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Assignment1-StrategyInvestigation.docxMaria M. Andersen ORGM5000 01.04.2018
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Strategy Investigation
Examining the Grown Popularity of the Business Model
By Maria M. Andersen
This paper will examine the use of the traditional approach to strategy, while looking into reasons as to why there has been such a significant increase in the use of business models within the organization over the last two decades. When talking about business strategy and business model, some might confuse the two of them as the same. Hence, this paper will explain both the differences and similarities of a strategy and a business model, and furthermore how they might complement each other. In order to gain a greater understanding of these elements, this paper will study the strategy and business models used by Apple Inc. and Nokia, and look into the reasons as to why Apple have had such great success, while Nokia did not.
Before going in depth of analyzing the traditional approach of strategy and the business model, it is important to understand the definition of each. In some people’s eyes, the distinction between the two hardly exists. However, understanding the difference is what might separate a successful company from the unsuccessful ones.
A strategy may be defined as the plans and actions that a company decides to take on in order to achieve their goals (Grant et al. 2014). Furthermore it is a set of commitments and actions that are integrated and coordinated within the organization in order to exploit their core competencies and gain competitive advantage (Hanson et al. 2014, 5). Abraham (2012, 10) also make a simple description of what a strategy is in his article “Strategic Planning: A Practical Guide for Competitive Success”, referring to a strategy as “how a company actually competes”.
The business model on the other hand is a conceptual structure or framework that provides a basic template for an organization on how to successfully operate the business, and how they create, deliver and capture value (Grant et al. 2014, Osterwalder 2010, 14). Simply placed, the business model refers to the logic of the organization along with how it operate in the market and how the firm is creating value for all its stakeholders (Casadesus-Masanell and Ricart 2010).
When looking at the strategy and the business model from a broad perspective, a main difference between the two is that a business model is more generic than a strategy (Teece 2010). One simple distinction between strategy and business model may be how Margretta explains it in “Why Business Models Matter”, stating that a business model is the description of how the business is being run, while the strategy explains how you can do better than your competitors (Magretta 2002). Hence, making sure that the business model is closely linked to the strategy of the company is critical in order to ensure that the business model helps achieving competitive advantage (Teece 2010).
The founder of the modern strategy field, Michael Porter stated to Magretta in an interview (2012); “the business model is the most basic step in thinking about the viability of a company. If you’re satisfied with just being viable, stop there. If you want to achieve superior profitability, then strategy – as I define it – will take you to the next level”. In essence, the business model and the strategy complement each other. In order to protect competitive advantage, connecting the strategy and the business model is necessary as they are mutually dependent (Teece 2010, Hough 2011). As described by J. Hough (2011), “the model describes how value will be created and the strategy acquires the necessary capabilities”. Furthermore, Hough (2011) argues that if the two are not properly connected, the strategy is likely to not succeed, and the business model will not be delivering any value. Hence, the business model and the strategy are related, yet different concepts that are dependent on each other in order to achieve competitive advantage.
There are different views on exactly how the concept of business models has evolved over time, but the common denominator is that the use of business models within the firm has become more active and innovative than ever before (Spieth, Schneckenberg and Matzler 2016). Throughout the evolution of the field, different approaches such as the industrial organization theory and the resource-based view, has created a greater understanding of the dynamics of competition, resources and capabilities within the organization (Casadesus-Masanell and Ricart 2010). However, the changes happening in the external environment, such as globalization, deregulation and technological changes, have had an even greater impact on the grown popularity of business models as these factors have enabled firms to do business in an entirely new way than ever before (McGrath 2010).
Industries, management and strategy literature has during the last two decades gained a greater interest for the concept of business model (Nisa and Ravichandran 2013). The concept has mutated over a period of time, where the term business model itself had its first appearance in computing magazines in the 1970s, followed by magazines for the general public in the early 1990s before academic publications finally started using the term in the late 1990s (Nisa and Ravichandran 2013). In the earlier years, business models were often talked about within the firm, but it was infrequently evaluated (Teece 2010). This seems to have been a sufficient approach in the past, but then the environment, along with consumer behavior and innovation started changing.
