Description
This presentation explain strategy and business models strange bedfellows a case for convergence.
S.Afr.J.Bus.Manage.2004,35(1) 35
Strategy and business models - strange bedfellows? A case for convergence
and its evolution into strategic architecture
G.M. Mansfield* & L.C.H. Fourie
Graduate School of Business, University of Stellenbosch,
PO Box 610, Bellville 7535, Republic of South Africa
[email protected]
Received October 2003
Strategy aims for sustainable competitive advantage; business models are said to be the sine qua non of value creation.
Firms in the networked economy may ask which approach is the more relevant and whether either, or both, are sufficient
for success - and then misinterpret the linkage between them. Internet-based businesses are faced with rapid change in an
environment characterised by connectedness and choice in which dynamism, innovation and customer-centricity appear
to be the winning ingredients for success. In the networked economy the internet with its open standards has created
commercial arrangements which manifest a disdain for traditional boundaries and demand new patterns of management
behaviour for effective performance. The classic approach to strategy formulation with its perceived indifference, for
example, towards network formation, confusion around generic strategy deployment, lack of dynamism and its vacuous
treatment of customer-centricity have led electronic business practitioners to the flawed conclusion that a business model
is the only compelling strategic behaviour which predicates success. This conceptual paper builds a theoretical base
which traces the roots of strategy and business models, reviews the context of each, postulates a relationship between
these two fundamental approaches and offers some guidelines on the missing ingredients.
*To whom all correspondence should be addressed.
Introduction
The dot.com debacle suggests the existence of two ill-
founded beliefs among internet-spawned firms. The first is a
disregard for the value of the process and content of
traditional business strategy. The second misleading
assumption, and possibly a key contributor to failed
networked economy ventures, is the belief that a good
business model alone, in an environment characterised by
change and uncertainty, is sufficient for survival (Bertsch,
Busbin & Wright, 2002; Kanter, 2001; Krantz, 2000). This
paper explores and contrasts the propositions in the context
of the networked economy and finds them both wanting. It
cannot be definitively stated that the current e-business
environment represents a totally different, discontinuous
change from the old; neither is there any guarantee that
present and past environments share common features or
imperatives for competitive advantage (Honda & Martin,
2002; Kim, Nam & Stimpert, 2001:5).
Understanding the role and relevance of strategy is
necessary for the effective competitive behaviour of firms in
the networked economy. It is postulated, for commercial
firms to perform effectively in this environment, that a
strategy based purely on conventional strategic approaches
may also prove inadequate since ‘during times of
uncertainty, traditional approaches to formulating and
implementing strategy are not sufficient. Traditional
strategy approaches are grounded on assumptions of
continuity and gradual evolution…’ (Welborn & Kasten,
2003:22). Strategy, however, has a positive contribution to
make that is not irrelevant to firms in the economy of t oday.
Background
Strategy is that management behaviour concerned with the
firm’s creation of sustainable competitive advantage.
Strategy reflects the sum of manageria l choices and is a
blend of deliberate actions, tactical responses and
organisational learning. Effective strategy implementation
requires that management build a strategy-focused
organisation, allocate resources, establish policies, motivate
and reward people, install systems and apply leadership
(Thompson & Strickland, 2001:3 &19). It is the essence of
how any endeavour, whether profit seeking or otherwise,
establishes, sustains, grows and eventually, having made its
economic contribution to stakeholders, exits its domain of
activity. Regardless of whether the prevailing economic
paradigm is agrarian, industrial, information or knowledge-
based, corporate strategy remains that pattern of decisions
defining the firm’s products and markets, objectives, plans
and range of business. It frames the economic, human and
technological organisation and drives the creation of a return
to all constituents. Strategy content includes the firm’s
market position, its resource deployment, and how it
conducts its operations, attracts and satisfies customers,
competes successfully and achieves organisational
objectives. It is the way a firm attains its desired future.
Strategy formulation is one of the many tasks performed by
management and is by no means an isolated function. As
businesses evolved from operating in primitive markets,
through barter behaviour to the instantaneous electronic
exchanges of today, astute managers have endeavoured to
incorporate broader perspectives in their thinking without
36 S.Afr.J.Bus.Manage.2004,35(1)
losing focus. Latterly, as the networked economy blurred
corporate boundaries through the creation of strategic
alliances and online collaboration, so strategy, in order to
remain relevant, has had to broaden its base to cater for the
intra- and extra -organisational linkages between strategic
entities.
The contribution of strategy
After studying several corporations in the United States,
strategy writers in the 1940s concluded that the most
successful comp anies were centralised and excelled at goal-
setting (Drucker, 1946; Sloan, 1963). Levitt (1960) viewed
strategy from a broader perspective in which he maintained
that a focused vision produced the best result. The
formalised and academic measurement of strategy and
strategic thinking, however, is rooted in the work of
Chandler (1962). As one of the first writers on corporate
diversification his definition of strategy included the setting
of long-term goals and objectives, the determination of
courses of action and the allocation of resources to achieve
those objectives (Chandler, 1969). In the mid-1960s a
blueprint for planning a firm’s objectives, expansion plan,
product-market positions and resource allocation was
advocated by Ansoff (1968). The first attempt to quantify
the specific relationship between strategy and performance
came from the Boston Consulting Group, founded in 1964
(Henderson, 1989). A blend of market analysis and research
with financial theory resulted in the quantification of
performance and the development of an extensive database.
In the mid-1970s the perspective of strategy research shifted
towards strategic management and theories on
organisational behaviour, economics, finance and marketing
(Schendel & Hofer, 1979) which eventually gave rise to
strategy content research. The major thrust of the strategy
content research explored linkages between environmental
conditions, corporate or business-unit strategic decisions and
economic performance (Koch, 2000).
Strategic management researchers have focused increasing
attention on the concepts of strategic taxonomies frequently
referred to as gestalts, strategic archetypes (Robinson &
Pearce, 1988) or generic strategies. These efforts aim to
provide an empirical mechanism through which different
strategies or patterns of strategic behaviour can be classified
across a variety of industries. The taxonomy-oriented
research stream has long been promulgated by strategy
scholars as a means to the identification of interrelated
strategy components, recognising that competitive strategies
represent a network of interactions among the various
constituent elements that ultimately make up a business
strategy (Galbraith & Schendel, 1983; Kim, et al., 2001).
Studies have been conducted on the effect of industry
evolution and strategy (Anderson & Zeithaml, 1984;
Hambrick & Schecter, 1983). This stream of research has a
clear intent to establish the relationship between conditions
leading to strategy and the resultant performance. The
different stages of industry evolution are emergence,
growth, shakeout, maturity and decline. Findings indicate
that firms do pursue different strategies across different
industry contexts and that particular strategic behaviours are
most appropriate at specific stages; that is, they are
associated with market share gains and profitability
enhancement (Fahey & Christensen, 1986:176). The
findings also suggest that firms adapt their strategies as an
industry evolves through its life cycle. Since the web is in a
turbulent phase of early evolution relevant strategies will be
characterised by frequent adaptation and change.
Industry positioning
In the formulation of strategy there is a need to locate the
firm as a participant in an industry of similar organisations.
The first influential work on strategy measurement comes
from Porter (1980) who postulated that competitive
advantage flowed from the industry position of the firm. He
notes, ‘The essence of formulating competitive strategy is
relating a company to its environment,’ and that, ‘the key
aspect of a firm's environment is the industry or industries in
which it competes’ (1980:3). He finds that the underlying
determinants of the appropriate classification for an industry
revolve around five competitive forces which drive industry
competition: the threat of new entrants, bargaining power of
buyers and suppliers, threat of substitute products or
services, and inter-industry rivalry among existing firms.
Based on an analysis of these five forces an industry may be
classified as representing one of five generic industry
environments: fragmented, emerging, mature, declining, or
global. Latterly, with the insights of the drivers in the
networked economy, Downes and Hui (1998) proposed
adding three more forces, namely, those of globalis ation,
digitisation and deregulation. Unfortunately these addenda
still predicate a relatively stable environment.
In what has become known as the positioning-based view
(PBV) Porter further postulates that firms could earn
monopoly rents either by selecting industries that are
structurally attractive or by manipulating the forces driving
competition. He proposes three potentially successful
generic strategic approaches for creating a defensible
position and outperforming competitors in a given industry:
overall cost leadership; differentiation or the creating of a
product or a service recognised industry-wide as being
unique; and, focus in which the firm concentrates on a
particular customer niche, geographic market or product line
segment.
The relevance of Porter’s framework to internet-based firms
whose domain is characterised by turbulence and
uncertainty remains the subject of academic debate. His
generic strategy of cost leadership, for exa mple, can be as
viable a strategic choice for web-enabled commerce as it is
for off-line businesses (Kim, et al., 2001). Low price
suppliers remain appealing to price-sensitive online buyers.
