The business model is consistent with a number of emerging
concepts from the field of strategic management. Strategy, in
Porter s (1996)view, is about performing different activities than
competitors or about performing similar activities in different
ways. He just aposes strategy against operational effectiveness, a
concern with performing similar activities better than competitors.
The business model has elements of both strategy and operational
effectiveness. For instance, a low-cost advantage deriving from a
novel approach to distribution might be central to the way in which
the firm creates value, reflecting Porter s (1996)notion of
strategy. Similarly, the model might call for internal
manufacturing, where product ion processes are fairly similar to
those of competitors and the firms competitiveness in this area is
a function of operational effectiveness.To see the dissimilarity
between a strategy and a business model, you need only look at
Wal-Mart. You might think that the giant retailers success was a
result of pioneering a new business model, but thats not the case.
When Sam Walton opened his first Wal-Mart in 1962 in the hamlet of
Rogers, Arkansas, the discount-retailing business model had been
around for a few years. It had emerged in the mid-1950s, when a
slew of industry pioneers (now long forgotten) began to apply
supermarket logic to the sale of general merchandise. The idea was
to offer lower prices than conventional department stores by
slashing costs. And so the basic business model for discount
retailing took shape: First, strip away the department stores
physical amenities such as the carpeting and the chandeliers.
Second, configure the stores to handle large numbers of shoppers
efficiently. And third, put fewer sales-people on the floor and
rely on customers to serve themselves.Do those things well, and you
could offer low prices and still make money.Walton heard about the
new discount stores, visited a few, and liked their potential.In
1962, he decided to set out on his own, borrowing a lot of ideas
for his early stores from Kmart and others.But it was what he chose
to do differently the ways he put his own stamp on the basic
business model that made Wal-Mart so fabulously suc-cessful.His
model was the same as Kmarts, but his strat-egy was unique.From the
very start, for instance, Walton chose to serve a different group
of customers in a different set of mar-kets.The ten largest
discounters in 1962, all gone today, focused on large metropolitan
areas and cities like New York. Wal-Marts key strategy, in Waltons
own words, was to put good-sized stores into little one-horse towns
which everybody else was ignoring.He sought out isolated rural
towns, like Rogers, with populations between 5,000 and 25,000.Being
a small-town guy himself, Walton knew the terrain well. The nearest
city was probably a four-hour drive away. He rightly bet that if
his stores could match or beat the city prices, people would shop
at home. And since Wal-Marts markets tended to be too small to
support more than one large retailer, Walton was able to preempt
competitors and discourage them from entering Wal-Marts
territory.Wal-Mart also took a different approach to merchan-dising
and pricing than its competitors did that is, it promised customers
a different kind of value.While com-petitors relied heavily on
private label goods, second-tier brands, and price promotions,
Wal-Mart promised national brands at everyday low prices.To make
this promise more than a marketing slo-gan, the company pursued
efficiency and reduced costs through innova-tive practices in areas
such as pur-chasing, logistics, and information management.The
business model of discount re-tailing has attracted many players
since it emerged in the 1950s.Most of them have failed.A few, like
Wal-Mart and Target, have achieved superior performance over the
long haul because their strategies set them apart. Wal-Mart offers
branded goods for less to a carefully cho-sen customer base.Target
built a strategy around a dif-ferent kind of value style and
fashion.The losers in the industry the chronic underperformers like
Kmart are companies that tried to be all things to all people.They
failed to find distinctive ways to compete.Mintzberg and Lampel
(1999) describe strategy as an elephant of which we can only grab
hold of some part or other. This is a nice metaphor for the fact
that business strategy is an enormous domain in which little
consensus exists and a variety of schools reign. Different views
include that strategy is about providing a company vision,
designing an organization that achieves a fit between internal
strengths and weaknesses and external threats and opportunities
(Learned, Christensen et al. 1965), positioning the company in the
market (Porter 1985), defining a set of goals and objectives
(Drucker 1954; Kaplan and Norton 1992), the steps to achieve them
and the way to measure them (Kaplan and Norton 1992). In this
dissertation I argue that the business model and strategy talk
about similar issues but on a different business layer. I
understand the business model as the strategys implementation into
a conceptual blueprint of the company's money earning logic. In
other words the vision of the company and its strategy are
translated into value propositions, customer relations and value
networks (see Figure 9).
Conclusion The terms business model and strategy are being used
by millions of people but their definitions are fuzzy. If one
accepts Porters (1996) definition of strategy as valid, then
compares definitions of business model from a broad cross-section
of the literature, e.g., as Pateli (2002) and Freeman (2003) have
done, it is really quite hard from a Figure 1 perspective to
distinguish between the terms. In his condemnation of the term
business model, Porter (2001, p.73) seems to have come to the same
conclusion. But the contribution of this article is to show that
there is a meaningful alternative to Figure 1 thinking. That
alternative view is simply the suggestion that it may be more
helpful to view a business model as an abstract representation of a
firms strategy, as depicted in Figure 2. To understand Figure 2,
one has to accept that a firms strategy is always firmly anchored
in its own particular competitive environment. So a firms strategy
is specific to that firm and that firm alone. By contrast, a
business model can be conceived as an abstraction of a firms
strategy. This same business model could then apply to more than
one firm. Equally well, a firms strategy can be represented by any
number of business models. Combining this idea with Magrettas
(2002) suggestion that a business model decribes an organizations
core logic for creating value suggests the following definition for
a business model: A business model is an abstract representation of
some aspect of a firms strategy; it outlines the essential details
one needs to know to understand how a firm can successfully deliver
value to its customers. Towards the end of the paper we asked:
Which comes first, strategy or business models? Our answer was that
because business models are like patterns in architecture and
software engineering (Alexander 1977, Coplien 1996, Veryard
2001)i.e., as successful solutions to some way in which firms
create valuebusiness models come first. Just as pattern languages
can be used for designing software, so, we suggest, combinations of
business models could be used for designing strategy: thinking in
terms of combinations of business models could enable strategists
to mix and match various combinations of business models to create
new strategies for new and existing businesses.
