Strategy vs Business Model: Is There a Difference?
“Business model” and “strategy” are among the most heavily used terms in the field of business and management, although too often, the meaning of these terms is not very well understood. Moreover, they are sometimes even used interchangeably. This confusion needs to be addressed, so managers and other participants can make a clear distinction between these terms and use them with more confidence during strategy sessions.
In order to explain the difference between these two terms, let's focus on strategy first. The manner in which strategy is understood depends primarily on the perspective taken. Viewed from the plan or proactive perspective, strategies are intended and precede actions. They present a look into the future. This means strategies are formulated first and then the implementation process can begin. The strategy formulation concerns the use of simple rules that permit adaptation while establishing bounds that can prevent companies from falling off the edge of chaos (Eisenhardt and Sull, 2001).
From the strategic positioning perspective, the essence of strategy is choosing to perform different activities or similar activities differently than competitors do. Strategy renders choices about what not to do as well as choices about what to do (Porter, 1996).
Alternatively, strategies can be viewed from the reactive perspective, where they present “a pattern in a stream of decisions or actions” (Mintzberg and McHugh, 1985). In this case, they represent the retrospective view (a view into the past). Thus, strategy is not formulated. It is formed in a manner that blurs the conceptual distinction between formulation and implementation processes. Rather than being distinct processes, formulation and action (i.e., implementation) are viewed as constantly co-evolving: following and affecting each other through a process of strategic learning and control (Farjoun, 2002). More specifically, strategy is seen as a blend between deliberate and emerging strategy. Deliberate strategies are the ones that are realized as intended and emergent strategies are those patterns or consistencies realized despite, or in the absence of, intention. This means that deliberate strategies are based on the planning processes, while emergent strategies are focused on learning. This is why deliberate and emergent strategies may be conceived as two ends of a continuum along which real-world strategies lie (Mintzberg, 1987; Mintzberg and Waters, 1985).
After discussing the notion of “strategy” and the manner in which it forms in organizations, let's turn our attention to the notion of “business model”. Simply put, a business model may be regarded as a prevailing concept of business or as a generic value chain underlying business. This chain has two parts. The first part includes all the activities associated with making something. The second part concerns all the activities focused on selling what was made in the first part (Magretta, 2002). Therefore, a business model shows two important functions: value creation, i.e. a series of interrelated activities within a firm, and value capture, i.e. a firm earning a profit from some portion of its activities (Chesbrough, 2007). Following this line of argument, Osterwalder and Pigneur (2010) described a business model as the rationale of how an organization creates, delivers, and captures value.
As Shafer, Smith, and Linder (2005) have noticed, while a business model does facilitate analysis, testing, and validation of a firm’s strategic choices, it is not in itself a strategy. The value of business models lies in their ability to capture important elements of organizational strategy and make them form a coherent and compelling whole (Timmers, 1999). Therefore, a business model is more generic than a business strategy because successful business models very often become shared by multiple competitors. At the same time, selecting a business strategy is a more granular exercise than designing a business model (Teece, 2010).
After tracking this line of argument and reviewing various articles on this subject, it comes to mind that understanding differences and points of intersection between strategy and business model depends primarily on the standpoint of strategy formation taken by the author.
Obviously taking the stand from the prescriptive viewpoint on strategy formation, Osterwalder and Pigneur (2010) have stated that the business model is like a blueprint for a strategy to be implemented through organizational structures, processes, and systems. Even Mintzberg, Taylor, and Waters (1984) argued in a similar manner that ready-made strategies, i.e. strategies that have been pretested in another organization before they were imposed in the organization in question and made deliberate, can be perceived as a “business model”. Clearly, this perspective does not provide substantial insights regarding the difference between strategy and business model.
When one observes a strategy from the point of strategic positioning perspective, he will not be able to differentiate the strategy from the business model as well. According to this perspective, strategy involves the configuration of a tailored value chain, i.e. deliberately choosing a different set of activities required to produce and deliver a product or service that enables a company to offer a unique mix of value (Porter, 1996). In other words, strategy defines how all the elements of what a company does fit together. Thus, if we consider strategy from this point of view, it would be practically impossible to differentiate strategy and business model and we might say that Porter was right when he claimed that the business model concept is not well defined, nor is there a theory to support it (Porter, 2001). He has acknowledged the lack of understanding of business models and how they can be differentiated from strategies. “The definition of a business model is murky at best. Most often, it seems to refer to a loose conception of how a company does business and generates revenue” (p. 73).
