Introduction
As soon as you start talking about business and you go deeper in details, with high chances you will start talking about Business Model and Strategy. Sometimes it can happen that the word Business Model is misinterpreted with the word Strategy and even if they have a different meaning, sometimes can be that the difference is slightly.
So, the aim of this paper is to clarify firstly why Business Models matter and secondly, in order to avoid misunderstanding, their real meaning will be defined as well as the differences.
Moreover, two different cases will be briefly analysed to underline the importance of the Business Model.
Going through several articles, lot of different definitions are given about Business Model and Strategy. Even if the authors give their own personal interpretation about these two words, mostly of the time their meanings sound more or less the same.
I will report the once that I found clarifying better the differences between them.
Definitions
To make It easy, here the succinctly definitions:
Basically, Business Model refers to the business logic of the firm, which means for the way you choose to operate and how you decide to create value for your stakeholders.
The other way around, Strategy alludes to the choice of the most fitting plan of action, through which the firm will face in the marketplace against their rivals
(From Strategy to Business Model onto Tactics, Ramon Casadesus-Masanell and Joan Enric Ricart).
Once you read these quick and concise definitions seems clear and easy understand the differences between Business Model and Strategy, but since in several papers this difference is underlined, I decided anyway to report other definitions given by different authors, as they contribute to give a bigger overview about the topic and a help to clarify differences.
As previously mentioned, going deeply in the definitions, Magretta defines business models as ‘stories that explain how enterprises work’, in addition follows Drucker in defining ‘a good business model’ as the one that provides answers to the following questions:
- ‘Who is the customer and what does the costumer value?’
- ‘What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?’
Even if is not formal, her implicit idea explain that a business model is about how an organization earns money by addressing these two fundamental issues and how it identifies and creates value for customers, and how it captures some of this value as its profit in the process. ( From Strategy to Business Model onto Tactics, Ramon Casadesus-Masanell and Joan Enric Ricart ) p.197.
Additionally, also the following definition keep the interpretation of Business Model similar to what we saw so far, but I report it as I consider it useful for the reader, which will have a better overview. Without doubt, is important for a business man to have clear idea about the power of a business model and which values he can gain from it, such as understand how to create value for the customers and between all the possible partners which partner is a key for the business to succeed and which one can be avoided.
Indeed, a business model articulates the logic and provides data and other evidence that demonstrates in which way a business creates and delivers value to the customers. In addition, it also outlines the architecture of revenues, costs, and profits associated with the business enterprise delivering that value. (Business Models, Business Strategy and Innovation, David J. Teece) P.173
After all these definitions, It can therefore be said that the existing definitions on the one hand have enriched the literature of different points of view, on the other led to a general confusion that, added to the lack of definition of other authors, has meant that today, although there are a wide interest in the subject, there is no definition of a universally accepted business model.
In fact, it seems that at present there is still no consensus on a shared definition of Business Model and emerges the need to intensify the empirical research in this area.
After this big exploration about Business Model, which is considered now as clarified, we came right to the word Strategy.
Strategy is often defined as a contingent plan of actions designed to achieve a particular goal, settled starting from the Business Model. As point out by both Caves and Ghemawat, an essential element of strategy is the set of ‘committed choices’ made by the management.
Furthermore, in a similar way, Porter states: “strategy is the creation of a unique and valuable position, involving a different set of activities”. In the statement has an important value the word ‘creation’, which refers to the decision made by the management of the firm in order to compete on the market.
The decision of the management is the choice of an appropriate Business Model in order to better conduct the business, better compete on the market and to create value for the customer and moreover create value for the stakeholders.
In other words, Strategy refers to a firm’s contingent plan as to which business model it will use. It is important to note the word ‘contingent’ – strategies should contain provisions against a range of environmental contingencies, whether they take place or not. (From Strategy to Business Model onto Tactics, Ramon Casadesus-Masanell and Joan Enric Ricart).
Moreover, Porter (2001, p.71), describes strategy as “how all the elements of what a company does fit together”. On the surface, this definition appears to be parallel to that of business models: “A system, how the pieces of a business fit together” (Magretta, 2002, p. 6) (Business Model: What It Is and What It Is Not Carlos M. DaSilva, Peter Trkman P.383), but the differences must be perceived.
Indeed, Strategy shapes the development of capabilities that can alter current Business Models in the future. Strategy is about building dynamic capabilities aimed at responding efficiently to future and existing contingencies (Ambrosini and Bowman, 2009). (Business Model: What It Is and What It Is Not Carlos M. DaSilva, Peter Trkman ).
In conclusion, the strategy is intended as how a company achieve its goals set on the market using its resources and competitive advantages, starting from the business model.
As mentioned earlier, Is important understand that “the strategy reflects what a company aims to become, while business models describe what a company really is at a given time “(Business Model: What It Is and What It Is Not Carlos M. DaSilva, Peter Trkman ) P.383 .
Discussion about why it matters
After all these definitions it appears clearer what is meant by the words Business Model and Strategy. Now let’s see why Business Model should matter as a way of strategizing and why should matter in developing business capabilities and related activities, such as create value for the company. Why company should care about it? Why business model matter?
Still remember my first approaches to the world of business as soon as I graduated.
During my first experience I incurred in the word Business Model without actually knowing the right term, but just had a vague idea about it. Only after few meetings with my colleagues I learned the real meaning and the purpose for a firm and why it was important to have a good and clear business model, but what questions should he answer?