A business model articulates the logic, the data, and other
evidence that support a value propositionfor the customer, and a
viable structure of revenues and costs for the enterprise
delivering thatvalue. In short, its about the benefit the
enterprise will deliver to customers, how it will organizeto do so,
and how it will capture a portion of the value that it delivers. A
good business model willprovide considerable value to the customer
and collect (for the developer or implementor of thebusiness model)
a viable portion of this in revenues. But developing a successful
business model(no matter how novel) is insufficient in and of
itself to assure competitive advantage. Once imple-mented, the
gross elements of business models are often quite transparent and
(in principal) easy toimitate e indeed, it is usually just a matter
of a few years e if not months e before an evidentlysuccessful new
business model elicits imitative efforts. In practice, successful
business models veryoften become, to some degree, shared by
multiple competitors.companies can adopt business models [e.g.
Freemium or multiplerevenue stream models] pioneered in one space
into another.A business model is more generic than a business
strategy. Couplingstrategy and business model analysis is needed to
protect competitiveadvantage resulting from new business model
design.As described, a business model is more generic than a
business strategy. Coupling strategy anal-ysis with business model
analysis is necessary in order to protect whatever competitive
advantageresults from the design and implementation of new business
models. Selecting a business strategyis a more granular exercise
than designing a business model. Coupling competitive strategy
analysisto business model design requires segmenting the market,
creating a value proposition for each seg-ment, setting up the
apparatus to deliver that value, and then figuring out various
isolating mech-anisms that can be used to prevent the business
model/strategy from being undermined throughimitation by
competitors or disintermediation by customers.Having a
differentiated (and hard-to-imitate) e but at the same time
effective and efficient earchitecture for an enterprises business
model is important to the establishment of competitive ad-vantage.
The various elements need to be cospecialized to each other, and
work together well asa system.
Business Model and Strategy 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. (Magretta,
2002, p. 92) In Osterwalder & Pigneurs (2005) account of
business model literature they find that the debate about the
differences between strategy and business models reveals widely
differing opinions. Several authors who write within this field do
not take account of the relation between business model and
strategy and even use the terms interchangeably. Nevertheless, the
authors who do explicitly deal with the relation between the
business model and strategy can be divided into two groups: Those
who see a relation, yet a clear separation or distinction between
the two concepts, and those who might be said to support Hedman
& Kallings (2003) notion that the business model unites the
finer aspects of strategy. They then make the case for viewing a
business model as an abstraction of strategy: A business model
outlines the essential details of a firms value proposition for its
various stakeholders and the activity system the firm uses to
create and deliver value to its customers. If Porter [1996, 2001]
is used to define strategy, a business model may be defined as an
abstract representation of some aspect of a firms strategy.
However, unlike strategy, business models do not consider afirms
competitive positioning. (Seddon et al., 2004, p. 429) The business
model can be identical for several firms, but they will need a
strategy to differentiate themselves in terms of customers,
markets, products and services as well as value creation. She
offers the example of Wal-Mart which operates a widely used
business model (discount retailing) but has differentiated itself
from the start by choosing specific locations, specific brands and
specific processes within the areas of purchasing, logistics, and
information management. It is the firms strategy in this respect,
the author concludes, that sets Wal-Mart apart from competitors.
Shafer et al. (2005) also explicitly consider the business model as
a concept that differs from that of strategy. While admitting that
it is not a trivial task to define strategy, they summarize the
field as made up by contributors ranging from Henry Mintzberg over
leading strategist Michael Porter to management guru Peter Drucker.
Although these contributors differ widely in perspective, the
authors argue that there is a common element which is: Making
choices. The business model, on the other hand, is a reflection of
those choices and their operating implications. Hence, it can be
used as an analytical tool to test and validate the choices.
Two main differentiating factors seem to have captured the
attention of scholars. The first is the traditional emphasis of
strategy on competition, value capture, and competitive advan-tage,
whereas the business model concept seems to focus more on
cooperation, partnership, and joint value creation (Magretta, 2002;
Mkinen & Seppnen, 2007; Mansfield & Fourie, 2004). The
second factor of interest to management scholars is the focus of
the business model concept on the value proposition and a
generalized emphasis on the role of the cus-tomer, which appears to
be less pronounced elsewhere in the strategy literature. Our review
reveals a strong consensus that the business model revolves around
customer-focused value creation (Chesbrough & Rosenbloom, 2002;
Mansfield & Fourie, 2004). Viewed from this perspective, the
business model encompasses the pattern of the firms economic
exchanges with external parties (Zott & Amit, 2008); it
outlines the essential details of a firms value proposition for its
various stakeholders as well as the activity system the firm uses
to create and deliver value to its customers (Seddon, Lewis,
Freeman, & Shanks, 2004).Despite the highlighted conceptual
differences between business models and certain aspects of firm
strategy, scholars have also emphasized that the business model can
play an important role in a firms strategy. According to Richardson
(2008), the business model explains how the activities of the firm
work together to execute its strategy, thus bridging strategy
formulation and implementation. In a similar vein, both Shafer et
al. (2005) and Casadesus-Masanell and Ricart (2010) view the
business model as a reflection of a firms realized strategy.
According to Teece, the business model reflects a hypothesis about
what customers want, and how an enterprise can best meet those
needs, and get paid for doing so (2007: 1329).
Strategy and Business Models
Figure 9: Business Strategy and Business Model