The web facilitates price comparisons by making tools
available which reduce search costs and thus enables
customers to benefit from nearly perfect information,
acquired at little or no cost (Bakos, 1997). However, pursuit
of the lowest price is not necessarily the reason customers
purchase items on the web as indicated in a study by J P
Morgan (1999). This survey highlighted support as the main
criterion for such customers. Price was important only to
19% of the respondents.
S.Afr.J.Bus.Manage.2004,35(1) 37
A successful differentiation strategy is built on factors
including design, brand image, reputation, technology,
product features, networks and differentiated customer
service (Kim, et al., 2001). Differentiation should not be
imitable. Such differentiating elements are applicable to
internet firms.
Porter’s focus strategy targets specific groups of buyers or
product lines. These strategies rely on low costs or
differentiated products and services. A new entrant web
firm can compete against large established firms by focusing
on a particular niche, such as eBay taking on Sotheby in the
auction market (Cohen, 2002). A focused strategy increases
the chance of survival and success and may function as an
entry barrier. Lower investment levels required by online
businesses enable lower break-even points. Thus, targeting
even small market segments can be a viable strategy for
online firms. Customers may be easily connected with firms
that focus on niche markets due to the web’s pervasive
search capabilities (Kim, et al., 2001:6).
The resource-based view of the firm
Needing to go beyond the industry explanation gave rise to
the resource-based view (RBV) of the firm. The basic
principles have been extensively documented and reviewed
(Barney, 1991; Hamel & Prahalad, 1990; Priem & Butler,
2001). This view of the firm builds on Schumpeter’s (1934)
perspective of value creation which views the firm as a
collection of resources and capabilities. This perspective,
more than that of strategy, begins to parallel the concept of
the business model.
The RBV posits that marshalling and uniquely combining a
set of complementary, specialised resources and capabilities
can create value (Rayport & Jaworski, 2001: 79-87). These
capabilities are heterogeneous within an industry, are scarce,
durable, not easily traded and difficult to imitate (Barney,
1991; Hamel & Prahalad, 1990 & 1994). Such resources and
capabilities are valuable if they reduce a firm’s costs or
increase its revenues compared to what would have been the
case if the firm did not possess those resources. Utilisation
of the resource is more important than its possession and a
resource only becomes a competitive advantage when it is
applied to an industry and brought to market (Kay, 1993).
It can be seen from the above that the Porter and RBV
frameworks are not mutually exclusive. Also evident is how
strategy mediates between the organisation and its
environment. The internet, however, has introduced
changes in resource markets. The economic environment is
moving towards networks, open markets, mobile labour and
information abundance.
Resources are becoming increasingly tradable and the
advantages accruing from market position and strategic
imitation are falling (Fahy & Hooley, 2002). Careful
analysis of an enterprise’s web-related activities and that of
its stakeholders now give clues to its competencies (such as
alliances, vendors, value chain, technologies, skills and
pricing policies) previously invisible to a competitor. Such
transparency facilitates the imitability of competencies. In
fluid resource markets sustainable advantage is reinforced
by assets that are not easily discernable.
The resource-based approach to strategy has gradually
become a perspective that combines realism with rigour but
has shortcomings. ‘The debate over the resource-based view
has so far been largely conducted either theoretically or
empirically at the macro-level, with large-scale statistical
studies the weapon of choice. …With no firm conclusions
emerging, the macro approach to the resource-based view is
in danger of failing to deliver against its promises’ (Johnson,
Melin & Whittington, 2003:6). To add complexity to the
RBV in the networked economy is the increasing criticism
against it for failing to show where and when knowledge
resources are of competitive advantage (Zack, 1999).
Internet-based businesses are dynamic and have learnt to
cope with and adapt to rapid changes in what has become a
hyper-competitive environment (D’Aveni, 1994 & 1998) in
which speed, surprise and innovation are the winning bases
of competitive advantage (Brown & Eisenhardt, 1997).
Hyper-competition impacts both the level and the frequency
of strategy activity. Fast and innovative responses to
competition require organisational decentralisation moving
strategic decisions to line managers who are closer to the
customers. Strategic innovation increasingly involves
managers at the periphery, rather than just those at the centre
(Hamel & Prahalad, 1996). The hypercompetitive situation
takes strategy-making from measured cycles into a much
more continuous process (Brown & Eisenhardt, 1997).
Strategy formulation has become a routine feature of
organisational life. With its impact on level and frequency,
hyper-competition makes of strategy something in which
more people are involved, more often than ever before.
Progress on content issues in strategy is beginning to rely
increasingly on a ‘micro perspective view’ (Johnson, et al.,
2003:6).
In the traditional pre-internet economic paradigm, the
position- and resourced-based views have tended to
dominate the academic strategy debate as they endeavour to
explain the variance in the performance of businesses. These
perspectives were developed and published in times of a
more predictable economic environment than the one
prevailing today. Developments surrounding the internet
have brought about significant change. Just how material
these changes are, and what new demands are made on
strategy, need to be explored in an economic context.
The economic landscape
The new drivers of growth have introduced fundamental
economic change. Such developments could begin to
question the role of traditional competitive behaviour and
the appropriateness and validity of its associated strategies
in this environment. In the e-business literature various
writers (Kalakota & Robinson, 2001; Rayport & Jaworski,
2001; Tapscott, Ticoll & Lowy, 2000) echo the sentiments
of strategic management authors, Thompson and Strickland
(2001:225), who maintain that ‘the impact of the internet
and the rapidly emerging e-commerce environment is
profound. …There can be no doubt that the internet is a
driving force of revolutionary proportions’. Developments
38 S.Afr.J.Bus.Manage.2004,35(1)
of this magnitude that impact on the entire world do not
happen very often. When they do, it may seem as if the old
rules no longer apply. Although this is a widely accepted
popular proposition it is a view not necessarily shared by all.
The new drivers of technology and inter-connectivity have
changed ways in which economic entities interact. The
choices now available to customers, management’s
knowledge of competitor behaviour such as dynamic pricing
and channels used for delivering knowledge content, have
introduced new behaviour. When the telephone enabled
communications and mechanisation produced the production
line, firms had the choice, at their peril, of ignoring the
shock created by these interventions or embracing the
concomitant benefits. This same dilemma faces business
today.
In the networked economy, economics is no longer the study
of scarcity. Customers are confronted with abundance, as
many of the non-physical, knowledge-based products of the
networked economy are reproduced and distributed at near-
zero marginal cost (Tapscott, et al., 2000:5) making the
creation of value that much more of a central purpose in
today’s businesses. The new drivers in the economy and the
changes in the environment have encouraged some
entrepreneurs to adopt novel approaches to value creation.
In doing so, however, some businesses have irrationally
overstepped the mark and almost abandoned strategy along
with its rich and valuable heritage, the point made earlier.
The concept of value and the rise of the
business model
Competitive behaviour is the rationale for business strategy
development - a truism in any free market. Customer
interconnectivity has driven firms to disregard traditional
boundaries and raised inter-firm collaboration to heights not
seen before. Value creation can now be shared among firms
from different industries and in vastly different geographical
locations (Awad, 2002). The reach of the internet enables
customers to have a wider choice and be better informed
than ever before (Evans & Wurster, 1999). Such challenges
exist in the dynamic, networked and highly competitive
domain of the e-commerce firm.
Traditional approaches to strategy formulation and the
perceived indifference of strategy content towards alliance
formation (Tapscott, 2001), confusion around generic
strategy deployment (Murray, 1988), its lack of dynamism
(Eisenhardt & Martin, 2000) or focus on customer-centricity
(Hax & Wilde, 2001), all of which are becoming
prerequisites for success in the networked economy, have
driven some internet-spawned businesses to seek new ways
of competing and creating value in virtual ma rkets.
Value opportunities from non-traditional sources are
embedded in digital exchanges. Value is a prized
commodity that has exchange potential in an open market.
The characteristics of virtual markets impacting on value-
creating economic transactions include the ease of extending
a product range to include complementary products,
improved access to complementary assets, new alliances
among firms, the potential reduction of asymmetric
information among economic agents through the internet
medium, and real-time customisability of products and
services (Amit & Zott, 2001). Industry boundaries become
porous as value chains are redefined (Sampler, 1998). This
in turn may affect the scope of the firm as opportunities for
outsourcing arise in the presence of reduced transaction
costs and increased returns. A transaction occurs when a
good or service is transferred across a technologically
separable interface; when one stage of processing terminates
and another begins (Williamson, 1983). Value creation
flows from cost reductions through transaction efficiencies.