These changes in the environment have increased the necessity of addressing customer needs more carefully, but also amplified the need for innovation of new products and services within the firm in order to differentiate themselves and capture value (Teece 2010). Hence, frequently evaluating the business model will allow the firm to assess the market position of the company and do a health check of the overall performance (Osterwalder and Pigneur 2010, 212). However, merely developing a good business model will not be sufficient in order to achieve competitive advantage, as the model might be easy for competitors to imitate (Ovans 2015). In order to develop a successful business model, it must be differentiated, which will make it harder for competitors to replicate, while it is effective and efficient. This is what is known as business innovation according to Stan Abraham, which in itself can be a passageway to competitive advantage (2012, Teece 2010).
In order to gain a greater understanding of how one might use strategy and business models to become a successful player in the industry, this paper will look into the usage of the two within Apple Inc., while examine why and how they managed to outcompete some of the biggest existing players.
Alexander Osterwalder and Yves Pigneur demonstrates a good example in “Business Model Generation”, presenting how Apple introduced the iPod in 2001, a music device enabling the users to download and listen to a thousand songs – straight from the pocket. Together with the iPod, Apple also developed the software called iTunes, which allows the consumers to transfer music, photos and other content from their iPod directly to their computer. However, iTunes was not only a conjunction from the device to the computer, the users would also be connected with an online store, Apple Store, where users could buy content or downloading for free. This type of bundling, giving the consumers access to not only the music device, but also the innovative software of a platform along with an online store made sure Apple gained a central market position (Osterwalder and Pigneur 2010, 47)
Before Apple even introduced the iPod, portable media players was already a successful product in the music industry, with companies such as Diamond Multimedia with their device called Rio. Nevertheless, when the iPod was introduced to the industry, Diamond Multimedia had to call themselves beaten by Apple. The reason as to why Apple managed to outperform the already existing and successful companies was due to the active use of business models. The value proposition of Apple was to allow the users to search, buy and enjoy music digitally. However, in order to make this possible, Apple negotiated with all the big record companies and managed to sign deals with them, which made it possible to create the world’s biggest music library online. Conversely, instead of thinking the traditional way of how they should go about to gain as much revenues as possible from this music library, they use the music store as a protection shield from their competitors as this is the key factor that differentiates the iPod from other portable music devices (Osterwalder and Pigneur 2010, 47).
Furthermore, what has made Apple stand out as the powerful company they are in today’s technology industry is how they, since the launch of the iPod, have managed to transition into the use of a business model pattern (Johnson and Foss 2016). They started out with the iPod as a standalone device in 2001, introduced iTunes in 2003 and then later on presented the App Store. This demonstrates how Apple continues to examine the customer needs, and making sure they align their innovations with it (Osterwalder and Pigneur 2010, 84).
A business model must surely be a logical way of doing business, but in order to be a successful business model, factors such as the customer needs has to be addressed along with making sure the model is difficult for competitors to replicate (Teece 2010). During the last decades, there has been a grown understanding stating that a company should primarily focus on understanding their own business model, examine whether it is creating value to its customers or not, and then alter the business model based on their findings through innovation and creativity in order to set it apart from its industry (Abraham 2013). According to Abraham (2013), Apple is one of the most well known examples where business model innovation has been used, with its combination of technology, service and product innovations that have resulted in several industries re-inventing themselves.
Not long ago, it was Nokia who was the dominant mobile phone maker in the world, while in Q4 of 2017 Forbes reported that they had only 1% of the market share in the smartphone market (Spence 2018). One might wonder why or how this happened, since Nokia historically has been know for being an adaptive company, moving in and out of several businesses. Nokia was even one of the first companies to come up with the smartphone back in 1996 and actually built a prototype of the touch screen (Anwar 2014). However, what Nokia was not successful at was actively using the business model, hence they did not follow they evolution of the environment and customer needs and was thereby unable to translate their research and development into products that was attractive enough for the users to buy (Spence 2018).
These events and changes in the environment, that has caused the business model to grow in popularity, mirrors the arguments many scholars researching innovation, entrepreneurship, and strategy today are giving about where the firm’s focus should be: “on the demand side of the value equation rather than on the resource side” (Priem, Li and Carr 2012). Traditionally, the resource-based view has been the main strategy for companies, with the exception of the industrialized organization paradigm introduced by the work of Michael Porter (Hoskisson, et al. 1999). The demand-side research emphasizes the importance of considering the consumer needs by looking downstream in the value chain towards the product markets, concentrating on creating value rater than capturing value, while examine strategies within demand-side rather than resource-based factors (Priem, Wenzel and Koch 2018).
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