Business Model and Strategy Lead to Success

The term “business model” has acquired a wide relevance from the early 1990s through the developing technologies, and the foundation of the first internet-based companies which allowed the spread of the information and facilitated the communication (Carlos M. DaSilva, Peter Trkman, 2014).

Companies have started to analyse the environment they compete in, to define the position they occupy, to develop competitive advantages both from the business level and corporate level perspectives and to maintain these advantages sustainable from the competitors’ threats (Casadesus-Masanell Ricart, 2010). In the last two decades, the term “business model” has been misused and has become commonly used in entrepreneurship, literature and even media. In reality, this concept does not have a precise theoretical foundation in the economic-business sciences. Furthermore, the business model is often misinterpreted and confused with other terms typical of managerial literature, such as strategy; however, as I already mentioned, after the introduction of advancing technologies, it started to acquire the meaning through which it became well-known nowadays (Carlos M. DaSilva, Peter Trkman, 2014). Although there is not an appropriate definition of what a business model is, two main concepts can be extrapolated: firstly, apart from analysing what companies do, it emphasises how companies do business; secondly, it seeks to interpret the way firms create and capture value (Jaqueline Pels, Tomás Andrés Kidd, 2015 ).

An important consequence derives from this value creation every company must focus on it if it wants to keep a step-up in business: It allows companies to sort out the competences required in the business they are in and identify which of them are affecting the competitive advantage they have towards their competitors.

A successful driver to sustain this competitive advantage is the ability to innovate the products, services, and processes. Every company should focus on adapting to the environmental changes through innovating their business models while keeping the competitive advantage on the market. If companies are not able to introduce innovative changes to their business model because of an inability to maintain the market pace, they risk dropping down the competition.

Companies must amply examine the customer they are serving and by the agency of this analysis identify the customer’s needs which are still unsatisfied. Therefore, the aim of them becomes fulfilling those needs by providing them a different vision of products or services, making them understand the benefits the innovation is bringing with. Seeing beyond the boundaries of the traditional business models turns out to be gap between a successful company and a failing or “flat” company: developing an inexistent business model would stand for catching a huge opportunity to design an undoubtedly winning future (Stoilkovska, Aleksandra, Natasha Ristovska, Sashko Gramatnikovski, 2015).

Entering the digitalisation era has brought some irreversible facts, for example the velocity things are happening is dramatically increased. Technology has incredibly shorted the product life cycles. Companies with a flexible business model will always maintain the competitive advantage, so being capable of shaping the core activities to further give value to the customer (Leona Achtenhagen, Leif Melin, Lucia Naldi, 2013). People now wants to have the cutting-edge thing to keep up with the last trend. Another reason why innovating allows to be ahead is that nowadays all the companies, especially for product-based ones, need to offer a complete experience rather than just the product itself (Harvard business review, 2011). As Mark Truby (Vice President of Communications, Ford Motor Company) said: “A good story makes you feel something and is universal. They want to grasp your values and your commitment to excellence; be inspired and intrigued. Storytelling is the most powerful way to convey these ideas.”

On the other hand, not all the actions endeavoured to innovate business models are alike and sometimes undertaking the wrong decision could bring to a relentless failure. Managers must choose the right approach when it comes to make a decision about innovating or not business models of organisations. There are four different approaches basing on the different situational challenges that a sector or company might be affected by: the reinventor approach is applied in case of companies within a sector which is progressively degenerating because of commoditization, or the introduction of new regulations, or simply as a loss in the core activities to run the business. Therefore, it is necessary to redefine new value-creating operations starting from a fresh value proposition. The adapter approach is quite different from the first one because the core business would not be able to respond positively to external changes even if reinvented. This is the most drastic approach because companies could even think about egressing the current core business and looking for other opportunities in different markets, forced to develop unknown competences before and having a distinct customer segment.

Thirdly, the maverick approach is about expanding the core business of a company which takes place by an insight of a future breakdown growth. Lastly, the adventurer approach aims to extend the business size by examining adjacent markets. Having a clear direction and a complete understanding of the business you are going to compete in are the minimum requirements to succeed in those new markets (BCG, 2018).

Easy real examples could illustrate what an innovative business model is and what is not. “Kodak” is the most iconic example of a failing business. Kodak has been the first firm to have foreseen the coming digital revolution. In fact, it has been Kodak to invent one of the first digital camera in 1975. What was such the problem then to lead the company to bankruptcy? Mainly the timing.

Kodak's disadvantage was basically the fact of being in a monopoly in America, gaining then a certain feeling of security and this made the company to be less dynamic, moving more slowly and continuing to focus more on its photographic filming traditions, thinking of selling low-cost digital and high-cost photographic films. Kodak thought that the new Chinese middle class would have chosen the photographic film before moving to digital, something that did not happen, and when in the 90’s it tried to convert the chemicals used for the films into medicines did not succeed. Moreover, focusing more on acquisitions rather than its own core activities, the company did not develop its innovative business. Finally, a continuous change at the top of the company has prevented the preservation of a single business strategy.

On the contrary, the Spanish manufacturing company “Zara” highlight a perfect example of innovative business model changing completely the traditional fashion “rules”. Amancio Ortega Gaona, founder of Zara, was the first who pioneered what is called “fast fashion”. This model has completely revolutionized the fashion industry. The emergence of this new trend is due to the evolution of the fashion market that occurred in the 90’s, a market already in itself chaotic, constantly moving and subject to the tastes of the moment, which has faced other remarkable changes such as the tightening of competition, the need for innovation and the greater independence of the postmodern consumer who is increasingly demanding and aware. Therefore, Ortega overcame the traditional concept of seasonality, replacing by the need of numerous mini-collections during the year, presented and delivered to the sales point with the same speed which the customers’ tastes get easily modified. This explains the strategic relevance of the time factor and the need to adopt a quick response logic. Speed of response to the market incitements, the extremely short cycle of production, the continuous renewal of the assortment, the fast turnover of the store, the accessible prices and the attractive design are all the characteristics that made Zara’s innovating business model become a simple example of success (Stephanie 0. Crofton, Luis G. Dopico, 2007).