One of the main benefits of transacting over the internet, or
in any highly networked environment, is the reduction in
transaction costs it engenders.
According to a recent survey the cost of sending 1 trillion
bits electronically has, over the past 30 years, dropped from
$150,000 to $0.12 (Economist, The, 2000:6). This
development, coupled with the emergence of virtual
markets, has changed the way companies operate and
structure economic exchanges.
The opportunity for wealth creation which has become
available is not a recent phenomenon. Early examples of
value creation through structural innovation became evident
in the early 1900s as vertically-integrated, industrial
corporations began to feature strong supply-chain
hierarchies. This led to businesses making process and
structural innovations which resulted in new ways of
production, for example, through collaborative networks
leading to outsourcing and the formation of virtual
corporations (Tapscott , et al., 2000:14-15).
Economic development and new value creation through the
process of technological change and innovation first
observed by Schumpeter, identified several sources of
innovation, or value creation, including the introduction of
new goods or new production methods, the creation of new
markets, the discovery of new supply sources and the
reorganisation of industries. Schumpeter’s notion of
creative destruction (Becker & Knudsen, 2002:394) was
developed after noting that certain economic rents, or
income streams, become available to entrepreneurs
following disruptive technological change. These
diminished once the innovation became an established
practice. Schumpeter (1934) highlighted the contribution of
individual entrepreneurs and placed an emphasis on the
innovations and services rendered by the new combinations
of resources. Firms may differ in terms of the resources and
capabilities they control until some exogenous change, or
Schumpeterian shock, occurs. Value creation in virtual
markets comes from exploiting relational capabilities and
complementarities between a firm’s resources and its
capabilities, for example, between online and offline
capabilities.
In the mid-1980s, Porter published a framework analysing
the process of value creation at the organisational level. He
defines value as ‘the amount buyers are willing to pay for
what a firm provides them. Value is measured by total
revenue. A firm is profitable if the value it commands
exceeds the costs involved in creating the product’ (Porter,
S.Afr.J.Bus.Manage.2004,35(1) 39
1985:38). Porter’s analysis identifies activities of the firm
with their concomitant economic implications. It includes
defining the strategic business unit, identifying crit ical
activities, defining products, and determining the value of an
activity. The value chain framework addresses the activities
a firm should perform. It identifies the configuration of the
firm’s activities that enable it to add value to its products
and compete in its industry. Value chain analysis
concentrates on the primary activities having a direct impact
on value creation, and support activities affecting value only
through their impact on the performance of the primary
activities. He posits that value can be created by
differentiation through activities that reduce buyer costs or
raise buyer performance. The drivers of product
differentiation, and hence sources of value creation, are
policy choices, linkages within the value chain or with
suppliers and channels, timing (of activities), location,
sharing of activities among business units, learning,
integration, scale and institutional factors. He maintains that
information technology creates value by supporting
differentiation strategies.
Testing Porter’s concepts in the networked economy led
Rayport and Sviokla (1995) to advocate the existence of a
virtual value chain that includes a sequence of gathering,
organising, selecting, synthesising and distributing
information. This revised concept corresponds better to the
realities of virtual markets and in particular highlights the
value of information (Shapiro & Varian, 1999). These
authors propose that e-business value creation can result
from combinations of information, physical products and
services, innovative configurations of transactions, and the
reconfiguration and integration of resources, capabilities,
roles and relationships among suppliers, partners and
customers.
Theoretical frameworks continue to make valuable
suggestions about possible sources of value creation
(Hackney & Burn, 2002; Hax & Wilde, 2001; Scott, 1998;
Zott, Amit & Donlevy, 2000). Some insights are the results
of research in the fields of entrepreneurship and strategic
management. Value drivers raise the question of precisely
which sources of value are of importance to e-businesses
and whether such entities can be identified in the context of
their businesses. Each theoretical framework, though, has
some limitations when considered in the context of highly
interconnected electronic markets (Amit & Zott, 2001:500)
and these authors maintain that this reinforces the need for
the identification and priorit isation of the sources of value
creation in e-business.
For some networked economy firms seeking to pinpoint the
source of value, the temptation to attribute shareholder
wealth creation solely to a business model was inevitable.
The consequences have often been negative (Krantz, 2000).
Given the correct context, the contribution of a business
model has been proven to be nothing more than a useful
starting point.
The context of the business model
Neither of the misconceptions among internet-spawned
firms, that traditional process and content of business
strategy is no longer relevant (Bertsch, et al., 2002) or that a
good business model assures longevity (Krantz, 2000), is
precisely valid. For most of the last century a well-crafted
business strategy did deliver successful competitive
advantage as many works on strategy will testify
(Christensen & Raynor, 2003; Porter, 1985; Thompson &
Strickland, 2001); some maintain that this will always be the
case (Porter, 2001). However, as was shown earlier, the
advent of the internet and its concomitant technologies
introduced irreversible and fundamental changes to the
domain of e-business. There is also the fallacy that business
models alone indicate successful performance for such firms
(De, Biju & Abrham, 2001; Finke lstein, 2001; Kanter,
2001).
A model is an abstract representation of reality that defines a
set of entities and their relationships. A business model most
commonly describes the linkage between a firm’s resources
and functions and its environment. It is a contingency
model that finds an optimal mode of operation for a specific
situation in a specific market. The evolving business model
concept is derived from a quest for value creation driven by
environmental developments and infrastructural
opportunities.
The business model, as a concept, is loosely defined in the
literature. ‘There has been no attempt to provide a
consistent definition for a business model in the Internet
context’ (Mahadevan, 2000:56). According to Eisenmann
(2002) business models are widely used but rarely defined.
Practitioners once resorted to using the term to describe a
unique aspect of a particular internet business venture but
this resulted in confusion. Timmers (2000:32) concurs and
states that ‘the literature … is not consistent in the usage of
the term ‘business model’ and, moreover, often authors do
not even provide a definition of the term’. The most quoted
descriptions of business models are those of Timmers
(2000), Amit and Zott (2001), Afuah and Tucci (2001) and
Magretta (2002).
A business model is an architecture for product, service and
information flows, including a description of the various
business actors and their roles; a description of the sources
of revenues, and a description of the potential benefits for
the various business actors (Timmers, 2000). Amit and Zott
(2001) view a business model as something that depicts the
content, structure, and governance of transactions designed
so as to create value through the exploitation of business
opportunities. A business model includes the design of the
transaction content, structure and governance. Afuah and
Tucci (2001) find a business model to be a method by which
the firm builds and uses its resources. Their business model
consists of components, linkages between such components
and the dynamics between them. In a larger context,
Magretta (2002) sees the business model as a variation of
the generic value chain underlying all businesses and
comprising the business activities associated with making
something and the business activities associated with selling
something.
There are several other definitions which contribute to the
overall concept and understanding of the context of the
business model (The e-Factors report of the European
40 S.Afr.J.Bus.Manage.2004,35(1)
Commission, 2002). Weill and Vitale (2001) view business
models as a description of the roles and relationships among
a firm’s consumers, customers, allies, and suppliers that
identifies the major flows of product, information, and
money, and the major benefits to participants. Elliot (2002)
posits that a business model specifies the relationships
between different participants in a commercial venture, the
benefits and costs to each and the flows of revenue. In an
effort to develop a more comprehensive concept,
Mahadevan (2000) combines business models into a blend
of three business-critical streams: The value stream which
identifies the value proposition for the business partners and
the buyers, the revenue stream, a plan for assuring revenue
generation for the business; and the logistical stream which
addresses the supply chain of the business.
In their hierarchical representation of a business model,
Petrovic, Kittl and Teksten (2001) build on the work of Alt
and Zimmermann (2001) who identified generic elements
present in most definitions. Petrovic et al. (2001) expand
the business model contextual scope to include the internet
and dynamic business evolution. Their analysis begins by
viewing a company as an organised social system composed
of interdependent parts delineated by identifiable boundaries
whose boundary-spanning activities enable it to persist and
evolve over time. They then posit that a business model
describes the logic of a ‘business system’ which is the
source of value creation. In similar fashion Applegate
(2001) sees the business model as describing the structure,
relationships among elements and its response to the real
world.
From the numerous and often disparate definitions
illustrated above, it can be seen that the business model as a
concept is presently in the early stages of its evolution and
benefits little from its turbulent and dynamic contextual
environment. It is unwise at this juncture to attempt
absolute claims of definitive explanation or even to opt for
one single definition; in the context of this paper such an
approach is also unnecessary.
