Difference Between Business Model and Strategy

Business Model vs Strategy
 

To identify the difference between business model and strategy, first we require to know the clear definitions and parameters of both, business model and strategy. This is simply because both the terms are interrelated. Typically, a business model refers to a plan or a diagram, which talks about how a company uses its resources, how it competes, how it develops business relationships, how it deal with consumers, and how the firm creates value to generate sustainable earnings. This is according to Barringer & Ireland. Putting it very simple, in overall, a business model talks how a company competes in the competitive market whereas strategy refers to the long-term direction of the company. Explicitly, strategy defines ways and means of achieving a future projected state of affair. Therefore, we see a link and an interrelation between the two terms. Strategy is the long-term direction of the company and the business model facilitates the strategy as it defines how a firm competes.

What is a Business Model?

In overall, a business model is the overall framework of a business. Illustratively, it depicts what are the key activities of the business. Let’s assume a manufacturing company. Managing operations of the company is crucial, and it requires a number of key activities to be managed. Further, the company has to determine how they manage relationships with the consumer. If it is a luxury good, they have to develop a secure customer relationship management strategy as the company wants a loyal customer base. When creating a loyal customer base, the value proposition is important. Simply, a value proposition refers to what type of a value a company creates in order to retain consumers with them for a foreseeable future. When doing this process, an effective revenue management process is required. If revenue is not managed properly, all the functions of a company may decline. In this regard, effective cost management is also required.

Business models also acknowledge managing strategies of key partnerships as well. For effective and smooth transformation of the company’s supply chain, partnerships outside the company are important. Say, a company has adopted a disintermediation strategy while negotiating with the suppliers and thus it is an example of a key partnership. In this regard, the company is required to determine what type of consumers that they deal with. Are they daily buyers, industrial buyers, etc. A proper business model needs clear identification of consumer types too. Therefore, a business model refers to a plan that talks how the company manages key partnerships, consumers, value propositions, costs and revenues, key resources, etc. All in all, a business model defines how a company competes and how its competitiveness is achieved by means of the activities mentioned above.

Difference Between Business Model and Strategy

What is Strategy?

As mentioned above, strategy refers to the long-term direction of the company and it expresses in the foreseeable future what the company’s expected position is. Being competitive and achieving competitive advantages are necessary to attain a desired strategy. In fact, there are different classifications of strategies. Among them, corporate strategy, operational strategy, and business unit strategies are common in terms of definitional angles. Corporate strategy refers to the overall scope and the purpose of the business. Corporate level strategies address the whole company. Business level strategies always focus on Strategic Business Units (SBUs). An SBU is defined as a separate department or an entity of a large business conglomerate. The major decisions such as, which markets to follow, and what competitive strategies should be used in those markets are determined in business level strategies. Operational strategies focus on organizational process designs, organization in order to produce goods and services as facilitators of business level and corporate strategies.

Business Model vs Strategy

What is the difference between Business Model and Strategy?

• Definitions of Business Model and Strategy:

• A business model refers to a plan or a diagram which talks about how a company uses its resources, how it competes, how it develops business relationships, how it deal with consumers, and how the firm creates value to generate sustainable earnings.

• Strategy refers to the long-term direction of the company.

• Purpose:

• Business models are derived for the purpose of determining competitiveness.

• Strategies are derived with the purpose of determining the future state.

• Interrelationship:

• Strategy defines long-term direction of the company and the business model facilitates the strategy as it defines how a firm competes.

• Elements and Types:

• Business models comprise the elements of key activities, resources, revenue and costs, value propositions, key partnerships, channels, resources, and customers.

• Common types of strategies are corporate, business levels and operational strategies.

 

References:

  1. Barringer , B., &Ireland , D. (2008). Entrepreneurship: Successfully Launching New Ventures (Global edition of 4th revised ed.). Pearson Education.

Images Courtesy:

  1. HP and IBM business model by Alexander Osterwalder (CC BY-SA 2.0)
  2. Strategic Management by  Farcaster (CC BY-SA 3.0)