Business Model Vs. Business Strategy
A business' success includes many elements. Alongside a brilliant idea, a successful business must create a value for its customers for the business to generate income. To achieve value and profit, a business must have proven method of capturing customers while retaining the current ones. The business model and the business strategy provide the framework for the business to achieve these goals. But a business model is often mistaken for a business strategy or they are used interchangeably which leads the company non-competitive in the market. So, to get ahead of competitors, a company not only need a good business model and a clear strategy, they also need a clear understanding of the difference between the two. Definition brings clarity.
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Business model
'A business model describes the rationale of how an organisation creates, delivers and captures value' (Alexander Osterwalder and Yves Pigneur, 2010). A business model lays out a step-by-step plan of action for company to operate profitably in the marketplace.
It consists of four interlocking elements that, taken together, create and deliver value.
The first element is, Customer value proposition (CVP). A successful company is one that has found a way to help customers get an important job done (create value for customers). Here, the job is a fundamental problem in a given situation that need a solution. Once the job is recognised (along with all dimensions), including the process of how to get it done, the offerings can be designed. The more important the job is to the customers, the greater the CVP.
The second element is Profit Formula. It is the blueprint that defines how the company creates value for the customer and for itself. It consists of:
Revenue model- Price/volume
Cost structure- cost of the key resources required by the business model (economies of scale, direct and indirect costs).
Margin model- contribution needed from each transaction for desired profits.
Resource velocity- how fast and well the company needs to turn over inventory, fixed assets and other assets while utilising the resources.
The third element is Key resources, they are assets such as, products, people, technology, equipment, channels and facilities required to deliver the value proposition to the targeted customers. These key elements have to be kept in focus as they create value for the customer and the company, and the way those elements interact.
The last element is key processes. Operational and managerial processes allow successful companies to deliver value in a way they can successfully repeat and increase scale. Processes may include planning, training, development, manufacturing, budgeting, sales and company's rules and norms.
These four elements are the building blocks of any business. In brief, customer value proposition and profit formula define value for the customer and company; whereas key resources and key processes describe how these values can be delivered to the customer and the company (Johnson W. M., et al. 2008)
Business strategy
One of the most misused words in strategic management is 'Business strategy'. Most people use the word 'strategy' but don't really know or understand the important underlying business strategy principles (Flander D. J., 2018). Some great definitions of strategy by authors and professors-
"Strategy is a pattern in a stream of decisions."
– Henry Mintzberg
"Strategy is thinking about a choice and choosing to stick with your thinking"
– Jeroen De Flander
"The essence of strategy is choosing want not to do."
– Prof. Michael Porter
Some business strategy principles every leader should know-
1. Compete to be unique not to be the best: strategy is not about being the best but to be unique. Many leaders take business competition as world of sports and believe that there can be only one winner. But competing in business is more complex. Within a single industry there can be different companies all trying to meet with the industry average, each with a different strategy. Therefore, there can be several winners.
2. Compete for profit: Business is not about having a large market share but is about making money.
3. Before developing a business strategy first know the industry: Each industry has its own characteristics and structure. This structure and where the company stands within it determines the profitability. The better one knows about the industry and understands it, the better one can determine elements that can make the company unique and reap a higher average return than the industry average.
4. Business strategy is about choice: Need a clear choice of 'who' the company is going to serve and a clear choice of 'how' will they serve their clients. It's about connecting the outside world (demand) with the company (supply).
5. A good business strategy is also about saying 'No': once it is clearly defined where the company wants to go, a clear proposition for a specific client segment (who) and unique activities in the value chain to offer the needs of the clients (what), one will realise that there are lots of things that they are not going to do. There will be customers that they will not serve, activities that the company will not be perform and products/ services that they will not offer. As Michael porter said, 'The essence of strategy is choosing what not to do".
6. Business strategies requires one to keep moving: competitors move, customer's needs, behaviour change, and technology transform is very common in business. One most important element to determine future path for the company is to predict these evolutions and trends and integrate this thinking into the business strategy-building process.
7. One of the most important tool of business strategy is scenario thinking: turning data into assumptions is important to fuel reflection process. Scenario thinking is the standard way to work with assumptions in a structured way to fix some parameters and let other vary (Flander D. J., 2018).
Wal-Mart is one of the best example to show the distinction between a strategy and a business model. Many thinks that Wal-Mart's success was a result of pioneering a new business model, but that is not the case. Sam Walton opened his first Walmart in 1962 in the hamlet of rogers, Arkansas but the discount retailing model was introduced in the market long back. A slew of industry pioneers had introduced this model in mid 1950s when they began to apply supermarket logic to the sale of general merchandise. Since 1930s supermarkets had been making customers believe about the value of giving up personal service in exchange for lower food prices. The new breeds of retailers noticed this and adapted this basic story of the supermarket to clothing, appliances, and other consumer goods. The basic idea was to offer lower prices than standard departments stores by reducing the costs. And then this business model for discount retailing came into shape- the first step was to remove the department store's physical facilities like carpenting and chandeliers. The second step was to arrange the stores in a way that they can handle large numbers of shoppers efficiently. The last step was to put fewer sales person on the floor and let the customers take the charge and serve themselves. Following those things well, one could offer low prices and still make money.