The deep conceptual differences between strategy and
business models could easily be confused by an ill-informed
web entrepreneur. Given the naivety of some of the early
web pioneers and their management inexperience it is not
unlikely that this confusion contributed to some dot.com
failures (Afuah & Tucci, 2003; Chaffey, 2002). A business
model exp lains how an enterprise works. It approximates a
value chain as it includes a description of all the key
business processes, the flows of products, services and
information associated with these processes. It also
describes the participants in the business venture, including
the roles and relationships, as well as transactions completed
between the players. It is interesting to note that neither
competitive advantage or industry environment, nor the role
of business models in securing these, are considered
significant. Thompson and Strickland (2001:4-5) view a
business model as being more focused than strategy and
concerned with financial success. Strategy places more
emphasis on competitive initiatives while business models
deal with revenue flow and viability.
Business models and strategy
According to the classical view, strategy undergirds the
relationship between an enterprise and its environment. In
much of the foregoing analysis the preoccupation of strategy
with futurity is clearly identified, as is the need for the firm
to formulate effective strategies to defend its competitive
position. Strategy formulation also relies on analytical
procedures. The position-based view demonstrates the
potential of rents flowing from appropriate industry
positioning. The resource-based view, among others, shows
the importance of effective systems and the ability, as a core
competence of the firm, to rapidly deploy these to meet the
dynamic needs of the business. The attitude of the firm
toward identifying and managing risk is also a trait of an
effective strategic management process. These then are
some of the critical performance characteristics sourced
from the study of strategy which are relevant to any business
whether in the networked economy or not. Business models
identify other factors.
In a perfunctory exploration of the strategy-business model
relationship, two authorities on business models, Elliot and
Magretta, have endeavoured to understand the linkage
between the concepts. Elliot (2002:7) considers business
strategies as specifying how a business model could be
applied to the market to differentiate the firm from its
competitors. Magretta (2002:3), in a broader sense, contends
that ‘...a good business model remains essential to every
successful organisation, whether it’s a new venture or an
established player’. Simplistically, both Elliot and Magretta
agree that a business model is different from a business
strategy in that the latter approach is more concerned with
creating and defending an effective competitive position.
Strategy, they contend, defines how a business organisation
can do better than its rivals; it also embraces principles of
differentiation. In another approach, Osterwalder and
Pigneur (2002) believe that business mo dels are the link
missing between strategy and business processes. To them
business models form the linkage between the planning and
implementation levels of a business.
Different frameworks facilitate the identification of relevant
characteristics which may predicate performance. They also
provide useful ways to classify, organise or describe
business models according to a set of principal dimensions.
There are three taxonomies of business models frequently
encountered in the literature, each making its own unique
contribution. In his framework Tapscott et al. (2000)
classify collaborative businesses while Timmers (2000) uses
degrees of innovation and functional integration. Rappa
(2002) differentiates by source of revenue or revenue
streams. The first two taxonomies are contextual while the
latter is functional. Each of these frameworks identifies
performance factors which can be attributed to business
models and entails a different approach. Timmers (2000)
examines business models from the point of innovation and
functional integration. Tapscott et al. (2000) evaluate
different business models from the point of collaborative
business webs such as portals, intermediaries, and
infomediaries. Rappa (2002) presents a view, where the one
eminent factor of separation is the source of revenue.
S.Afr.J.Bus.Manage.2004,35(1) 41
Expansions outside the firm boundaries are emerging. There
is a trend towards a contingency approach where alliances
and networks of companies are established as and when
needed. There are competing trends towards tighter co-
operation between competing value chains.
Business models have been further reduced, in the literature,
to their individual comp onents. The components of a
business model reveal how firms structure and implement
their models in the networked economy. A business model
shows how a web firm plans to make money in the long
term. The various components must work together and have
clearly defined linkages. As with the definition of a business
model, there is a dearth in the literature of agreement on the
key components of a business model. The analysis of Afuah
and Tucci (2001) is useful in that it relates the component to
the strategy employed by the business.
In essence, therefore, business models shape the specific
value-creation behaviour of a commercial web-enabled
enterprise. Their product is the revenue-generating ability
of the firm. Just as strategy is concerned with futurity, so
business models have an undisguised passion for customer-
centricity as the source of value creation. Characterised by
innovation, functional integration and all iances, economic
innovativeness and the ability to leverage value from its
value chain, the distinguishing characteristics of business
models appear different from those of strategy, but are
equally important contributors to effective web-enabled
performance.
Business models, per se, are not complete. As the above
analysis demonstrates, certain explicit considerations are
absent from the business model concept. Not readily
identifiable are the factors of strategic intent, sustainable
competitive advantage, objective setting, environmental
analysis and industry positioning, all of which are favoured
by informed strategy.
In order to discourage accusations of parsimony the study on
which this paper is based continues with a further analysis
of electronic business ventures, beyond the realms of
strategy and business mo dels, in an effort to uncover what
other factors could contribute to the performance of web-
enabled ventures. In the process, the concept of strategic
architecture is given new meaning.
Strategy and business models: underlap and
strategic architecture
So far the discussion has centred around the dangers of
either blindly applying traditional strategy or relying solely
on a business model for effective performance in the
networked economy. The question arises whether there are
any ingredients missing and what they might be.
It is effectively beyond the scope of this paper to
comprehensively address this issue. In seeking answers a
study is in progress that will identify the critical success
factors sourced from strategy and business models, probe for
missing elements and describe the linkages between them.
It is possible, for example, given the emphasis on managing
businesses in a turbulent, networked environment that being
able to create and respond swiftly to market change and to
match resources to dynamic and networked markets may
require a firm to develop an ability for dynamic pliancy. In
similar fashion, given the enthusiasm and dedication of the
founders and e-entrepreneurs, and the need to unite and
create a motivating climate for the people in the
organisation, the existence of harmony, considered as the
output of successful alignment behaviour, may also be
indispensable. Finally, since many products developed for
and traded on the internet are high in knowledge content,
often with little or no material substance, managing
knowledge may also be a key differentiator.
A theoretical research construct, the strategic architecture of
commercial web-enabled enterprises (STRACWEN) has
been developed. Its dimensions are based on strategy and
business models, mediated by configuration theory (Miller,
1986), dynamic capability (Eisenhardt & Martin, 2000) and
knowledge management (Skyrme, 2000 & 2001). This
construct will be used to measure the strategy of e-
commerce businesses and correlate it with their
performance. The phrase ‘Strategic Architecture’ has been
used before but in a different context (refer Hamel &
Prahalad, 1990; Kiernan, 1993).
Conclusion and implications
The new rules for business success in the networked
economy place a premium on value creation and its
concomitant proposition. To benefit most from the
Schumpeterian rents spawned by the internet and its
technologies, firms have employed value creation concepts
which have been historically grounded on internalising
transactions and improving efficiencies, both of which lend
themselves to the application of technology. In so doing
however the new entrepreneurs have tended to underplay the
value of business strategy, often with inauspicious
consequences.
The prima facie role of strategy is the pursuit of competitive
advantage. Its rich heritage spanning almost a century of
business endeavour has produced a valuable compendium of
proven tools and techniques. The purpose of strategy is the
achievement of a desired future. In this process competitive
behaviour, objective setting, environmental analysis,
analytical procedures, risk management and effective
systems have become some of its valuable characteristics.
In contrast, the business model is a more recent
phenomenon, augmented by the internet and underpinning
the value creation process. When intuitively and
irresponsibly applied to web-spawned business, it has
created a mistaken belief amongst less-informed
businessmen that it is the sole means to sustainable
commercial viability.
Internet business is evolving and firms are grappling with
the new rules for competing successfully in the networked
economy. Developing and implementing new or changed
business models requires entrepreneurial flair and careful
management of risk. The leaders of such ventures develop
business models aimed at releasing latent value in
42 S.Afr.J.Bus.Manage.2004,35(1)
technology but in the process become blinded to the fact that
although the economic rules may be different, the basic
ethos of business remains the same. This view may also
have contributed towards the disregard for the value of
strategy.
The dot.com failures of 2000 have given no credence to the
demonstration of management possessing a clear grasp of
the relationship between strategy and business models.
Neither has the loose definition of a business model helped
clarify the issue. A business model is the product of
management’s inexorable quest for the best customer value
proposition, wholly concerned with customer centricity. Not
readily discernable from the pure business model however,
are the factors of strategic intent, sustainable competitive
advantage, objective setting, environmental analysis and
industry positioning, all of which are elements of strategy.
Neither strategy nor business models, in isolation, indicate
success for electronic businesses; both are required, and
more, as this paper has argued. Active debate between
strategists and e-business practitioners will eventually lead
to the realisation that strategic intent and value creation
remain the foundations for effective performance of every
networked economy firm. From that moment, and only from
that moment, will the sleeping partners of strategy and
business models cease being strange.
