From Ripples to Tsunamis (Part 2)
The rising popularity of business models as a ‘buffer’ construct
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 Part 1 of this series, I laid the groundwork for understanding this impact by clarifying the definitions and relationships between these concepts, understanding how they interact with each other, and what is the scope of their influence within an organization.
In this article (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.
The Strategy — Model — Processes ‘Sandwich’
Business Strategy addresses the fundamental reasons of why a firm exists, how and where it competes, and what value its products propose to its customers, the Business Model is more about the mechanism of value creation and capture that will deliver the said strategy. The Business Strategy is more transformational in nature (in terms of the scope of decisions made about and by the business), and concerns the enterprise as a whole (vs. individual units, service lines, and product streams), and therefore is a more stable concept for the business (i.e. less changing).
The Business Model, on the other hand, is more concerned about the mid-level delivery of the strategy, where the scope of decisions can be both transformational (albeit on a limited scale) as well as transactional (in terms of mechanics and organization of functional relationships and mandates). This changes as market dynamics, demand and supply dynamics, and competitive dynamics shift. The Business Model translates the Business Strategy into the necessary Business Processes which will drive the enterprise towards its strategic goals.
The Business Processes are designed based on the configuration of the business model, to transact for day-to-day work, supported by policies and procedures, and enabled by enterprise-class systems (ERP, CRM, SCM, etc.). The Business Model combined with the process architecture dictates the design of the ‘Operating Model’, which also consists of the design of the organization, and draws the boundaries between functional domains. It is important to note that the Business Process ‘layer’ transacts with the marketplace and receives input from the marketplace as well as communicates to the marketplace about how things operate within the enterprise. In a sense, the Business Process layer is both a broadcasting as well as a receiving mechanism for the enterprise (the colloquial rubber hitting the road)
Business Model Wins the Popularity Contest
When you analyze the popularity of Google search term trends between terms of ‘business strategy’, ‘business model’ (and ‘business ecosystem’ — but more on that later), since 2004 and on a worldwide basis, you see two things:
a) that the term ‘business model’ is almost 5 times more searched than the term ‘business strategy’;
b) that the term ‘business strategy’ (for the last 15 years) has been trending downward while ‘business model’ is trending upward.
Over the last 5 to 8 years, to study this growing deviation between these two search terms, I conducted a series of informal interviews with executives from different and diverse companies ranging from consumer goods giants such as Unilever and Nestle, to crop-protection companies like FMC and Syngenta. My findings suggest that the reasons for this divergence in trends of search terms is fairly consistent across the companies (keeping in mind that there is certainly selection bias prevalent here as I have selected companies that are fairly large in terms of revenue and number of employees, as well as span a global footprint with their product portfolios and their supply chains).
The consensus between these executives appears to be that strategy is becoming more of a ‘static’ notion or a ‘proclamation’ whereas the business model is more flexible and ‘accessible’ to most mid-level executives who are charged with facing and dealing with the companies’ competitors through manipulating a combination of different levers of the business. The business model component configuration directly impacts processes and can be tied back to strategy just as easily. This makes it more appealing for selective or limited business transformations (think brand or category or business unit level, while maintaining the overall strategy of the firm).
Business Model as a ‘Bi-directional Buffer’
As I mentioned briefly in Part 1, Mintzberg (1985) claims that there are two major ways in which strategies are developed: a) what is traditionally ‘inside-out’ is called a ‘deliberate’ strategy, where senior leadership dictates a strategy and has it deployed across the business at all levels, until it reaches the customer; and b) ‘outside-in’ or ‘emergent’ strategy, where customers dictate most of the strategic direction of the company based on some foundational elements decided inside-out. This is more traditionally new startups that begin with a few stakes in the ground, but are wide open to listen to customers and allow customers to drive their direction. Most mature companies may begin with a ‘deliberate’ strategy and keep their feelers open for ‘emergent’ signals from the marketplace. As an aside, one of the reasons that younger companies outperform incumbent or mature companies is that they are much more biased towards ‘emergent’ strategies and less stuck to their legacy thinking.
These large enterprises are prone to do major strategy-shifting exercises only once a decade or so. This whereas they may tweak their business models more frequently, in order to compete effectively in the diverse markets with a diverse set of competitors.
On the Emergence of Business Ecosystems as Units of Analysis
The search terms ‘Business Ecosystem’ and ‘Ecosystem Business Model’ are in their infancy, but we predict that this search term will grow quickly in the coming months and years. I am currently in the process of writing a whole other piece about Multidextrous Business Ecosystem Models (MBEMs), which will be published in the coming weeks.
Much has been said in extant literature about the relationship (or lack thereof) between the field of strategy and that of business models. Michael E Porter (1985) introduced the notions of ‘corporate strategy’ and ‘business level strategy’ to bifurcate the concept of strategy into components that could be studied in separate streams. The subsequent literature dived into the notion of ‘business level strategy’ and studied it in great depth. I take this well-travelled road of literature and attempt to establish a relationship between the business level strategy and the business model.
It has been claimed that companies compete on the basis of their business models (Ramon Casadesus-Masanell & Ricart, 2007). Successes (e.g. Amazon) and failures (e.g. Sears) of companies have been attributed to the design of their business models; the failure of competitors to reconfigure their business models to compete effectively (e.g. Netflix vs. Blockbuster), and companies not adapting their business models to emerging externalities (e.g. Barnes and Noble booksellers) fast enough have also been attributed to their success or failure. Existing research proposes the notion of a business model as being dynamic rather than static (R. Casadesus-Masanell & Ricart, 2010), in order to be able to effectively deal with demand and supply uncertainty, market variability, competitive actions, technological evolution, and other externalities.
This idea of a business model having to be dynamic requires that the business model be flexible on its different components. For instance, in a new firm, where there is no incumbent business model, this notion implies that it should build in some type of structural flexibility so as to adequately respond to internal and external factors, as well as to enable future reconfiguration as needed. For existing firms, it implies that a business model reconfiguration exercise should be facilitated through the flexibility of the dimensions of the business model. This is reflected by R. Amit and Zott (2012)’s activity system perspective which claims that BMR fundamentally consists of adding and dropping activities within the business, which is aided by the inherent flexibility of the business model due to the flexible interdependencies between the components of the business model (Siggelkow, 2002).
Amit, R., and C. Zott. “Creating Value through Business Model Innovation.” [In English]. Mit Sloan Management Review 53, no. 3 (Spr 2012): 41-+. <Go to ISI>://000301897400008.
Casadesus-Masanell, Ramon, and J. E. Ricart. “Competing through Business Models.” IESE Business School Working Paper Working Paper №713. (2007). https://doi.org/http://ssrn.com/abstract=1115201 or http://dx.doi.org/10.2139/ssrn.1115201.
Mintzberg, Henry, and James A Waters. “Of Strategies, Deliberate and Emergent.” Strategic Management Journal 6, no. 3 (1985): 257–72.
Porter, Michael E. “Competitive Strategy: Creating and Sustaining Superior Performance.” New York: The free (1985).