Your business strategy is a plan for how your company will make money. Business models, Harvard Business Review says, have also been described as plans for making money, but models and strategy are not the same thing. One way to explain business model vs. strategy is that your model explains how you business earns money; strategy explains how you earn more than your competition.
Tip
Choosing a business model is like choosing between an all-terrain vehicle and a luxury limo — which is best suited for the situation you're driving into? A strategy is figuring out how you're going to get to your destination, when you should stop for gas, and what you need to pack.
So What's a Business Model?
Strategy is a concept most people are familiar with from games and sports. A business model is a more recent concept, credited to a 1994 article by management consultant Peter Drucker. Though the article doesn't use the term "model," it does talk about how companies orient themselves around a set of assumptions. These assumptions define who their customers are, what the company does and what its strengths and weaknesses are.
Drucker uses IBM as an example. For a long time, IBM's assumptions were that it sold or leased business machines; in the computer era, it sold computer hardware. This business model worked well for decades. Eventually, however, software became king, and IBM didn't adapt. It kept focusing on hardware and lost ground to newer, more flexible companies until it changed its assumptions.
The Corporate Finance Institute gives several examples of business models. A manufacturing model involves taking raw materials and turning them into finished products. A franchise company assumes it can make money by providing uniform services in store after store. Stores such as Target or Publix bring together a variety of products and offer them for sale.
For a long time, models had to be developed after the fact. Disney's business model didn't include theme parks until after Walt Disney came up with the idea for the company's first, Disneyland. With personal computers, spreadsheets and marketing research it's now possible to design a model from the ground up, then build your business to fit. You can test out multiple assumptions, see which ones are most likely to work, and incorporate them into your model.
Business Model vs. Strategy
A basic difference between business strategy and business model is that modeling assumptions describe how the business works and what it does. Business strategy is a set of assumptions about how your company can outperform the competition. First you set your goals, and then you come up with a strategy to achieve them. A given company's strategy can be built around reducing risk, running lean or trying radical, unconventional approaches, for example.
Suppose you're an established restaurant built on a business model of providing quality food in an attractive setting. If other restaurants open using the same model, you need a strategy to compete. This could involve a loyalty program, lower costs, acquiring a liquor license or upgrading your marketing game.
When you're drawing up plans for your business, you can play with both strategy and modeling. Your strategy for competing with established companies could be "develop a superior model." Alternatively, you could take an established model and move it into a new industry. Amazon started by selling books. During the pandemic, it redefined itself as a company that delivers groceries to those who were social distancing. Changing its model proved an effective strategy.
Another difference between business strategy and business model is that models don't change as rapidly. They're a more fundamental set of assumptions about how your business is run. The risk for any business owner is that at some point the model stops working. Then you have to make the strategic decision to change the model. If customers are leaving and your model doesn't offer a solution, the model needs to change.
Modeling and Strategizing
The Center for Management Organization & Effectiveness (CMOE) says that ideally, your business model and your strategy would be identical. Part of strategy would be developing an effective business model; the model you choose would incorporate business strategies among its core assumptions. In a world where you're constantly competing with other companies, even if you achieved that ideal, you might have to change it as conditions changed.
Entrepreneur says one of the first steps in creating your business model is to define your target market. A grocery could target consumers willing to pay for quality organic food, who want spices and ingredients for ethnic cuisines or who want large quantities of food cheap. Your assumptions about your market will shape your strategy to reach them. Other modeling elements include your branding, your resources and your business activities.
You can think of your model as a matter of making choices. Policy choices include where you locate your plants or stores, whether you use union workers, and whether you try to go carbon-neutral. Asset choices involves your equipment and technology. Governance choices are about who can make policy and asset decisions. Do you want a centralized model where you make all decisions or should your management team have flexibility to make some of those calls?
Strategizing and Modeling
Modeling may also include initial ideas for your business strategies. In the real world, it's rarely a conflict of business model vs. strategy; they work together, and some elements overlap. There's a good chance you'll develop both at the same time. Strategic thinking often involves thinking about your model.
One example of overlap is what's called the blue ocean strategy. The typical marketplace is a red ocean, filled with fierce competition; in a blue ocean, you sail alone. You get there by offering a new kind of product or service or shifting your old business model to a new environment. Netflix, for example, found success with a model offering a familiar service – DVD rentals – online.
A common approach to strategy is to balance quality vs. cost. You can offer cheap services or goods to a wide customer base, offer more expensive goods by providing a great customer experience, or prioritize expensive quality and service to a smaller group of customers. The strategy then influences your business model. Another approach to strategy is to look at what the competition is doing and calculate, precisely, how to counter and defeat them.
Both business strategy and business modeling are based on assumptions, projections and sometimes guesswork. It's important to leave room for innovation down the road. Your model may not work. Your competitors may neutralize your strategy. Review your original model and strategy regularly and see if they're still working. If not, make changes before the problem becomes critical.