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doc_749049532.pdf
This presentation explain strategy and business models strange bedfellows a case for convergence.
S.Afr.J.Bus.Manage.2004,35(1) 35
Strategy and business models - strange bedfellows? A case for convergence
and its evolution into strategic architecture
G.M. Mansfield* & L.C.H. Fourie
Graduate School of Business, University of Stellenbosch,
PO Box 610, Bellville 7535, Republic of South Africa
[email protected]
Received October 2003
Strategy aims for sustainable competitive advantage; business models are said to be the sine qua non of value creation.
Firms in the networked economy may ask which approach is the more relevant and whether either, or both, are sufficient
for success - and then misinterpret the linkage between them. Internet-based businesses are faced with rapid change in an
environment characterised by connectedness and choice in which dynamism, innovation and customer-centricity appear
to be the winning ingredients for success. In the networked economy the internet with its open standards has created
commercial arrangements which manifest a disdain for traditional boundaries and demand new patterns of management
behaviour for effective performance. The classic approach to strategy formulation with its perceived indifference, for
example, towards network formation, confusion around generic strategy deployment, lack of dynamism and its vacuous
treatment of customer-centricity have led electronic business practitioners to the flawed conclusion that a business model
is the only compelling strategic behaviour which predicates success. This conceptual paper builds a theoretical base
which traces the roots of strategy and business models, reviews the context of each, postulates a relationship between
these two fundamental approaches and offers some guidelines on the missing ingredients.
*To whom all correspondence should be addressed.
Introduction
The dot.com debacle suggests the existence of two ill-
founded beliefs among internet-spawned firms. The first is a
disregard for the value of the process and content of
traditional business strategy. The second misleading
assumption, and possibly a key contributor to failed
networked economy ventures, is the belief that a good
business model alone, in an environment characterised by
change and uncertainty, is sufficient for survival (Bertsch,
Busbin & Wright, 2002; Kanter, 2001; Krantz, 2000). This
paper explores and contrasts the propositions in the context
of the networked economy and finds them both wanting. It
cannot be definitively stated that the current e-business
environment represents a totally different, discontinuous
change from the old; neither is there any guarantee that
present and past environments share common features or
imperatives for competitive advantage (Honda & Martin,
2002; Kim, Nam & Stimpert, 2001:5).
Understanding the role and relevance of strategy is
necessary for the effective competitive behaviour of firms in
the networked economy. It is postulated, for commercial
firms to perform effectively in this environment, that a
strategy based purely on conventional strategic approaches
may also prove inadequate since ‘during times of
uncertainty, traditional approaches to formulating and
implementing strategy are not sufficient. Traditional
strategy approaches are grounded on assumptions of
continuity and gradual evolution…’ (Welborn & Kasten,
2003:22). Strategy, however, has a positive contribution to
make that is not irrelevant to firms in the economy of t oday.
Background
Strategy is that management behaviour concerned with the
firm’s creation of sustainable competitive advantage.
Strategy reflects the sum of manageria l choices and is a
blend of deliberate actions, tactical responses and
organisational learning. Effective strategy implementation
requires that management build a strategy-focused
organisation, allocate resources, establish policies, motivate
and reward people, install systems and apply leadership
(Thompson & Strickland, 2001:3 &19). It is the essence of
how any endeavour, whether profit seeking or otherwise,
establishes, sustains, grows and eventually, having made its
economic contribution to stakeholders, exits its domain of
activity. Regardless of whether the prevailing economic
paradigm is agrarian, industrial, information or knowledge-
based, corporate strategy remains that pattern of decisions
defining the firm’s products and markets, objectives, plans
and range of business. It frames the economic, human and
technological organisation and drives the creation of a return
to all constituents. Strategy content includes the firm’s
market position, its resource deployment, and how it
conducts its operations, attracts and satisfies customers,
competes successfully and achieves organisational
objectives. It is the way a firm attains its desired future.
Strategy formulation is one of the many tasks performed by
management and is by no means an isolated function. As
businesses evolved from operating in primitive markets,
through barter behaviour to the instantaneous electronic
exchanges of today, astute managers have endeavoured to
incorporate broader perspectives in their thinking without
36 S.Afr.J.Bus.Manage.2004,35(1)
losing focus. Latterly, as the networked economy blurred
corporate boundaries through the creation of strategic
alliances and online collaboration, so strategy, in order to
remain relevant, has had to broaden its base to cater for the
intra- and extra -organisational linkages between strategic
entities.
The contribution of strategy
After studying several corporations in the United States,
strategy writers in the 1940s concluded that the most
successful comp anies were centralised and excelled at goal-
setting (Drucker, 1946; Sloan, 1963). Levitt (1960) viewed
strategy from a broader perspective in which he maintained
that a focused vision produced the best result. The
formalised and academic measurement of strategy and
strategic thinking, however, is rooted in the work of
Chandler (1962). As one of the first writers on corporate
diversification his definition of strategy included the setting
of long-term goals and objectives, the determination of
courses of action and the allocation of resources to achieve
those objectives (Chandler, 1969). In the mid-1960s a
blueprint for planning a firm’s objectives, expansion plan,
product-market positions and resource allocation was
advocated by Ansoff (1968). The first attempt to quantify
the specific relationship between strategy and performance
came from the Boston Consulting Group, founded in 1964
(Henderson, 1989). A blend of market analysis and research
with financial theory resulted in the quantification of
performance and the development of an extensive database.
In the mid-1970s the perspective of strategy research shifted
towards strategic management and theories on
organisational behaviour, economics, finance and marketing
(Schendel & Hofer, 1979) which eventually gave rise to
strategy content research. The major thrust of the strategy
content research explored linkages between environmental
conditions, corporate or business-unit strategic decisions and
economic performance (Koch, 2000).
Strategic management researchers have focused increasing
attention on the concepts of strategic taxonomies frequently
referred to as gestalts, strategic archetypes (Robinson &
Pearce, 1988) or generic strategies. These efforts aim to
provide an empirical mechanism through which different
strategies or patterns of strategic behaviour can be classified
across a variety of industries. The taxonomy-oriented
research stream has long been promulgated by strategy
scholars as a means to the identification of interrelated
strategy components, recognising that competitive strategies
represent a network of interactions among the various
constituent elements that ultimately make up a business
strategy (Galbraith & Schendel, 1983; Kim, et al., 2001).
Studies have been conducted on the effect of industry
evolution and strategy (Anderson & Zeithaml, 1984;
Hambrick & Schecter, 1983). This stream of research has a
clear intent to establish the relationship between conditions
leading to strategy and the resultant performance. The
different stages of industry evolution are emergence,
growth, shakeout, maturity and decline. Findings indicate
that firms do pursue different strategies across different
industry contexts and that particular strategic behaviours are
most appropriate at specific stages; that is, they are
associated with market share gains and profitability
enhancement (Fahey & Christensen, 1986:176). The
findings also suggest that firms adapt their strategies as an
industry evolves through its life cycle. Since the web is in a
turbulent phase of early evolution relevant strategies will be
characterised by frequent adaptation and change.
Industry positioning
In the formulation of strategy there is a need to locate the
firm as a participant in an industry of similar organisations.
The first influential work on strategy measurement comes
from Porter (1980) who postulated that competitive
advantage flowed from the industry position of the firm. He
notes, ‘The essence of formulating competitive strategy is
relating a company to its environment,’ and that, ‘the key
aspect of a firm's environment is the industry or industries in
which it competes’ (1980:3). He finds that the underlying
determinants of the appropriate classification for an industry
revolve around five competitive forces which drive industry
competition: the threat of new entrants, bargaining power of
buyers and suppliers, threat of substitute products or
services, and inter-industry rivalry among existing firms.
Based on an analysis of these five forces an industry may be
classified as representing one of five generic industry
environments: fragmented, emerging, mature, declining, or
global. Latterly, with the insights of the drivers in the
networked economy, Downes and Hui (1998) proposed
adding three more forces, namely, those of globalis ation,
digitisation and deregulation. Unfortunately these addenda
still predicate a relatively stable environment.
In what has become known as the positioning-based view
(PBV) Porter further postulates that firms could earn
monopoly rents either by selecting industries that are
structurally attractive or by manipulating the forces driving
competition. He proposes three potentially successful
generic strategic approaches for creating a defensible
position and outperforming competitors in a given industry:
overall cost leadership; differentiation or the creating of a
product or a service recognised industry-wide as being
unique; and, focus in which the firm concentrates on a
particular customer niche, geographic market or product line
segment.
The relevance of Porter’s framework to internet-based firms
whose domain is characterised by turbulence and
uncertainty remains the subject of academic debate. His
generic strategy of cost leadership, for exa mple, can be as
viable a strategic choice for web-enabled commerce as it is
for off-line businesses (Kim, et al., 2001). Low price
suppliers remain appealing to price-sensitive online buyers.
