Business strategy / Business model
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2011 by Marty J.Schmidt. Revised 24 December 2011.
The Meaning of Business Strategy and Business Model
The terms business model and business strategy are very closely related. Some business people prefer to define the business model simply as the concrete illustration of the strategy at work. In any case, both the model and the strategy describe how the company makes money: how it creates customer value, how it competes with others in the same industry, and how it generates revenues and spends money to create acceptable margins.
Many different strategies and models are possible, even for companies in the same industry selling similar products or services. Southwest airlines (in the US) and Ryan Air (in Europe), for instance, have strategies concentrating on providing low cost transportation. Singapore Airlines, by contrast, has a strategy based on brand image for highest quality luxury customer service.
A strategy is judged successful if it leads to a strong competitive position, business growth, and good margins. This item further describes business strategy and business model, in the context of related terms including strategic objective and business plan.
• What Must a Business Strategy Achieve?
• Business Strategy Strategic Objectives
• The Business Model at the Heart of the Business Strategy
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What Must a Strategy Achieve?
Although many strategies are possible, almost all of them succeed by targeting just two areas of business performance. Successful strategies work because they accomplish one or more of the following:
- Create customer demand, resulting in ...
- Increased business volume.
- Ability to charge higher prices and take higher margins.
- Increased customer retention, repeat business.
- Lower costs:
- Lower cost for developing, producing, selling, distributing and servicing products.
- Lower infrastructure costs, lower operational costs.
As the examples below illustrate, however, there are many different ways to attempt to create demand and lower costs.
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Business Strategy Strategic Objectives
A company's business strategy is probably best described and understood in terms of key business performance objectives (i.e., strategic objectives). Consider, for instance, the major operational focal points in one company's business.
Lines and arrows simply show contributions or impacts from one areas to another. The example is by no means meant to be exhaustive: even a small business includes other operational and structural areas that may be candidates for strategic objectives.
Setting certain objectives in any of these areas may lead to either increased customer demand or to lower costs. The objective can be called a strategic objective if achieving the objective contributes materially to reaching overall business performance objectives, including the ability to compete effectively, grow the business, and achieve good margins. Notice in the examples below, incidentally, that reaching an objective in one area (e.g., customer retention) may depend on reaching objectives in other areas (e.g., Customer Service).
A few examples of strategic objectives in one or more of these areas include the following.
Area: Infrastructure.
Objective: Operate with low infrastructure and low operational costs.
This objective may be achieved by using inexpensive office space or expecting employees to work from a home office, "Low cost" airlines may lower operational costs by hiring non union flight crews and minimizing customer services. Retail stores implement a low cost strategy by avoiding expensive store displays and using only a minimal sales staff.
Area: Branding.
Objective: Establish value for brand name that allows premium pricing.
Clothing designers (e.g., Armani, Donna Karan), designers of luxury goods (e.g., Louis Vuitton), and even consumer technology goods (such as Apple Computer and Sony) successfully brand their products by achieving objectives in product design, product quality, pricing, and promotion.
Area: Customer retention.
Objective: Encourage customers to buy successive products from the original source.
Varieties of this strategy are sometimes called the "subscription model" (e.g., mobile phone service providers who entice customers to sign long-term contracts in return for discounted or free phone handsets), or "lock in" (a maker of computer printers sells printers at low price, but then makes good margins from printing ink that must be bought from the same source). Customer retention strategies are also approached through setting objectives in customer service (to improve customer satisfaction), or pricing (offering favorable prices for repeat buyers or for upgrades).
Area: Pricing.
Objective: Be the "low price leader" in the market
A retailer may be able to offer customers lower prices than the competition if the retailer can achieve objectives in infrastructure and operational costs (as in the example above), or achieve objectives with the supply chain (e.g., negotiate lower prices from suppliers in return for volume buying and access to the retailers established market).
Areas: Product Development, Manufacturing, Direct Sales, and Distribution.
Objective: Produce finished products at low production cost; sell and deliver to customers at low cost.
The success of Dell computer is attributed to an innovative approach to achieving low costs in each of these areas. Products offered are designed to be assembled easily from pre-built components, sales are primarily through mail order or online, and distribution is accomplished through commercial carriers (without "middlemen" such as retailers, and without store expense).
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The Business Model at the Heart of the Business Strategy
The business strategy is implemented, communicated, and ultimately tested and evaluated by business management through a business model. Moreover, It is accurate to say that the business model is the heart of the company's business plan. The business plan explains in more detail and depth how the business strategy and model will be implemented, what will impact business performance for better or worse, and what implementing the business model should lead to in terms of the company's financial performance and financial in the next year and beyond.
A business model typically includes at a minimum four major components:
1. The company's offering and value proposition.
The business model includes a statement of the company's value proposition. This describes the company's offerings in goods and services in terms of the value they offer to the customer.
For instance, Dell was founded in 1984 with an innovative value proposition that was unique at the time. Dell promised to build a computer, exactly as and when a customer orders it, and deliver it at a very competitive price. As another example, Boeing states the customer value proposition for its 747-8 aircraft very simply: "...more range, better fuel efficiency, and lower operating costs."
In brief, the value proposition states states why customers would buy from this company instead of from the competition.
2. The company's customers.
Regarding customers, the business model typically spells out clearly ...
- The target market, or audience for the company's products and services. The market may be defined in terms of such factors as gender, age, occupation, economic status, experience or education, geographic location, or special interest, for example.
- The company's approach to customer relationship management (CRM), including plans and objectives for customer service, customer satisfaction, and customer retention.
- The selling and distribution strategy. The company may plan to deliver directly to customers directly through retail shops, through visits from a direct sales force, through catalog or online orders shipped directly to customers, or through third party distributors or resellers.
- The marketing strategy and marketing plan, which explain how the value proposition will be communicated and promoted, through product positioning, branding, and through application of a pricing model.
3. The company's infrastructure and operations.
This section of the model spells out clearly ...
- Key activities performed by the company in order to implement the business model (such as market analysis, product design, manufacturing, and so on). Also spelled out are key activities that will be performed by business alliance partners, supply chain partners, channels partners, and others.
- Key resources and assets necessary for the creation of customer value. These can range from buildings and equipment, to critical employee skills, to patents and intellectual property, for instance.
4. The company's finances.
For many people, the section on company finances is the business model's most important content and its reason for being. This section describes in quantitative terms ...
- The company's revenue sources and cost structure. This part of the business model is often summarized and presented in descriptions that have the form of (a) the company's income statement, and (b) the company's operating budget and capital budget.
- The company's financial position, including sources of funding and degree of leverage (the extend to which funding is provided by lenders compared to funding provided by owners).
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