From Ripples to Tsunamis (Part 1)
How Pivoting Your Enterprise Strategy Impacts Your Business Model and Business Processes
Business Strategy, Business Models, and Business Processes are presented as points along the same continuum of business operations between the conceptualization, planning and execution steps in an enterprise. The impact of a pivot on the strategy can have a potentially tremendous impact on your business model and business processes. Strategy pivots can create ripples or tsunamis in the business models and business processes. How do you anticipate and cope with these?
In this article (Part 1), I lay the groundwork for understanding this impact by clarifying the definition and relationship between these concepts, understanding how they interact with each other, and what is the scope of their influence within an organization.
What’s a Business Strategy?
I start with M. E. Porter (1996)’s perspective on competitive strategy as an organization’s choice of performing a specific set of activities to deliver a “unique mix of value”, in order to compete. A strategy describes the link between the firm and its industry environment, articulating how it will deploy its resources to achieve its long-term goals (Grant, 2010). Lafley and Martin (2013) describe their view of strategy in practical terms: a formulaic articulation of the “winning aspiration” which provide guidance and direction for a business; defining the “playing field” which provides the business direction as to where it will compete in terms of geography, product range, market segments, customer channels, and production stages. In addition, and aligned with other strategy scholars, there is a unique value proposition and a distinct competitive advantage. I am using the Lafley and Martin (2013) ‘waterfall’ framework of defining a strategy. They start with the ‘winning aspiration’, then define ‘where I will play’, which embodies the purpose of the enterprise, encompassing the specific business choices of product, market, geography, and customer, and then defining ‘how I will win’, which defines the value proposition to customers as well as what the competitive differentiator is.
Relating the notions of Strategy and Business Model
Seddon et al. (2004) have provided some diagrammatic representations of the different schools of thought in relevant literature regarding the conceptual relationship between strategy and business models, with relevant literature searches. Firstly, I see in the figure below (configuration ‘A’ and ‘B’) that the two concepts are linked to varying degrees, but retain their mutual distinction for the most part. Magretta (2002) and Mansfield and Fourie (2004) discuss that the role of the strategy describes the competitive advantage and play of a firm, the business model focuses more on the mechanism for value creation of a business. A. Pateli and G. Giaglis (2003) and Al-Debei and Avison (2010) have presented the business model as the ‘missing link’ between business strategy and business processes, and have also been interpreted as different levels of abstraction of each other. They go on to state that conceptually both deal with the same issues, i.e. the logic of the business, but whereas strategy deals with the competitive aspect of the business, the business model deals with the logic of value creation and capture. Secondly, in the figure below (configuration ‘C’), I see that the terms are used synonymously (Abd Aziz, Fitzsimmons, & Douglas, 2008; R. a. R. Casadesus-Masanell, J. E., 2009). Lastly, I see in the figure below (configuration ‘D’ and ‘E’), that, either the business model is assumed to be enveloped within the strategy concept (Michael E Porter, 1987), or the converse, where the strategy is included within the business model concept (A. Pateli & G. Giaglis, 2003).
In each of these relationships shown in the figure below, the concepts of strategy and business model seem to be in competition over dominance or overlap, in a fight over ‘intellectual territory’ or relevance. The figure below illustrates the different characterizations of the relationship between the notions of strategy and business models (source: Seddon et al. (2004) ):
Generally accepted schema of concepts
Emergent schools of thought propose that the business model is the translation between the transformational notion of ‘strategy’, to the transactional notions of ‘business processes’ (Pateli, 2004; A. G. Pateli & G. M. Giaglis, 2003) and can be depicted as shown in the figure below, completing the chain of logic that the differentiating mechanisms for business models to realize their competitive strategies lie in the “supporting processes” (Teece, 2010).
Further, “business models implicate processes and incentives” (Teece, 2007), and so there is a logical connection between the strategy, business model, and business processes. The business model contains elements of both strategy as well as operations, and in a way, uses the well-established boundaries of these concepts to clarify the scope of the business model (Morris et al., 2005). A. Pateli and G. Giaglis (2003) share their business model definition framework as a traditional pyramid structure, with strategy at the top, followed downward by business model, and then business processes, followed by information systems. Other scholars share this view of the business model being the logical link between strategy and business processes (J. C. Linder & Cantrell, 2001; Petrovic et al., 2001a; Timmers, 1998). The business model is “considered as the conceptual and architectural implementation of a business strategy and represents the foundation for the implementation of business processes” (A. Pateli & G. Giaglis, 2003).
