Putting Strategies and Business Models to Work

Introduction

Even though we are in the 3^rd decade of the 21^st century, the business vocabulary is still filled with a lot of terms and buzzwords used inappropriately. Two terms that are often found in business magazines or heard when executives speak are “strategy” and “business model”. These terms are often being used out of their original context and sometimes even interchangeably. It is obvious that they have a different meaning for different people, thus introducing confusion in conversations on strategic issues, which is why I feel the need to address them once more. 

My first attempt to do so happened in 2012, when my coauthor Dragan Milošević and I wrote an extensive literature review and developed a specific perspective on the notions of strategy and business model.[1] More specifically, we wrote about the things that bring them together, as well as the things that divide them. However, since this article was written for the purpose of academia, its style is very descriptive and analytical in some segments, hence maybe even boring to the people who see themselves as practitioners and trying to get to the essence of the message as quickly as possible in order to have something to work with.

Therefore, I will try to do my best to explain the relation between strategy and business model in a more concise and practical manner, but also to go one level deeper and depict how these two notions are being decomposed and implemented in a day-to-day business.

Relation between strategy and business model

The business landscape of today is in constant flux with all kinds of novel businesses models coming up and changing its reality. Some of them are disrupting the whole industries (like Amazon’s business models in book publishing, retail, or logistics), while others are mere extensions of the already known ways of doing business.  But, no matter how much they move the needle in terms of the manner in which the value is being created and delivered to the customers, the business model as an entity has become the main prism through which companies’ strategies are being viewed and assessed. The narrative revolving around business models is becoming more prevalent with each day that passes, especially when the overall topic is related to strategy.

One of the first things that comes to mind is how does strategy relate to a business model? Strategy refers to setting the company’s direction – where a company wants to be and how to get there. It renders choices about a company’s future by defining specific goals and objectives, as well as initiatives it will implement in order to achieve them. Put differently, strategy is all about changes in a company, and these changes are always related to its growth or development (sometimes both at the same time).

On the other hand, business model captures the manner in which a company creates and delivers value to its customers. It reflects how important elements in a company are mutually aligned. More specifically, a business model tells the story of how a company is using its most important resources, how it transforms them, what it makes for its customers, how it delivers its products and services, who are the customers, how the money is being made, and how it is being spent. Of course, this storyline refers to one moment in time. Since business models are susceptible to changes, the storyline must change along.

Now let’s get back to the question of how strategy relates to a business model, even though the answer should be more or less obvious by now. If strategy is about changing the company (in terms of its development), while business model is about how company operates at one specific moment, we may conclude that strategy is a path between two or more business models. Change from one business model to another involves strategy in between. In other words, strategy is a change of business model – it refers to the choice of the next business model a company will adopt.[2] Take for example Nokia. This company has changed numerous business models throughout its history: from producing paper, through rubber products, electronics, mobile phones, and finally taking a stronghold in the network business these days.

However, strategy doesn’t always lead to a change of the business model. We already stated that strategy may represent changes in a company related to its growth or development. When strategy is reflected only in a growth component, the business model stays the same. For example, when a company management decides to increase the spending on R&D in order to develop a better product pipeline, or to initiate aggressive marketing campaign in order to increase the market share of their products or services, the business model will not go through any changes. In these cases everything stays the same in terms of the manner in which the value is created and delivered to the customers, except some objectives are being modified quantitatively and some activities done more or less frequently. Thus, strategy is changed, but the business model is not. This situation usually occurs in the short run, while in the long run, strategy entails some sort of the business model change.

From strategy and business model… onto tactics and operations!

Strategy is made of strategic goals and objectives, as well as initiatives that will enable a company to reach them. Initiatives are specific projects – each of them represents a scope of work outside of the day-to-day business and aiming to reach at least one of the defined strategic goals or objectives. Of course, not all initiatives have the same importance for the overall strategy nor there is always enough resources to back up all initiatives at the same time. Therefore, initiatives need to be prioritized in a dynamic manner – priorities should be susceptible to changes occurring in the company’s environment and adjusted accordingly. 

This is where we are entering into the field of tactics. Tactics is simply a dynamics of implementing initiatives in order to achieve strategic goals and objectives, while taking into account the changes in the overall context in which company operates. In other words, tactics involves day-to-day decisions on implementing initiatives in the effort to achieve strategic goals and objectives.

On the other side, a business model should be decomposed as well. Zooming in on a business model shows a more granular structure of the overall value chain, i.e., the manner in which a value is created and delivered to the customers. First it shows the value streams and then, as we zoom in more closely, we get to see specific processes, then activities, and finally individual operations (like movements, clicks on the screen, etc). This whole hierarchy (based on a level of details one can observe), starting with business model, and ending with individual operations, is a depiction of what a specific company is doing on a day-to-day level. The most usual term for this is “operations”.

Operations in most industries are heavily dependent on the IT systems. Therefore, if we would like to zoom in on an individual operation, we would enter the dimension beyond the one visible to the human eye. This dimension starts with the application architecture, then we could move to the data architecture, and finally end up in the area of technical architecture (involving hardware, networks, and similar artifacts). However, this dimension is a separate topic, located in the domain of Enterprise Architecture, and it is not my attempt to go down that road. 

Conclusion

Moving from a strategy to tactics is related to the changes of companies, no matter if these changes are purely quantitative (involving only the growth dimension and thus not affecting the business model), or contain a qualitative dimension (involving development of a company and thus the change of the current business model). 

On the other hand, moving from a business model to processes and individual operations is a matter of zooming in the day-to-day operations of a company in order to understand the manner in which it creates and delivers value to the customers on a more granular level. 

Therefore, even though both strategy and business model are definitely dynamic by nature, strategy depicts changes in a day-to-day business, while a business model is a high-level depiction of a day-to –day business. 

I hope this point of view on the concepts of strategy and business model will help practitioners with having more meaningful conversations on the topics related to strategic issues by having a more precise understanding of what these terms are.