How is a Business Model Different from a Strategy?
Military strategy is thousands of years old but the field of business strategy has only been around for about fifty years. Because this field is so new, there’s still a lot of disagreement about how business strategy and business models should be defined—and often among those who write about these topics the most!
Given these challenges, is it even possible to answer the question, “What is the difference between a business model and business strategy?” We believe the answer is “yes,” and we have chosen to stand by definitions of those terms that are similar to the position of professors at Harvard Business School.
This discussion will help you understand the difference between business models and strategies and how founders choose strategies that become the models for their business. Use these ideas to think about how you can approach your own role in the business more strategically.
What Is a Business Strategy?
A foundational business strategy is a carefully chosen response to a business environment. It takes the form of a set of decisions about the direction the business should go.
Think of strategy as the plan you make before you go on a drive. In this analogy, the business environment would be the weather conditions and your strategy would be the decision you need to make between having a night out in the city, going off-roading in the mountains, or going on another type of trip.
Strategy includes all the choices you make about where you’re going, what you’ll do when you get there, what you need to take with you, how you’ll prepare for the conditions you’ll meet along the way, and which vehicle you will take. The choices you make are designed to accomplish certain goals.
Similarly, before a company is started, founders carefully assess the current business environment (the markets, customers, competition, and so on) and try to forecast the future. They choose a mission and goals. Then, they create a plan for how the company will work toward those goals and fulfill that mission.
This process creates the overarching strategy at the core of a company, which defines why the company exists. A business strategy might include the following:
- A focus on customers who are eager for a solution
- A value proposition for those customers
- An inventory of the resources and capabilities needed to deliver that value
- An effective business model that will consistently deliver that value
Another powerful part of an effective business strategy is contingency planning. Contingency plans are “if, then” scenarios and might sound like, “If this competitor does this, we will do that,” “If the market shifts in this direction, we will pursue such and such activity,” and “If our customers don’t respond to this offer, we will focus on that offer instead.”
Contingency plans are important because the founding strategy is much like a hypothesis; the start of the business is a series of experiments, and adjustments must be made as the business learns more and matures over time.
What Is a Business Model?
Let’s go back to the analogy of planning a trip. The strategy includes assessing the weather, choosing and perhaps even modifying a car, and making other preparations.
In that analogy, the business model would be represented by choosing the correct car for the conditions and goals of the trip. It could be a rugged jeep with off-roading options or a luxury sedan with leather seats and a state-of-the-art sound system.
A business model is a system that consists of cycles of activity which fulfill the mission and goals of the company. It is the expression of a high-level strategy. It can be expressed very simply by a term such as
- Pay as you go
- Product to service
A list of 19 models is available from Harvard Business Review. However, a complete business model might include details such as a company’s
- Strengths and weaknesses
- Customers and customer segments
- Customer relationships
- Supply chain
- Important resources and activities in its value chain
- Revenue streams
- Cost structures
- Cost-control methods
- Employee-payment policies
- Marketing campaigns
- Governance framework
- Vertical-integration practices
Not every car would be appropriate for every type of trip. Similarly, certain business models do a better job of expressing a particular business strategy than others.
Business Model vs Strategy
You may still wonder what the true difference is between a business model and a strategy, and you may also be wondering why we need to define the differences at all. The simple answer is that in a perfect world, we wouldn’t need to. The business model would be a perfect expression of the ideal strategy and the model would continuously make the founders a great profit.
However, in the real world, technology, changing demands, and other factors can make a business model obsolete or ineffective. Founders and managers may need to tweak the business model in order to continue to progress toward their goals. They might even scrap their current model completely and adopt an entirely new one.
Strategic thinking includes choosing between different business models and sometimes switching to a new model to achieve the mission and goals of the strategy, just like a driver might change to snow tires in a storm or even buy a new car when an old one no longer serves the driver’s needs.
Founders must decide which model would most effectively serve their customers based on the products, services, and value they are offering and the resources that are available in the current business environment.
How Do Founders Choose a Strategy?
Thinking about how a high-level strategy is chosen can be useful even if your job is to plan and/or execute annual strategies rather than create core business strategies.
If you understand the core strategy of your company, you can think about how to contribute to it more directly. That might mean focusing more on innovation, competition, or another key concept.
Four ways founders come up with their high-level strategies can be found below. See if one of these approaches seems to describe your company and think about how you might apply the concepts to your own role.
1. Seeking a Blue Ocean
The best-selling book Blue Ocean Strategy uses the analogy of a red ocean to represent a market environment in which companies fiercely compete. In contrast, a “blue ocean” describes a situation in which a company creates a new category of product or service that can be sold without competition.
Cirque du Soleil, for example, stripped away many of the classic elements of a circus and offered a new type of show at a higher price to theater-going audiences instead of offering this style of entertainment at a low price to audiences sitting outdoors in tents.
Blue ocean strategy requires innovation, leadership, and the imagination to sometimes serve customers who don’t yet understand why they need what you are offering.
2. Choosing Between Cost and Differentiation
A lecture at the University at Albany stated that founders can choose between cost and differentiation to arrive at five different types of strategies:
- Cost leadership: Using efficient, low-cost business practices to offer the lowest, most-attractive prices to a mass customer base
- Differentiation: Using great customer service, special features, innovation, and more to offer high-value products or services to a mass market without competing on price
- Focused low cost: Focusing on cost leadership and marketing only to a relatively small group of customers
- Focused differentiation: Competing through differentiation and marketing only to a relatively small customer base
- Integrated low-cost and differentiation: Marketing to a mass audience using both differentiated features and low prices
3. The Chess Master
Some founders approach strategy like a game of chess. They carefully assess the current market situation, all the pieces they have available, and where the competition has placed their pieces on the board. They choose a goal they’re passionate about and then plan many moves ahead, seeking to outmaneuver the competition and anticipate every adverse circumstance.
If founders and managers are able to create plans that are detailed enough and anticipate their business moves well enough, they may have the satisfaction of seeing their ideas work as expected and their company reaching its goals despite competition and difficult circumstances.
4. Strategizing about Strategy
Your Strategy Needs a Strategy advocates using a system to choose between categories of strategies. The first step is to assess the strategic situation by rating the unpredictability of the markets, the changeability of the situation, and the difficulty or ease of current problems.
Then, a founder uses what he or she learns from this assessment to choose between five strategy types:
- Classical: simply analyzing, planning, and executing in a stable environment
- Adaptive: in an unpredictable environment, running a series of experiments and codifying and extending those that perform best
- Visionary: creating new markets and innovations in a predictable yet changeable environment
- Shaping: setting up a platform for other businesses to connect in a changeable, unpredictable environment
- Renewal: revamping a business model because of the imminent failure of a corporation
Continue Learning How to Think Strategically
We hope this discussion helps answer the question, “What is the difference between a business model and a strategy?” and gives you a deeper way of thinking about strategy that can help you in your role.
The more you practice strategic thinking, the more valuable you will be to your company. Good strategy can guide a company through difficult situations and may even contribute to changing a business model for the good of the entire company. To learn more about thinking and leading strategically in your organization, contact CMOE.