In light of the definition of strategy (M. E. Porter, 1996; Michael E Porter, 2001), Seddon et al. (2004) suggest that business models are abstractions of strategy. In their view, the business model is at a higher level of abstraction of a strategy, which, in a sense, is yet another level of abstraction above the actual firm in real life. In their interpretation, several business models can be contained within the strategy layer, which is unique at the firm level. Business models are seen as more generic in nature than the business strategy. However, they draw an interesting and important distinction: that business models do not contain the blueprint for competitive action, which is the principal objective of a strategy. Aligned with this interpretation Christoph Zott and Amit (2010) describe business models as ‘activity systems.’
One cannot talk about business models in any depth without the strategic context. The business model must be tailored to the business strategy of an enterprise. Moving upstream, I see that the strategy is a consequence and manifestation of the vision and mission, which provide the enterprise with an aspirational goal and direction, and lay out the broad principles by which the enterprise will conduct business within its commercial ecosystem. The figure below shows that there is a two dimensional hierarchy within enterprise definition. First, there is a scale that measures the impact of decisions or choices, which ranges from lower to higher. The other axis measures the scope of decisions or choices, which ranges from strategic to tactical (and if extended further, to operational). Whereas this is a conceptual and qualitative framework, it provides me insight as to the hierarchy of decisions or choices, in terms of their scope and their impact on the business.
As previously mentioned, the business leadership articulate the vision and mission to state the aspiration of the business and provide the broad principles by which the business will operate. The enterprise must then use the strategy to build on this vision and mission, and lay out in more depth what it will sell, how it will compete, and what markets and customers it will do business with. The enterprise must then define the business model to translate the guidance from the strategy into more depth and richness, considering the broader requirements in terms of the components of the business model (and which I shall come to in more depth in the next chapter). The business model translates the business strategy (a ‘transformational’ concept) into the functional business processes (a ‘transactional’ concept). The enterprise must then develop detailed business processes that will be used as guidance for day-to-day business operations, after being transformed into activity and task routines, which form the scope of tactical choices and have a lower impact on the business than concepts like the business model or the strategy.
A new characterization of the relationship between Strategy and Business Model
I propose a different lens for the co-habitation of these concepts, illustrating the position of Teece (2010), in his view that “coupling strategy analysis with business model analysis is necessary in order to protect whatever competitive advantage results from the design and implementation of new business models.” My diagrammatic representation extends the current portfolio of notions of ‘fit’ between these concepts.
Instead of a Strategy concept being represented as ‘embedded’ or ‘within’ the concept of a Business Model, I propose they are two standalone concepts, but they are concentric, i.e. there is a radial notion of ‘core’ and ‘periphery’, with an implied outward directionality from the ‘core’. “The separation of business model from strategy has far-reaching impacts” (Keen & Qureshi, 2006).
I represent the two concepts in a concentric ‘ring-like’ manner to convey the notion that you can have interchangeable business models, around the strategy ‘core’, without impacting the strategy, but also the notion that the evolution of the business model itself into a competitive weapon may imply that you can replace the strategy ‘core’ while leaving the business model in place. Clearly both must be present but they can be interchanged with different strategies (keeping business model constant) or different business models (keeping strategy constant).
Stitching all the concepts back together in a novel framework
Consolidating and arranging the aforementioned concepts into a single conceptual framework, I present my conceptual model of an enterprise in the figure below, as first demonstrated in the Business Model Beacon framework (Parekh, 2016):
Within the core of the business (the innermost circle) lies the vision and mission of the business (it’s core purpose), without which a business will be lost as to what it aspires to be and the broad principles by which it will conduct business. Without a vision and mission, a company risks being a sailboat without a sail, floating in the waters, at the mercy of the waves that carry or sink it, without the ability to steer and move deliberately in any direction.
The next circle in the core represents the business strategy that uses this mission and vision to determine the product or service that it will sell, the markets where it will operate, the type of customers or industry segment that it will cater to, and how it will compete. It also includes decisions such as how the business will organize into product categories and customer channels and choices of what vertical stages of production (if a manufacturing business), or what part of the value chain it will participate in (if a service business). One of the key elements of the strategy is the value proposition of the business to the customer, i.e. what customer ‘need’ (articulated or not) will be fulfilled by what the enterprise does and on what dimension(s) will it compete (e.g. cost, quality, speed, flexibility, price, product characteristics, etc.).
Encompassing the strategy circle is the business model. Keep in mind that the choices that are relevant to the product, market, customer type, industry, competitive context and value proposition have been made through the strategy. What has not been hitherto decided upon are the ‘mechanics’ by which the strategy will be realized. The business model therefore is all about the mechanics of how the strategy will be transformed into action by which it will be operationalized. There are specific decisions to be made in the choice of business model and this is what I will focus on now.