After hearing about the new discount stores, he visited few and liked their potential. Borrowing a lot of ideas for his early stores from Kmart and other stores, he decided to set out on his own in 1962. But there was something he chose to do different- the way he put his own ideas on the basic business model- that made Wal-Mart so fabulously successful. His business model was same as Kmart's but his 'strategy' was different and unique.
In the starting itself, Walton targeted to serves different group of customer segment of markets. The ten largest discounters in 1962 (no existence now) focused on big metropolitan's cities and areas like New York. Walton explained that the 'key strategy' of Walmart "was to put good-sized stores into little one-horse towns which everybody else was ignoring." He reached out to rural towns like Rogers which was isolated and had populations up to 25,000. Walton coming from a small town knew the system well. The nearest city was about four to five hours drive away. He knew that if he could beat the prices of city stores then 'people would shop from home'. Walton was able to prevent competitors to enter Walmart's territory as Walmart's market tended to be too small to support more than one large retailer.
Walmart not only targeted different customers than his competitors but it also took different approach to merchandising and pricing that is, it promised different kind of value to its customers. Walmart promised national brands at everyday low prices while, its competitors relied heavily on second tier brands, private label goods, and price promotion. To make its promise more than a company slogan, Walmart chased for efficiency and worked on reducing costs by using innovative practices in areas like, purchasing, logistics, and information management (Bradley, S.P. and Ghemawat, P. 1994).
The discount-retailing business model has attracted many market players but many also failed. But some like Walmart and Target accomplished their superior performance over the long time because of their unique strategies.
One more example to shed further light on the relationship between business models and strategies. It's the recent story of 'Dell computer'. Unlike Sam Walton, Michael Dell created his own business model and was a true business model pioneer. His business model is now well known. While others computer makers sold their computers through resellers, Dell sold directly to its end customers. This method reduced the costs of value chain and also helped the company to have access to information it needed to manage inventory better than any other company in the industry. Due to intense run of innovation in the industry, Dell's inventory advantage could avoid the high obsolescence that other computer makers had to bear. Dell has consistently outperformed its competitors for more than a decade due to its innovative business model.
But in this case, Dell's business model functioned much like a strategy. It made Dell different in ways that were hard for competitors to copy. If the rivals tried selling their computers directly then they would disturb their existing distribution channels and isolate their resellers on whom they relied. Stuck with their own strategies, the rivals were in loss if they tried copying Dell but were also in problem if they didn't. "When a new model changes the economies of an industry and is difficult to replicate, it can by itself create a strong competitive advantage" (Magretta J. 2002 pp. 91)
Not much people realise the role of Dell's pure strategy in the company's superior performance. While Dell's business model had laid out an idea of value chains that they would do, the company still lacked in making strategic choices about which customer segment to serve and what kind of products & services to offer. For example, in 1990s other computer makers focused on home market but Dell chose to go after large corporate accounts which indeed were far more profitable. Other computer makers offered low-end machines to attract first time buyers whereas Michael Dell wasn't interested in this instead he supported his territory by selling more powerful, higher margin computers.
As Dell sold direct and could analyse its customers in depth, it began to realise that its average selling to price to consumers was increasing while the industry was falling. Consumers, which the company wasn't targeting, were coming to buy their second or third machines and were looking for more power and less hand-holding. After having a profitable, billion-dollar consumer business in 1997, Dell dedicated a group to serve the consumer segment.
Now that everyone has started selling direct to their customers in the industry, dell's strategy has shifted to deal with the new competitive realities. Leading since a decade, Dell is by far the industry's best executor of the direct selling model and a low-cost producer (Magretta J. 2002). Basically, the company is using its cost advantage in computers to compete on price, to drive weak players out of the market and to gain share. also, the company is relying on its core business model to increase its reach by pursuing opportunities in new product market like servers, that have greater profitability than PCs. The basic business model remains same but the strategic choices like where to apply the model- which geographic markets, which segments, which customers segments, which products- are what change.
"Business model" and "strategy" are among the sloppiest used terms in business today. They can mean everything, if stretched, and end up meaning nothing. But studying the experiences of companies like Walmart and Dell, it shows that these two concepts have enormous practical value; Walmart offers branded goods for less prices to a carefully chosen customer base and built a target strategy around a different kind of value- style and fashion. The underperformers in the industry like Kmart tried to do all things to all people and this where they failed to find distinctive way to compete; in case of Dell, the clarity about their business model has helped them in another way, that is, basis for employee communication and motivation. A business model tells a good story- to improve execution, to get people in the organisation aligned around the kind of value the company wants to create, helps people to see their jobs and tailor their behaviour accordingly within the company.
It's true that arbitrary choices are involved in an attempt to draw sharp boundaries around abstract terms. But if don't draw lines between these terms then it will be confusing and difficult to use. These concepts are fundamental to performance and no organisation can afford confusion. – Refer other academics for conclusion