The web facilitates price comparisons by making tools
available which reduce search costs and thus enables
customers to benefit from nearly perfect information,
acquired at little or no cost (Bakos, 1997). However, pursuit
of the lowest price is not necessarily the reason customers
purchase items on the web as indicated in a study by J P
Morgan (1999). This survey highlighted support as the main
criterion for such customers. Price was important only to
19% of the respondents.
S.Afr.J.Bus.Manage.2004,35(1) 37
A successful differentiation strategy is built on factors
including design, brand image, reputation, technology,
product features, networks and differentiated customer
service (Kim, et al., 2001). Differentiation should not be
imitable. Such differentiating elements are applicable to
internet firms.
Porter’s focus strategy targets specific groups of buyers or
product lines. These strategies rely on low costs or
differentiated products and services. A new entrant web
firm can compete against large established firms by focusing
on a particular niche, such as eBay taking on Sotheby in the
auction market (Cohen, 2002). A focused strategy increases
the chance of survival and success and may function as an
entry barrier. Lower investment levels required by online
businesses enable lower break-even points. Thus, targeting
even small market segments can be a viable strategy for
online firms. Customers may be easily connected with firms
that focus on niche markets due to the web’s pervasive
search capabilities (Kim, et al., 2001:6).
The resource-based view of the firm
Needing to go beyond the industry explanation gave rise to
the resource-based view (RBV) of the firm. The basic
principles have been extensively documented and reviewed
(Barney, 1991; Hamel & Prahalad, 1990; Priem & Butler,
2001). This view of the firm builds on Schumpeter’s (1934)
perspective of value creation which views the firm as a
collection of resources and capabilities. This perspective,
more than that of strategy, begins to parallel the concept of
the business model.
The RBV posits that marshalling and uniquely combining a
set of complementary, specialised resources and capabilities
can create value (Rayport & Jaworski, 2001: 79-87). These
capabilities are heterogeneous within an industry, are scarce,
durable, not easily traded and difficult to imitate (Barney,
1991; Hamel & Prahalad, 1990 & 1994). Such resources and
capabilities are valuable if they reduce a firm’s costs or
increase its revenues compared to what would have been the
case if the firm did not possess those resources. Utilisation
of the resource is more important than its possession and a
resource only becomes a competitive advantage when it is
applied to an industry and brought to market (Kay, 1993).
It can be seen from the above that the Porter and RBV
frameworks are not mutually exclusive. Also evident is how
strategy mediates between the organisation and its
environment. The internet, however, has introduced
changes in resource markets. The economic environment is
moving towards networks, open markets, mobile labour and
information abundance.
Resources are becoming increasingly tradable and the
advantages accruing from market position and strategic
imitation are falling (Fahy & Hooley, 2002). Careful
analysis of an enterprise’s web-related activities and that of
its stakeholders now give clues to its competencies (such as
alliances, vendors, value chain, technologies, skills and
pricing policies) previously invisible to a competitor. Such
transparency facilitates the imitability of competencies. In
fluid resource markets sustainable advantage is reinforced
by assets that are not easily discernable.
The resource-based approach to strategy has gradually
become a perspective that combines realism with rigour but
has shortcomings. ‘The debate over the resource-based view
has so far been largely conducted either theoretically or
empirically at the macro-level, with large-scale statistical
studies the weapon of choice. …With no firm conclusions
emerging, the macro approach to the resource-based view is
in danger of failing to deliver against its promises’ (Johnson,
Melin & Whittington, 2003:6). To add complexity to the
RBV in the networked economy is the increasing criticism
against it for failing to show where and when knowledge
resources are of competitive advantage (Zack, 1999).
Internet-based businesses are dynamic and have learnt to
cope with and adapt to rapid changes in what has become a
hyper-competitive environment (D’Aveni, 1994 & 1998) in
which speed, surprise and innovation are the winning bases
of competitive advantage (Brown & Eisenhardt, 1997).
Hyper-competition impacts both the level and the frequency
of strategy activity. Fast and innovative responses to
competition require organisational decentralisation moving
strategic decisions to line managers who are closer to the
customers. Strategic innovation increasingly involves
managers at the periphery, rather than just those at the centre
(Hamel & Prahalad, 1996). The hypercompetitive situation
takes strategy-making from measured cycles into a much
more continuous process (Brown & Eisenhardt, 1997).
Strategy formulation has become a routine feature of
organisational life. With its impact on level and frequency,
hyper-competition makes of strategy something in which
more people are involved, more often than ever before.
Progress on content issues in strategy is beginning to rely
increasingly on a ‘micro perspective view’ (Johnson, et al.,
2003:6).
In the traditional pre-internet economic paradigm, the
position- and resourced-based views have tended to
dominate the academic strategy debate as they endeavour to
explain the variance in the performance of businesses. These
perspectives were developed and published in times of a
more predictable economic environment than the one
prevailing today. Developments surrounding the internet
have brought about significant change. Just how material
these changes are, and what new demands are made on
strategy, need to be explored in an economic context.
The economic landscape
The new drivers of growth have introduced fundamental
economic change. Such developments could begin to
question the role of traditional competitive behaviour and
the appropriateness and validity of its associated strategies
in this environment. In the e-business literature various
writers (Kalakota & Robinson, 2001; Rayport & Jaworski,
2001; Tapscott, Ticoll & Lowy, 2000) echo the sentiments
of strategic management authors, Thompson and Strickland
(2001:225), who maintain that ‘the impact of the internet
and the rapidly emerging e-commerce environment is
profound. …There can be no doubt that the internet is a
driving force of revolutionary proportions’. Developments
38 S.Afr.J.Bus.Manage.2004,35(1)
of this magnitude that impact on the entire world do not
happen very often. When they do, it may seem as if the old
rules no longer apply. Although this is a widely accepted
popular proposition it is a view not necessarily shared by all.
The new drivers of technology and inter-connectivity have
changed ways in which economic entities interact. The
choices now available to customers, management’s
knowledge of competitor behaviour such as dynamic pricing
and channels used for delivering knowledge content, have
introduced new behaviour. When the telephone enabled
communications and mechanisation produced the production
line, firms had the choice, at their peril, of ignoring the
shock created by these interventions or embracing the
concomitant benefits. This same dilemma faces business
today.
In the networked economy, economics is no longer the study
of scarcity. Customers are confronted with abundance, as
many of the non-physical, knowledge-based products of the
networked economy are reproduced and distributed at near-
zero marginal cost (Tapscott, et al., 2000:5) making the
creation of value that much more of a central purpose in
today’s businesses. The new drivers in the economy and the
changes in the environment have encouraged some
entrepreneurs to adopt novel approaches to value creation.
In doing so, however, some businesses have irrationally
overstepped the mark and almost abandoned strategy along
with its rich and valuable heritage, the point made earlier.
The concept of value and the rise of the
business model
Competitive behaviour is the rationale for business strategy
development - a truism in any free market. Customer
interconnectivity has driven firms to disregard traditional
boundaries and raised inter-firm collaboration to heights not
seen before. Value creation can now be shared among firms
from different industries and in vastly different geographical
locations (Awad, 2002). The reach of the internet enables
customers to have a wider choice and be better informed
than ever before (Evans & Wurster, 1999). Such challenges
exist in the dynamic, networked and highly competitive
domain of the e-commerce firm.
Traditional approaches to strategy formulation and the
perceived indifference of strategy content towards alliance
formation (Tapscott, 2001), confusion around generic
strategy deployment (Murray, 1988), its lack of dynamism
(Eisenhardt & Martin, 2000) or focus on customer-centricity
(Hax & Wilde, 2001), all of which are becoming
prerequisites for success in the networked economy, have
driven some internet-spawned businesses to seek new ways
of competing and creating value in virtual ma rkets.
Value opportunities from non-traditional sources are
embedded in digital exchanges. Value is a prized
commodity that has exchange potential in an open market.
The characteristics of virtual markets impacting on value-
creating economic transactions include the ease of extending
a product range to include complementary products,
improved access to complementary assets, new alliances
among firms, the potential reduction of asymmetric
information among economic agents through the internet
medium, and real-time customisability of products and
services (Amit & Zott, 2001). Industry boundaries become
porous as value chains are redefined (Sampler, 1998). This
in turn may affect the scope of the firm as opportunities for
outsourcing arise in the presence of reduced transaction
costs and increased returns. A transaction occurs when a
good or service is transferred across a technologically
separable interface; when one stage of processing terminates
and another begins (Williamson, 1983). Value creation
flows from cost reductions through transaction efficiencies.