There are three key dimensions to the business model: (1) the enterprise financial model, (2) the internal operating model, and (3) the network partner model.
The enterprise financial model discusses the mechanics of the financial aspect of the business and addresses how the business will make money, what costs are involved in order to generate the revenue, what assets the business will control or have access to, whether the business will own these assets or will ‘rent’ them. Further, it will address what type of ownership model is in place, and what is the profile of risk that the business is willing to undertake as part of its mission to compete through it’s strategy.
The internal operating model is an intuitive view of the business looking from outside in. It describes the operational, functional, and organizational mechanics of the enterprise and how it operates with the strategic paradigm. The internal operating model addresses the product portfolio and how that portfolio is segmented, what the product mix is, and also articulates the different parameters of quality, safety, regulatory, and use that enable the product or service to be a positive value delivery mechanism. It articulates what is the sales approach and how the sales function operates to meet customer requirements. It also looks at the marketing approach (including innovation) and how the business markets to its relevant stakeholders. Further, it also examines the supply chain operations of the business, in terms of how the four key pillars of Plan, Source, Make, Deliver, based on the SCOR model (Stephens, 2001). In addition, the business model also describes the organizational structure, span, and incentive schema. The organizational mechanics are particularly important as they describe (especially in larger and more complex organizations, such as matrix based multi-category, multi-channel, multinationals) the interaction touch-points between different ‘slices’ of the organization, whether they are functional, category, or channel oriented. This component also includes the skill-base and competencies of the resources within the organization and the capabilities of the organization as a whole to operationalize the strategic guidance. This brings another component to the forefront: coordination. The business needs to coordinate in some manner, and the systems and interfaces that the organization needs in order to do so, from the communication and transformation aspects to the mundane transactional aspects.
The network partner model is oriented towards an inside-out view of the business. It focuses on different components such as the customer and consumer component, which address how the business interacts with customers, how it organizes them (e.g. a channel approach), how it manages to keep up in the dynamic environment of the customers. Further, it also encompasses the final value delivery to the end-consumer (albeit via the customer in many cases) who might be purchasing the product from an intermediary. Further, the external model also addresses the suppliers, in terms of how they are organized to interact with them, with what frequency, and by whom, and with what frequency and level of transaction. The business model also addresses the complementor in terms of what products or services are supplied by another organization (internal or external) in the business ecosystem that aggregates value to the end-customer through a set of complementarities in terms of products or services. In addition, the business model needs to include the society/community and the environment in terms of the business’ interactions with people at large such as in terms of their corporate social responsibility programs, their interactions with communities and society as a whole, as well as with environmental groups. Supplementary to this, I also include the enterprises safeguards to protect the environment, and include the manners of organization and control to leverage environmental factors and work within the strict guidelines of safety and natural habitats.
Finally, the business process circle encompasses the business model layer, and describes in further depth the manner in which the mechanics of the strategy will be implemented through transactions and business routines. The business process layer includes the specifics around people, activities and systems that will enable the operationalization of the business model (once again, converting transformational concepts into transactional activities such that value is created, delivered and captured, the central theme and requirement of business models). The process layer describes the key activities that must occur, the sequence of these key activities along a time dimension, specifying the interactions between internal and external business partners within the commercial ecosystem, the technology enabler interactions in terms of inputs, outputs, formats, reports, and validation.
The performance metrics are embedded within each layer of the conceptual framework. There needs to be an organized and logical hierarchy of performance metrics to measure business and operational performance for each of the components of the business model, ordered and linked to the financial model and its associated financial performance metrics.
Closing thoughts, and what comes next…
In this article, I told you about the traditional (and often divergent) views of a) the hierarchical schema of business strategy, business models, and business processes, b) the inter-relationship between the strategy and business model. I then introduced you to a newer, more emergent view on how these concepts need to be reviewed (i.e. through the lens of transformational scope and magnitude of potential impact on the business through the concentric circle schema. I also introduced the new framework of the business model beacon (Parekh, 2016), in which you can break down the firm’s business ecosystem into three components.
In Part 2 of this series, I will dive deeper into some examples of strategy pivots and their impacts on the business model and processes. I will also go into some depth into the bi-directional nature of the ripples or tsunami, i.e. it can also be caused by market-changes that drive change into the heart of the business strategy.
In Part 3 of this series, I will then demonstrate how to leverage your business model as a translation device between the strategy and processes through the use of archetype business ecosystem models that can predict and configure changes to either direction and enable a firm to cope with these changes so that you turn tsunamis into ripples.
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