Apparently a business model is not strategy. Many people use the terms ‘business model’, ‘strategy’ and ‘tactics’ interchangeably. Here is a description of business models, by Casadesus-Masanell and Ricart (HBR Jan/Feb 2011) which brings some clarity.
Business models
Business models describe the logic of your company; the consequences you require and the choices you make to achieve them. Cause and effect relationships between consequences and choices can be shown in a systems diagram to illustrate how you operate and capture value.
There are three types of choices
Policy choices: Actions to be implemented across all operations (e.g. using non-union workers, locating your plants in rural areas etc.).
Asset choices: The tangible resources you deploy (manufacturing facilities, IT infrastructure etc.).
Governance choices: How you arrange decision rights over your choices about assets and policy (e.g. will you employ staff or outsource an operation).
Consequences may be of Rigid or Flexible
Rigid consequences are built on deep-rooted behaviours. They are not susceptible to change, even when the underlying choices are changed. Carefully chosen and nurtured consequences are difficult to imitate. They include unique aspects of your offer, built on scarce or inimitable competencies and resources such as your culture.
Flexible consequences respond readily to a change in the underlying choice. If you push your prices up your volume will go down.Here is an example from the article. The Ryanair business model in the 1980s showing their major choices; offering excellent service and a standardise fleet.
A good business model will:
- Focus rigid consequences aimed to differentiate you from competitors.
- Be aligned to the company vision and goals.
- Consist of clear, congruent, self reinforcing virtuous cycles.
- Be robust, allowing you to sustain its effectiveness over time.
- Show a clear structure for monetization.
- Provide customer stickiness, raising barriers to entry.
- Take into account interference effects from the business models with which you compete.
Strategy
Strategy refers to the plan about which business model to use. Executing a distinctive set of activities to establish a unique and valuable position is what strategy is all about. Strategy includes contingencies for changes in the market such as competitors’ moves or economic distress or environmental shocks). A considered strategic plan, documented in a strategy map will integrate with or provide input to your business model.
Facing stiff competition, Ryanair has been forced to redesign their business model which currently rest on the rigid consequences of low fixed costs and a reputation for reasonable fares.
Tactics
Changing strategic choices can be expensive, time-consuming and may require a focussed change management effort. But as an enterprise you have a range of options to compete. These options are set within the constraints of your strategy and business model, and are comparatively easy and inexpensive to deploy. These are tactics. These options can be delegated down to your front line.
For instance Metro, the largest newspaper in the world has created a business sponsored by advertisements that dictates that product must be free. This precludes Metro from competing on price.