“A good and clear business model answers Peter Drucker’s age-old questions: Who is the customer? And what does the customer value? It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that ex- plains how we can deliver value to customers at an appropriate cost?” (Why Business Model matter, Joan Magretta) p.4.
I believe that for a company is very important to have a clear and structured business model able to answer the questions mentioned above, as it can help to a firm to better compete on the market as it is a fantastic tool to develop, improve, innovate, strategize but also build any business from the beginning.
With a good business model, it’s also easier to organize the business and better manage different resources.
In my personal opinion the business model, therefore, aims to create value for all the parties involved in its architecture and this defines the entity of the total value it will create.
In addition to this, the business model determines the negotiating power of the company, identifying its competitors and the terms of the competition, determining the portion of the total value that the company will be able to appropriate. In particular, this percentage depends on the revenue model that the authors define as “specific modes in which a business model allows revenue generation” [Zott, Amit, 2010, p.218].
Trying to have a more concrete idea, it is possible to try to identify the business model as a set of different activities. The theoretical value of this definition lies in the fact of leading to an overall vision of the entire business going through all the activities. I refer the word activities to the different squares available on the Business Model Canvas.
Moreover, business model allows to understand what the consequences are due to the inclusion, for example, of a new activity unrelated to the traditional business of the company.
Indeed, the company that want to innovate their business in order to become for example the most competitive company on the market, must understand before acting how the new activity will impact the business, as well as all the other activity of the business, so that the risk can be limited as much as possible.
However, these may often conflict with the more traditional configurations of firm assets, whose managers are likely to resist experiments that might threaten their ongoing value to the company. A vice president of a field sales organization, for example, might take strong exception to experiments with online sales of the same products, whether they are successful or not.
This need for innovation is particularly interesting in the current economic situation in which several companies work alongside traditional business to keep their revenues steady.
This continuous need for incessant innovation is a consequence of the fact that nowadays markets are changing faster and faster, in particular the technology market, IT, etc …
This means having a business response as fast as the market in order to avoid losing competitive advantages or for example responding promptly to new market needs and so gain new competitive advantages.
Undertaking ac- tive tests to probe nascent markets with new potential configurations of the elements of a business model can allow a firm to learn ahead of the rest of the market, and to begin to generate the new data that can power its change process.
A clear example can be the Ryanair case.
In the early 1990s, Ryanair began to have big financial problems. These resulted in a high risk of bankruptcy, which in turn led Ryanair to embark on a new path.
At that time, Ryanair had at his disposal few possibilities of choice to be made in order to avoid bankruptcy, such as: become the Southwest of Europe, operate from one main airport, add business class or exit the industry.
After analysing all the possible business opportunities to avoid bankruptcy, the strategy chosen was to transform their business model into something totally different. Indeed, Ryanair decide to change business model and choose to adopt a new one similar to the Southwest’s one.
Is important to underline that, as the new option selected, all the opportunity listed above lead to develop a different business model from the old one.
Doubtless the strategy adopted for the new idea of business, brought to the company different and new way to operate and manage all the diverse resources of the business and new way to create value for the stakeholders. Indeed, business model help also companies to deliver value to stakeholders. [Casadesus –Masanell R., Ricart J. E., 2010]
Here is their strategy, change or innovate the business model in order to achieve a new goal, in this particular case avoid and face the bankruptcy problem.
The Business Model should matter to the company as this tool can help with the innovation of the business. We saw previously the example of Ryanair, which was able to innovate the business model and avoid bankruptcy and gain competitive advantage on the European market.
Another example is the Southwest Airlines. The founder of Southwest Airlines was able to understand in time, that most of the customers wanted to have access to direct, low-cost, reliable flights and good customer service. To meet these market needs, he avoided centralization, alliances or assignment to ticket sales agencies.
In order to cope with this need, he turned over the business model and concentrated on direct sales and standardization of aircraft, ensuring efficiency and flexibility. Not surprisingly, Southwest Airlines is today the largest low-cost airline in the world.
This example explains how a new business idea or, more in general, any new activity added in the current business model, can affect the various traditional business activities, which in this particular case turned out to be a complete business model variation.
So, in both cases analysed, a clear and well-structured Business Model helped the two companies to face promptly their issues.
Ryanair was able to analyse all their resources in order to decide what was, between all the possibility listed, the best solution for the company to avoid the bankruptcy, while Western Airlines was able to address the new customer needs.
Conclusion
Once that the words Business Model and Strategy were analysed and the difference between them were illustrated, with two cases was highlighted the relevance and the impact that a Business Model can have on the entire future of the company.
The Business Model, indeed, is a tool that help to innovate promptly the present issue as future contingency, as emerged in the previous examples of Ryanair and Southwest Airlines.
In conclusion as the cases pointed out, the business model is a valid tool that can help company in the process of innovation to achieve competitive advantages. Moreover, Business Model can be used to help company to develop new products to address promptly new customer needs, as nowadays the market is changing faster than ever, and company are more and customer oriented.
Furthermore, in both cases companies were able to create value for the company as for the customer itself.
So, Business Model can be a powerful tool for those companies that are able and capable in time to exploit it at his best. It can reveal useful to face market change, financial problem, new product development or in the innovation of it and, more important, it can be very useful to help companies to keep their competitive advantages in the market.
Despite having different needs, both the companies analysed faced the difficulties through product / service innovation. However, this innovation has been achieved, and this is the most important point, through a change in their business model.
The two exposed realities therefore have as a common denominator that they have been able to reinvent themselves, modifying parts of their business model and overcoming the difficulties that can be encountered when abandoning their traditional set-up and running the risks associated with the implementation of a new business model.