This is why we need to alter the point of view and see the strategy through the prism of the reactive perspective, where strategy presents “a pattern in a stream of decisions or actions” (Mintzberg and McHugh, 1985). In this case, even though strategy represents a consequence of decisions and actions undertaken by management based on their learning, only a view into the past may reveal the true nature of the strategy. In other words, strategy can be discussed and analyzed only a posteriori, i.e. after it happened. Thus, only realized strategies can be the object of observation (they represent a specific mixture of intended and emergent strategies). Taking this standpoint, Casadesus-Masanell and Ricart (2010) noted that business model refers to the logic of the firm, i.e. the way it operates and how it creates value for its stakeholders. On the other hand, they stated that strategy refers to the choice of business model through which the firm competes in the marketplace (a business model can be seen as a reflection of the realized strategy).
A business model, if seen at one specific moment, is a static form. Perhaps an appropriate analogy would be a picture or a photograph. It shows all the important elements of a business and their connections, i.e. it depicts the prevailing logic of a business at one specific moment. A business model reflects how important elements in an organization are aligned, i.e. how the value is produced and delivered to the customers. Now, if a temporal dimension is induced into this picture, a business model becomes a dynamic representation of organizational operating logic. It becomes an objective representation of the reality of the firm and its markets (Mason and Spring, 2011).
Through the prism of a business model seen as a set of important business components and their relations at one exact moment, as well as a reactive perspective of strategy formation based on learning, one can realize that strategy is seen as a set of actions realized in a specific time frame, i.e. a strategy consists of all business models in this specific period. In other words, if a business model does not change over time (which is in a majority of industries highly unlikely), a strategy is a reflection of this business model and one could argue that strategy and business model are the same thing. In reality, environmental pressures are forcing management to make more or less frequent changes in the prevailing logic of organizational functioning, which means that a business model does change. In this case, a strategy would represent the sum of all business models and their changes within a specified period. In other words, strategy is not a business model, but rather a pattern within which a business model changes.
Strategy can be traced historically along some period of time, which means that only one strategy may exist for a firm in a concrete time frame, while there may be countless business models in the same period. Each business model matches the set of functional strategies and their interdependencies, making strategic content in some particular moment, i.e. each business model is actually a bisection of the business strategy or a bisection of a set of functional strategies in one concrete moment. Thus, a business model has a static and dynamic component (this depends on whether the temporal dimension is included or not), while the concept of strategy cannot be seen as a static one,
Therefore, the conceptual integration between strategy and a business model can be traced along one dimension, which is time. The temporal dimension represents a strategy that includes a set of different business models if they were changing over time or a strategy that consists of a single business model if it had not been subjected to any kind of changes. In reality, change in a business model is always occurring to some extent, but the magnitude of the change depends primarily on the observer’s perspective and the time period over which the observation takes place. The distance of an observer from the picture he looks at will ultimately determine what he will see: a motion picture (strategy in terms of multiple business models or one business model) or a static picture (business model). As he zooms in the picture in front of him, he will be able to see more detailed action in a shorter time frame. At one point he will be looking at a concrete business model in a very short period of time, and he will be able to see frozen actions or static elements and their connections. On the other hand, as he zooms out, these elements will start moving, inducing the dynamics in the picture and he will be able to see a bigger picture, i.e. detailed actions will be lost from his sight, but a specific pattern of actions will eventually emerge. Thus, he will be able to track the strategy of the firm he observes.
Simply put, there is a clear difference between strategy and business model, but only if the reactive perspective is taken. Then and only then, a strategy may be seen as a pattern within which a business model changes, i.e., a strategy represents the sum of all business models and their changes within a specified period. In other words, a business model can be perceived as a bisection of strategy.
Therefore, during strategy sessions, when talking about strategy, managers need to have a long-term perspective in mind, which usually encompasses changes between several business models. Hence, they need to think several moves ahead, while keeping in mind that each change they make in any aspect of the strategy requires assessment and alignment with all the other aspects. Each one of these changes represents a change in the business model.
Derived from passages in the article:
Stefanovic, I. & Milosevic, D. (2012). On Conceptual Differentiation and Integration of Strategy and Business Model, Proceedings of Rijeka Faculty of Economics: Journal of Economics and Business, Vol. 30, No. 1, pp. 141-161
References:
Casadesus-Masanell, R. & Ricart, J. E. (2010). From Strategy to Business Models and on to Tactics, Long Range Planning, Vol. 43, No. 2/3, pp. 195-215
Chesbrough, H. (2007). Business Model Innovation: It’ Not Just about Technology Anymore, Strategy & Leadership, Vol. 35, No. 6, pp. 12-17
Eisenhardt, K. M. & Sull, D. N. (2001). Strategy as Simple Rules, Harvard Business Review, Vol. 79, No. 1, pp. 106-116