One of the main benefits of transacting over the internet, or
in any highly networked environment, is the reduction in
transaction costs it engenders.
According to a recent survey the cost of sending 1 trillion
bits electronically has, over the past 30 years, dropped from
$150,000 to $0.12 (Economist, The, 2000:6). This
development, coupled with the emergence of virtual
markets, has changed the way companies operate and
structure economic exchanges.
The opportunity for wealth creation which has become
available is not a recent phenomenon. Early examples of
value creation through structural innovation became evident
in the early 1900s as vertically-integrated, industrial
corporations began to feature strong supply-chain
hierarchies. This led to businesses making process and
structural innovations which resulted in new ways of
production, for example, through collaborative networks
leading to outsourcing and the formation of virtual
corporations (Tapscott , et al., 2000:14-15).
Economic development and new value creation through the
process of technological change and innovation first
observed by Schumpeter, identified several sources of
innovation, or value creation, including the introduction of
new goods or new production methods, the creation of new
markets, the discovery of new supply sources and the
reorganisation of industries. Schumpeter’s notion of
creative destruction (Becker & Knudsen, 2002:394) was
developed after noting that certain economic rents, or
income streams, become available to entrepreneurs
following disruptive technological change. These
diminished once the innovation became an established
practice. Schumpeter (1934) highlighted the contribution of
individual entrepreneurs and placed an emphasis on the
innovations and services rendered by the new combinations
of resources. Firms may differ in terms of the resources and
capabilities they control until some exogenous change, or
Schumpeterian shock, occurs. Value creation in virtual
markets comes from exploiting relational capabilities and
complementarities between a firm’s resources and its
capabilities, for example, between online and offline
capabilities.
In the mid-1980s, Porter published a framework analysing
the process of value creation at the organisational level. He
defines value as ‘the amount buyers are willing to pay for
what a firm provides them. Value is measured by total
revenue. A firm is profitable if the value it commands
exceeds the costs involved in creating the product’ (Porter,
S.Afr.J.Bus.Manage.2004,35(1) 39
1985:38). Porter’s analysis identifies activities of the firm
with their concomitant economic implications. It includes
defining the strategic business unit, identifying crit ical
activities, defining products, and determining the value of an
activity. The value chain framework addresses the activities
a firm should perform. It identifies the configuration of the
firm’s activities that enable it to add value to its products
and compete in its industry. Value chain analysis
concentrates on the primary activities having a direct impact
on value creation, and support activities affecting value only
through their impact on the performance of the primary
activities. He posits that value can be created by
differentiation through activities that reduce buyer costs or
raise buyer performance. The drivers of product
differentiation, and hence sources of value creation, are
policy choices, linkages within the value chain or with
suppliers and channels, timing (of activities), location,
sharing of activities among business units, learning,
integration, scale and institutional factors. He maintains that
information technology creates value by supporting
differentiation strategies.
Testing Porter’s concepts in the networked economy led
Rayport and Sviokla (1995) to advocate the existence of a
virtual value chain that includes a sequence of gathering,
organising, selecting, synthesising and distributing
information. This revised concept corresponds better to the
realities of virtual markets and in particular highlights the
value of information (Shapiro & Varian, 1999). These
authors propose that e-business value creation can result
from combinations of information, physical products and
services, innovative configurations of transactions, and the
reconfiguration and integration of resources, capabilities,
roles and relationships among suppliers, partners and
customers.
Theoretical frameworks continue to make valuable
suggestions about possible sources of value creation
(Hackney & Burn, 2002; Hax & Wilde, 2001; Scott, 1998;
Zott, Amit & Donlevy, 2000). Some insights are the results
of research in the fields of entrepreneurship and strategic
management. Value drivers raise the question of precisely
which sources of value are of importance to e-businesses
and whether such entities can be identified in the context of
their businesses. Each theoretical framework, though, has
some limitations when considered in the context of highly
interconnected electronic markets (Amit & Zott, 2001:500)
and these authors maintain that this reinforces the need for
the identification and priorit isation of the sources of value
creation in e-business.
For some networked economy firms seeking to pinpoint the
source of value, the temptation to attribute shareholder
wealth creation solely to a business model was inevitable.
The consequences have often been negative (Krantz, 2000).
Given the correct context, the contribution of a business
model has been proven to be nothing more than a useful
starting point.
The context of the business model
Neither of the misconceptions among internet-spawned
firms, that traditional process and content of business
strategy is no longer relevant (Bertsch, et al., 2002) or that a
good business model assures longevity (Krantz, 2000), is
precisely valid. For most of the last century a well-crafted
business strategy did deliver successful competitive
advantage as many works on strategy will testify
(Christensen & Raynor, 2003; Porter, 1985; Thompson &
Strickland, 2001); some maintain that this will always be the
case (Porter, 2001). However, as was shown earlier, the
advent of the internet and its concomitant technologies
introduced irreversible and fundamental changes to the
domain of e-business. There is also the fallacy that business
models alone indicate successful performance for such firms
(De, Biju & Abrham, 2001; Finke lstein, 2001; Kanter,
2001).
A model is an abstract representation of reality that defines a
set of entities and their relationships. A business model most
commonly describes the linkage between a firm’s resources
and functions and its environment. It is a contingency
model that finds an optimal mode of operation for a specific
situation in a specific market. The evolving business model
concept is derived from a quest for value creation driven by
environmental developments and infrastructural
opportunities.
The business model, as a concept, is loosely defined in the
literature. ‘There has been no attempt to provide a
consistent definition for a business model in the Internet
context’ (Mahadevan, 2000:56). According to Eisenmann
(2002) business models are widely used but rarely defined.
Practitioners once resorted to using the term to describe a
unique aspect of a particular internet business venture but
this resulted in confusion. Timmers (2000:32) concurs and
states that ‘the literature … is not consistent in the usage of
the term ‘business model’ and, moreover, often authors do
not even provide a definition of the term’. The most quoted
descriptions of business models are those of Timmers
(2000), Amit and Zott (2001), Afuah and Tucci (2001) and
Magretta (2002).
A business model is an architecture for product, service and
information flows, including a description of the various
business actors and their roles; a description of the sources
of revenues, and a description of the potential benefits for
the various business actors (Timmers, 2000). Amit and Zott
(2001) view a business model as something that depicts the
content, structure, and governance of transactions designed
so as to create value through the exploitation of business
opportunities. A business model includes the design of the
transaction content, structure and governance. Afuah and
Tucci (2001) find a business model to be a method by which
the firm builds and uses its resources. Their business model
consists of components, linkages between such components
and the dynamics between them. In a larger context,
Magretta (2002) sees the business model as a variation of
the generic value chain underlying all businesses and
comprising the business activities associated with making
something and the business activities associated with selling
something.
There are several other definitions which contribute to the
overall concept and understanding of the context of the
business model (The e-Factors report of the European
40 S.Afr.J.Bus.Manage.2004,35(1)
Commission, 2002). Weill and Vitale (2001) view business
models as a description of the roles and relationships among
a firm’s consumers, customers, allies, and suppliers that
identifies the major flows of product, information, and
money, and the major benefits to participants. Elliot (2002)
posits that a business model specifies the relationships
between different participants in a commercial venture, the
benefits and costs to each and the flows of revenue. In an
effort to develop a more comprehensive concept,
Mahadevan (2000) combines business models into a blend
of three business-critical streams: The value stream which
identifies the value proposition for the business partners and
the buyers, the revenue stream, a plan for assuring revenue
generation for the business; and the logistical stream which
addresses the supply chain of the business.
In their hierarchical representation of a business model,
Petrovic, Kittl and Teksten (2001) build on the work of Alt
and Zimmermann (2001) who identified generic elements
present in most definitions. Petrovic et al. (2001) expand
the business model contextual scope to include the internet
and dynamic business evolution. Their analysis begins by
viewing a company as an organised social system composed
of interdependent parts delineated by identifiable boundaries
whose boundary-spanning activities enable it to persist and
evolve over time. They then posit that a business model
describes the logic of a ‘business system’ which is the
source of value creation. In similar fashion Applegate
(2001) sees the business model as describing the structure,
relationships among elements and its response to the real
world.
From the numerous and often disparate definitions
illustrated above, it can be seen that the business model as a
concept is presently in the early stages of its evolution and
benefits little from its turbulent and dynamic contextual
environment. It is unwise at this juncture to attempt
absolute claims of definitive explanation or even to opt for
one single definition; in the context of this paper such an
approach is also unnecessary.
