions are as follows:

Strategy – Is the ongoing process of developing and sustaining a set of unique competencies that allow you to execute a set of actions (processes) that deliver differentiated products and services that out-compete rivals over time. The strategy is only successful to the extent that it creates real economic returns.

Business Model – Is a model that abstracts key strategy constructs into an explicit definition of how the businesses core operating logic creates, captures and delivers value for each stakeholder.

The two concepts are intricately linked and as I imply in my definitions, business models are a subset of strategy. If strategy is fundamentally about competiveness and real economic returns then finding business models that enable successful strategy is critical. Their differences become a touch more fuzzy when the business model becomes the core of the strategy. Businesses like Threadless, Redhat, Amazon and Skype have built strategies that incorporate very innovative business models that are the heart of the strategy.  

Where to start strategy or business model?  It may not matter, but I personally prefer starting on the business model side. Once you think you have an interesting unmet need or job to get done, modelling various ways in which value can be created, distributed and captured is a great way to encourage innovative and rigorous thinking. There are differing ways to develop or construct these models and levels of abstraction at which this can be done typically using a combination of diagrammatic tools and basic spreadsheet modelling. By simply changing variables like customer segments and associated value provisioned you are able to start understanding the effects on resourcing, processes, skills, partnerships, structures, channels, relationships, revenue and cost structure requirements. While these are key elements of strategy, at a modelling level, they offer you the ability to check whether both the logic and the numbers stack up. I will cover business modelling techniques in a subsequent post.

 Dr Raj Raina, a senior lecturer at the Gordon Institute of Business Science  offered an interesting insight into this subject when I discussed the strategy –business model subject with him. He pointed out that gaining insights into whether both the mode of competing and operating logic of the business model is sound can be difficult.  Business models have natural performance limits which affect your strategic success. A case in point may be where a strategy is sound but the scale achieved using the business model starts to negatively impact its effectiveness. This could occur when the cost of managing more resources increases more than your ability to charge higher prices. A profit formula that worked with lower transactions cost becomes compromised. Do you solve the problem by upping the value proposition side of the equation or the cost of managing a larger number of resources? The answer may be context specific and the solution may require tweaks to both your positioning (strategy) and business model (operating logic)

Irrespective of the definitions, the core operating logic encapsulated within models is critical to sound strategy. Business model thinking is constantly evolving offering more differential options and management teams new techniques for thinking through their strategic process and associated choices.