From Strategy to Business Essay

Strategy scholars have used the notion of the Business Model to refer to the ‘logic of the firm’ e how it operates and creates value for its stakeholders. On the surface, this notion appears to be similar to that of strategy. We present a conceptual framework to separate and relate the concepts of strategy and business model: a business model, we argue, is a reflection of the firm’s realized strategy. We find that in simple competitive situations there is a one-to-one mapping between strategy and business model, which makes it difficult to separate the two notions. We show that the concepts of strategy and business model differ when there are important contingencies on which a well-designed strategy must be based. Our framework also delivers a clear distinction between strategy and tactics, made possible because strategy and business model are different constructs. Ó 2010 Elsevier Ltd. All rights reserved. Introduction The ï ¬ eld of strategy has evolved substantially in the past twenty-ï ¬ ve years. Firms have learned to analyze their competitive environment, deï ¬ ne their position, develop competitive and corporate advantages, and understand better how to sustain advantage in the face of competitive challenges and threats. Different approaches – including industrial organization theory, the resource-based view, dynamic capabilities and game theory – have helped academicians and practitioners understand the dynamics of competition and develop recommendations about how ï ¬ rms should deï ¬ ne their competitive and corporate strategies. But drivers such as globalization, deregulation and technological change (to mention only a few) are profoundly changing the competitive game. Scholars and practitioners agree that the fastest growing ï ¬ rms in this new environment appear to be those that have taken advantage of  these structural changes to innovate in their business models so they can compete ‘differently’. IBM’s Global CEO Studies for 2006 and 2008, for example, show that top management in a broad range of industries are actively seeking guidance on how to innovate in their business models to improve their ability to both create and capture value.1 In addition to the business model innovation drivers noted above, much recent interest has come from two other environmental shifts. Advances in ICT have been a major force behind the recent 0024-6301/$ – see front matter.interest in business model innovation. Many e-businesses are based on new business models e Shafer, Smith and Linder ï ¬ nd that eight of the twelve recent business model deï ¬ nitions they present relate to e-business.2 New strategies for the ‘bottom of the pyramid’ in emerging markets have also steered researchers and practitioners towards the systematic study of business models. Academicians working in this area agree that ï ¬ rms need to develop novel business models to be effective in such speciï ¬ c and challenging environments (see work by Thompson and MacMillan, as well as by Yunus et al. in this issue), and socially motivated enterprises constitute a second important source of recent business model innovations. Advances in ICT and the demands of socially motivated enterprises constitute important sources of recent business model innovations. While it has become uncontroversial to argue that managers must have a good understanding of how business models work if their organizations are to thrive, the academic community has only offered early insights on the issue to date, and there is (as yet) no agreement as to the distinctive features of superior business models. We believe this is partly because of a lack of a clear distinction between the notions of strategy, business models and tactics, and the purpose of this article is to contribute to this literature by presenting an integrative framework to distinguish and relate these three concepts. Put succinctly:  Business Model refers to the logic of the ï ¬ rm, the way it operates and how it creates value for its stakeholders; and  Strategy refers to the choice of business model through which the ï ¬ rm will compete in the marketplace; while  Tactics refers to the residual choices open to a ï ¬ rm by virtue of the business model it chooses to employ. To integrate these three concepts, we introduce a generic two-stage competitive process framework, as depicted in Figure 1. In the ï ¬ rst stage, ï ¬ rms choose a ‘logic of value creation and value capture’ (i.e., choose their business model), and in the second, make tactical choices guided by their goals (which, in most cases, entail some form of stakeholder value maximization). Figure 1 thus presents our organizing framework: the object of strategy is the choice of business model, and the business model employed determines the tactics available to the ï ¬ rm to compete against, or cooperate with, other ï ¬ rms in the marketplace. The article is organized as follows. In the next section we deï ¬ ne and discuss the notion of business models and present a tool to represent them, while the following section considers the stage two ‘choice’ in our framework, presenting and discussing the notion of tactics in relation to that of business model. The following section then moves back to examine the ï ¬ rst e strategy e stage, after which we revisit our process framework to integrate the three notions. We discuss the connection between strategy and business model, arguing that both notions can be clearly separated. A detailed example is developed in the following stage, followed by some concluding remarks. Business models Although the expression ‘business model’ has gained in prominence only in the last decade, the term has been part of the business jargon for a long time, its origins going back to the writings of Peter Drucker. Although (as Markides points out) there is no widely accepted deï ¬ nition, Magretta deï ¬ nes business models as ‘stories that explain how enterprises work’, and follows Drucker in deï ¬ ning ‘a good business model’ as the one that provides answers to the following questions: ‘Who is the customer and what does the costumer value?’ and ‘What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?’ While not formal, her implicit idea is that a business model is about how an organization earns money by addressing these two fundamental issues e how it identiï ¬ es and creates value for customers, and how it captures some of this value as its proï ¬ t in the process. Amit and Zott’s deï ¬ nition, in contrast, is less broad (as it focuses on e-businesses) but more precise. Reviewing the contributions of several theories – including virtual markets, Schumpeterian innovation, value chain analysis, the resource-based view of the ï ¬ rm, dynamic capabilities,  transaction cost economics and strategic networks – they point out that each contributes elements to the notion, but that none, by itself, explains business models completely. They analyze a sample of U.S. and European e-business models to highlight the drivers of value creation, and present the following integrative deï ¬ nition: ‘A business model depicts the content, structure, and governance of transactions designed so as to create value through the exploitation of business opportunities.’ The content of a transaction refers to the goods or information exchanged, as well as to resources and capabilities required; the structure refers to the parties that participate, their links, and the way they choose to operate, and governance refers to the way ï ¬â€šows of information, resources and goods are controlled by the relevant parties, the legal form of organization, and the incentives to the participants.5 In this issue, they build on this deï ¬ nition to propose an ‘activity system perspective’ for the design of business models, arguing that activity systems capture the essence of business models and proposing two sets of aspects for designers to consider: design elements (content, structure and governance) that describe the activity system’s architecture, and design themes (novelty, lock-in, complementarities, and efï ¬ ciency) that describe its sources of value creation. The common thread across all of these approximations to the notion of busin ess model is well captured by BadenFuller, MacMillan, Demil and Lecocq in their deï ¬ nition ‘the logic of the ï ¬ rm, the way it operates and how it creates value for its stakeholders’, and we adopt their deï ¬ nition as the starting point for our argument. To make progress toward understanding business models, we ï ¬ nd it helpful to use the analogy of a machine e by which we mean a mechanical device that transmits energy to perform tasks. (Of course, real organizations are different from machines in many important respects, but the comparison is helpful, especially to our thinking in contrasting the notions of strategy and business models.) Any given machine has a particular logic of operation (the way the different components are assembled and relate to one another), and operates in a particular way to create value for its user. To be more concrete, different automobile designs have different speciï ¬ c logics of operation – conventional engines operate quite differently from hybrids, and  standard transmissions from automatics – and create different value for their ‘stakeholders,’ the drivers. Some may prefer a small car that allows them to navigate congested city streets easily, while others may prefer a large SUV with a powerful engine to enjoy the countryside to the fullest. Automobiles are made of parts – wheels, engines, seats, electronics, windshields, and the like. To assess how well a particular automobile works – or to create a new one one must consider its components and how they relate to one another, just as, to better understand business models, one needs to understand their component parts and their relationships. (We return to this analogy during the paper: readers will gain more value from it if they understand the design and building of the car as representing strategy; the car itself as the business model; and the driving of the car as the available set of tactics.)