The deep conceptual differences between strategy and
business models could easily be confused by an ill-informed
web entrepreneur. Given the naivety of some of the early
web pioneers and their management inexperience it is not
unlikely that this confusion contributed to some dot.com
failures (Afuah & Tucci, 2003; Chaffey, 2002). A business
model exp lains how an enterprise works. It approximates a
value chain as it includes a description of all the key
business processes, the flows of products, services and
information associated with these processes. It also
describes the participants in the business venture, including
the roles and relationships, as well as transactions completed
between the players. It is interesting to note that neither
competitive advantage or industry environment, nor the role
of business models in securing these, are considered
significant. Thompson and Strickland (2001:4-5) view a
business model as being more focused than strategy and
concerned with financial success. Strategy places more
emphasis on competitive initiatives while business models
deal with revenue flow and viability.
Business models and strategy
According to the classical view, strategy undergirds the
relationship between an enterprise and its environment. In
much of the foregoing analysis the preoccupation of strategy
with futurity is clearly identified, as is the need for the firm
to formulate effective strategies to defend its competitive
position. Strategy formulation also relies on analytical
procedures. The position-based view demonstrates the
potential of rents flowing from appropriate industry
positioning. The resource-based view, among others, shows
the importance of effective systems and the ability, as a core
competence of the firm, to rapidly deploy these to meet the
dynamic needs of the business. The attitude of the firm
toward identifying and managing risk is also a trait of an
effective strategic management process. These then are
some of the critical performance characteristics sourced
from the study of strategy which are relevant to any business
whether in the networked economy or not. Business models
identify other factors.
In a perfunctory exploration of the strategy-business model
relationship, two authorities on business models, Elliot and
Magretta, have endeavoured to understand the linkage
between the concepts. Elliot (2002:7) considers business
strategies as specifying how a business model could be
applied to the market to differentiate the firm from its
competitors. Magretta (2002:3), in a broader sense, contends
that ‘...a good business model remains essential to every
successful organisation, whether it’s a new venture or an
established player’. Simplistically, both Elliot and Magretta
agree that a business model is different from a business
strategy in that the latter approach is more concerned with
creating and defending an effective competitive position.
Strategy, they contend, defines how a business organisation
can do better than its rivals; it also embraces principles of
differentiation. In another approach, Osterwalder and
Pigneur (2002) believe that business mo dels are the link
missing between strategy and business processes. To them
business models form the linkage between the planning and
implementation levels of a business.
Different frameworks facilitate the identification of relevant
characteristics which may predicate performance. They also
provide useful ways to classify, organise or describe
business models according to a set of principal dimensions.
There are three taxonomies of business models frequently
encountered in the literature, each making its own unique
contribution. In his framework Tapscott et al. (2000)
classify collaborative businesses while Timmers (2000) uses
degrees of innovation and functional integration. Rappa
(2002) differentiates by source of revenue or revenue
streams. The first two taxonomies are contextual while the
latter is functional. Each of these frameworks identifies
performance factors which can be attributed to business
models and entails a different approach. Timmers (2000)
examines business models from the point of innovation and
functional integration. Tapscott et al. (2000) evaluate
different business models from the point of collaborative
business webs such as portals, intermediaries, and
infomediaries. Rappa (2002) presents a view, where the one
eminent factor of separation is the source of revenue.
S.Afr.J.Bus.Manage.2004,35(1) 41
Expansions outside the firm boundaries are emerging. There
is a trend towards a contingency approach where alliances
and networks of companies are established as and when
needed. There are competing trends towards tighter co-
operation between competing value chains.
Business models have been further reduced, in the literature,
to their individual comp onents. The components of a
business model reveal how firms structure and implement
their models in the networked economy. A business model
shows how a web firm plans to make money in the long
term. The various components must work together and have
clearly defined linkages. As with the definition of a business
model, there is a dearth in the literature of agreement on the
key components of a business model. The analysis of Afuah
and Tucci (2001) is useful in that it relates the component to
the strategy employed by the business.
In essence, therefore, business models shape the specific
value-creation behaviour of a commercial web-enabled
enterprise. Their product is the revenue-generating ability
of the firm. Just as strategy is concerned with futurity, so
business models have an undisguised passion for customer-
centricity as the source of value creation. Characterised by
innovation, functional integration and all iances, economic
innovativeness and the ability to leverage value from its
value chain, the distinguishing characteristics of business
models appear different from those of strategy, but are
equally important contributors to effective web-enabled
performance.
Business models, per se, are not complete. As the above
analysis demonstrates, certain explicit considerations are
absent from the business model concept. Not readily
identifiable are the factors of strategic intent, sustainable
competitive advantage, objective setting, environmental
analysis and industry positioning, all of which are favoured
by informed strategy.
In order to discourage accusations of parsimony the study on
which this paper is based continues with a further analysis
of electronic business ventures, beyond the realms of
strategy and business mo dels, in an effort to uncover what
other factors could contribute to the performance of web-
enabled ventures. In the process, the concept of strategic
architecture is given new meaning.
Strategy and business models: underlap and
strategic architecture
So far the discussion has centred around the dangers of
either blindly applying traditional strategy or relying solely
on a business model for effective performance in the
networked economy. The question arises whether there are
any ingredients missing and what they might be.
It is effectively beyond the scope of this paper to
comprehensively address this issue. In seeking answers a
study is in progress that will identify the critical success
factors sourced from strategy and business models, probe for
missing elements and describe the linkages between them.
It is possible, for example, given the emphasis on managing
businesses in a turbulent, networked environment that being
able to create and respond swiftly to market change and to
match resources to dynamic and networked markets may
require a firm to develop an ability for dynamic pliancy. In
similar fashion, given the enthusiasm and dedication of the
founders and e-entrepreneurs, and the need to unite and
create a motivating climate for the people in the
organisation, the existence of harmony, considered as the
output of successful alignment behaviour, may also be
indispensable. Finally, since many products developed for
and traded on the internet are high in knowledge content,
often with little or no material substance, managing
knowledge may also be a key differentiator.
A theoretical research construct, the strategic architecture of
commercial web-enabled enterprises (STRACWEN) has
been developed. Its dimensions are based on strategy and
business models, mediated by configuration theory (Miller,
1986), dynamic capability (Eisenhardt & Martin, 2000) and
knowledge management (Skyrme, 2000 & 2001). This
construct will be used to measure the strategy of e-
commerce businesses and correlate it with their
performance. The phrase ‘Strategic Architecture’ has been
used before but in a different context (refer Hamel &
Prahalad, 1990; Kiernan, 1993).
Conclusion and implications
The new rules for business success in the networked
economy place a premium on value creation and its
concomitant proposition. To benefit most from the
Schumpeterian rents spawned by the internet and its
technologies, firms have employed value creation concepts
which have been historically grounded on internalising
transactions and improving efficiencies, both of which lend
themselves to the application of technology. In so doing
however the new entrepreneurs have tended to underplay the
value of business strategy, often with inauspicious
consequences.
The prima facie role of strategy is the pursuit of competitive
advantage. Its rich heritage spanning almost a century of
business endeavour has produced a valuable compendium of
proven tools and techniques. The purpose of strategy is the
achievement of a desired future. In this process competitive
behaviour, objective setting, environmental analysis,
analytical procedures, risk management and effective
systems have become some of its valuable characteristics.
In contrast, the business model is a more recent
phenomenon, augmented by the internet and underpinning
the value creation process. When intuitively and
irresponsibly applied to web-spawned business, it has
created a mistaken belief amongst less-informed
businessmen that it is the sole means to sustainable
commercial viability.
Internet business is evolving and firms are grappling with
the new rules for competing successfully in the networked
economy. Developing and implementing new or changed
business models requires entrepreneurial flair and careful
management of risk. The leaders of such ventures develop
business models aimed at releasing latent value in
42 S.Afr.J.Bus.Manage.2004,35(1)
technology but in the process become blinded to the fact that
although the economic rules may be different, the basic
ethos of business remains the same. This view may also
have contributed towards the disregard for the value of
strategy.
The dot.com failures of 2000 have given no credence to the
demonstration of management possessing a clear grasp of
the relationship between strategy and business models.
Neither has the loose definition of a business model helped
clarify the issue. A business model is the product of
management’s inexorable quest for the best customer value
proposition, wholly concerned with customer centricity. Not
readily discernable from the pure business model however,
are the factors of strategic intent, sustainable competitive
advantage, objective setting, environmental analysis and
industry positioning, all of which are elements of strategy.
Neither strategy nor business models, in isolation, indicate
success for electronic businesses; both are required, and
more, as this paper has argued. Active debate between
strategists and e-business practitioners will eventually lead
to the realisation that strategic intent and value creation
remain the foundations for effective performance of every
networked economy firm. From that moment, and only from
that moment, will the sleeping partners of strategy and
business models cease being strange.
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