Business model is a holistic and multilevel concept which, among other things, explains how the company manages the different capital resources at its disposal (physical, financial, intellectual) for the purpose of value creation and takes a central position regarding the communication, especially the company reporting. Since the company is an open system the communication policy assumes a fundamental importance for it because it maintains and manages relationships with the various stakeholders, holders of resources or productive factors, who reveal evident information requirements and can influence the economic-financial, competitive and social performances.

From this perspective, in communication it is important to adopt not only a “pull” logic which indicates the disclosure of mandatory or explicitly requested information having as a central pivot the financial statement, but also a “push” logic which means an additional and “voluntary” informative background (Corvino A., 2008). The dynamic and changing context, the greater sensitivity of the authorities responding to the financial crisis and the environmental and social concerns of the public opinion are few of the several factors that bring the need for a greater flexibility and a complete reporting methodology which provides information on the current company situation and the potential prospects (Beattie Smith, 2013).

The integrated reporting meets these expectations because it provides a complete representation of how the company essentially manages the resources and how its business model impacts on the various stakeholders. Therefore, integrated reporting is an evolutive process of the mechanisms of management that responds to the growing need to measure and fully control the achievement of strategic objectives on the business model organization and better communicate the value created. The integrated report provides a complete, clear and precise representation of how the organization creates and supports its value over time and its main contents concern:

• Presentation of the company and the external environment (risk analysis opportunities) and future prospects;
• The business model;
• The link between strategy, governance, economic and financial performance and social, environmental and economic context in which the company operates.

Moreover, the business model is a useful tool to facilitate the comprehension by the employees of some organisational aspects: the impact of the external key factors on the organisation, the activities aimed to the value creation for the customers, the desired outputs and results, and the position occupied by the company in the business it is running.

As we mentioned above, the confusion and the uncertainty about the definition of a business model are even more accentuated by the lack of a clear distinction between the notion of business model and another concept frequently associated with it: that of strategy. Joan Magretta in his article “why business model matter” gives the example of Walmart which explain the difference between strategy and business model. He highlights the fact that the founder of Walmart did not implement a new business model, but he just adapted the concept taken from some discount store and adjusted it by applying a unique business strategy. Therefore, the success of Walmart is a consequence of its business strategy and not the model that was already used by other organisations.

There are numerous contributions in the literature that have analysed the relationship and have tried to explain the differences between the two concepts mentioned, whose boundaries are not always so obvious and traceable. Casadesus-Masanell and Ricart, in their article “From Strategy to Business Models and onto Tactics” have defined the concepts of business model, strategy and tactics, and then provide an integrated reference framework in order to distinguish and relate them. Therefore, they defined:

• Business model, as the corporate logic, the way in which it operates and how it creates value for its stakeholders.
• Strategy, as a contingent action plan, designed for reaching a specific objective and concerning the choice of the business model through which to compete tactics, as set of residual choices, made between those available depending on the business model identified; these are choices relevant for value creation and more easily reversible, differently from the strategic ones.

So, the goal of the strategy is the choice of the business model, which in turn determines the possible tactics to compete against or cooperate with the other companies in the market.

Lastly, among the numerous interpretations of the business model, we can easily say that one of the most recurring and important concepts we can extrapolate from them is the logic of value creation and capture of value”. The various contributions in the literature have highlighted the focus on the value proposition that companies use to address to their stakeholders and the prominent importance that is attributed to the role of the client. Therefore, the business model aims at cooperation and value creation for all the parties involved in its structure and determines the power of negotiation of the company, on which the total amount of the value created and the percentage of value appropriation by the company depends Four different drivers of value creation are identified:

• Efficiency: through an efficient redesign of the business model ('efficiency-centred design ') you can reduce the costs incurred associated with various activities and therefore increase the amount of the total value created
• Complementarities: this driver refers to the cases in which the joint execution of two or more activities leads to the achievement of a greater value respect to a separate execution.
• Lock-in. It indicates the characteristics of the business model that incentivize the customer and strategic partners to stay sticked to that model and not allow the actors involved to leave it easily for another one. For example, we talk about lock-in when there are high changing costs that may discourage customers.
• Novelty. This parameter refers to three possibilities for increasing the value created by the business model as the implementation of new activities (novelty of contents), new linking systems between activities (novelty of structure), and new governance systems.

In addition to the description of how a company generates value, the concept of business model plays a key role in explaining companies’ performances: it defines the method by which a company manages its resources to offer its customers the best possible value and obtain a profit from this (Christoph Zott and Raphael Amit).

In this article we have tried to analyse the business model concept and the advantages of it. We identified four different drivers and common uses regarding a business model:

• Business model as a driver of innovation
• Business model as a driver of communication
• Business model as a driver of the company’s strategy
• Business model as a driver of value creation and value capture.

Innovating the business model of a company is a necessary operation over time as so not to risk becoming obsolete and losing its competitiveness. The fast fashion introduced by Ortega is the perfect example of innovative business model. Communication within the company and reporting can be improved; employees can better understand and communicate the ideas through a visual representation of the company business model, identifying all the actors and activities needed to create value for the final customer. Moreover, we have seen how strategy is different from business model and we concluded clearly that the strategy aims to choose the best fitting business model. Therefore, if we were about to be asked whether business model matter or not the answer would be absolutely yes because it plays an exceptional role in companies.