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Strategy and the Business Model

Mihai Ionescu - Senior Strategy Consultant, Owner Balanced Scorecard Romania, Author

Is it true that you like the 9-boxes Business Model Canvas (BMC)? So did I. But then I've tried to use it in the practice of Strategy Management and I've realized that, for this purpose, it's rather useless, or even toxic. So, I went from liking it to a complete dislike, once the veil of widespread marveled adulation for the nine boxes has raised from my eyes. This article is about how did this happen and about how should the Business Model be presented, for using such representation as a Strategy tool.

What's wrong with the BMC?

Actually, nothing, as long as you want to use it as a customer-focused business assessment tool. But many people (including myself, sometime ago) intend to use the BMC as part of the Strategy Formulation process. That's also the desire of Alex Osterwalder, the 'co-creator' of the Business Model Canvas, to place it straight at the core of Strategy's tool-set, as proven by his 'strategyzer', a platform that promotes the BMC as a pivotal Strategy Management tool.

So, let's rephrase the question: What's wrong with the BMC, as a Strategy tool? My answer: Everything, because it ignores the fundamental components, causality and priorities that define the Strategy. It's like the Business Model Canvas has been created by a salesperson, not by a Strategy thinker. Let's see why.

Take a look at the diagram below, which maps the Strategy components with the BMC template. What abnormal things do you notice?

First of all, you may notice that some BMC boxes are located in the wrong places. For instance, the Revenue & Costs, which are part of any business' Strategy success quantification, should have been placed on top of the layout, not at the bottom, as if they would be some sort of enablers for the rest of the model. In which business representation would you put the 'top goals' at the bottom? Think again: Are they 'top goals' or 'bottom goals' for you?

Furthermore, you can see that some Strategy components are split and spread throughout the model, rather than being consistently placed in the same position, as required by their role in Strategy's logical construct. Let's be specific: The combination of Value Proposition (how-to-win) and Market Boundaries (where-to-play) is what determines our customers to buy from us and to remain our customers. If our competitors target the same customers (they play within the same Market Boundaries as us), it's the Value Proposition which determines if we win against our competitors (or make them irrelevant), or not.

In the same way, our Market Boundaries choices (where-to-play) are determining how well do we target our desired customers (and not others!), how adapted is our Value Proposition to their specifics (and not to those of others!), how convenient is for these customers to purchase (sales channels) and use our products or services (customer services). Many people are very confused about the scopes of Corporate Strategy and Business Strategy, thinking that the Market Boundaries choices (where-to-play) are decided at corporate level, not at business level. Think again. For instance, when we create a blue ocean, deciding to employ certain new competitive factors, along the Value Curve of our Value Proposition (how-to-win), we also target certain segments of marginal customers and/or non-consumers, deciding on our Market Boundaries (where-to-play). Both types of choices, intrinsically-linked, are made at the business level, not one at business level and the other at corporate level!

Let's get back to the BMC split and spread boxers and their wrong placement. If you have used the BMC, you have drawn causality arrows from one box to the other. What you got is something that looks generically like the picture below. Memorize it and compare it with how the causality should flow in such a model (see further on 'How should the canvas look like').

Do you like it? Does it help you see clearly the flow of dependencies and correlations between Capabilities and between the Capabilities and the Strategic Choices they are supporting, helping achieve, in the end, your Business Goals?

Lastly, there is a strategic unbalance between the BMC boxes. On one hand, some important Capabilities System's components are missing and those represented are in minority, compared to the rest of the model. Where exactly can we find in BMC some important capabilities, like Competences & Skills, Management Systems, Culture & Behaviors, Information & Knowledge, etc. Are they just unimportant sub-components of Key Activities or Key Resources? Why would the Key Partners be more important for the success of the business model than Innovation, or Human Capital, or Organization Culture, and get a box in the BMC layout, while the others don't? Why would we trust the author of the BMC that those capabilities that he selected for the 9 boxes are the most relevant ones for any business, at this level of detail?

For a good reference on what the Capabilities are and on how the Capabilities System works, take a look at the conceptual presentation made available on this subject by Strategy& (former Booz & Company):

Do you see any of the above fundamental capability components in the BMC? Do you have any idea why the Internal Capabilities are summarized in BMC at only Key Activities and Key Resources? Do you find this relevant and applicable?

In final evaluation, the Business Model Canvas is an eye-pleasing representation, but which doesn't have much to do with Strategy. That's why I'm calling the BMC 'The Pop-Art of Strategy, in Cartoon Network style' (no offense intended for the cartoons channel viewers).

The relationship between the Strategy and the Business Model

Must we change our Business Model in order to have a Strategy? Not at all. Although the Strategy may require changes of our positioning (Strategic Choices), it may very well retain for the Strategic Horizon ahead exactly the same Business Model that has been used until today.

Furthermore, as Strategy is 'a coherent mix of policy and action, designed to surmount a difficult and high-stakes challenge that an organization is facing' (*), it doesn't even mean that Strategy is always about changing of our Strategic Positioning. It may be the case that the same Strategic Choices that are valid today will continue to define our positioning over the Strategic Horizon ahead. In such cases (often encountered in practice) the Strategy is focused on bringing our Strategic Choices to life (truly and completely) and transforming them from purely declarative choices to real ones, confirmed by the marketplace. And this is done by improving, developing or acquiring the Capabilities requited to fully and adequately support these Strategic Choices.

(*) 'Good Strategy / Bad Strategy' - Prof. Richard Rumelt

McDonald's used an aggressive international expansion plan during the '80s and '90s and the main focused during those years was on the relationship with their growing network of franchisees. But that focus has also lead to a continuously worsening consumers perception about quality (low-end, unhealthy eating restaurants). During mid-'90s, McDonald's decided to adopt a completely different mix of Strategic Choices and re-focus from franchisees to consumers (Customer Re-definition), formulating and implementing a Strategy aimed at improving the customer experience, introduction of healthy food choices and increasing the menu diversity. Did this change in any way their Business Model? Certainly not.

On the other hand, if we decide to change our Business Model, for instance, moving from a single-sided business to a dual-sided one (e.g. from a buyer market place to a seller & buyer marketplace), our Strategic Choices will certainly change, as we have to re-design our Value Proposition for the two sides of the business (how-to-win) and our Market Boundaries (buyers market segments + sellers market segments, where-to-play).

But let's explore the way the BMC should have been constructed, to better understand the criticizing observations made above.

How Strategy works

If we look at the fundamentals of Strategy, we notice that there is a logical structure of components, linked by causality relationships. Take a look at the simplified diagram below.

This is not 'a framework' for Strategy. It's the simplified backbone of any Strategy, and this is how it works:

In any Strategy, for any business, the starting point is the view about Strategy's success, the Winning Aspirations. They are the basis for further success quantification, as Business Goals, desired to be reached at the end of the Strategic Horizon (at the Strategic Destination). We cannot build a Strategy without them, because we would be like Dorothy and Scarecrow at the yellow brick road crossroad.

Further on, the Business Goals are intended to be reached based on our selection of a limited and very specific set of Strategic Choices, with which we believe that we can build a strong Competitive Advantage.They represent the Strategic Position of our business.You can find more details about Winning Aspirations and Strategic Choices in 'Playing to Win' (A.G. Lafley & Prof. Roger Martin) or in the Pulse article 'Strategic Choices & Strategy Models'.

But without a number of capabilities required to bring them to life and support them, the Strategic Choices remain just declarations of intention. That's why the next challenge is that of adapting our Capabilities System needing to undergo the necessary changes, from the current set of capabilities to the required one, for being able to support our Strategic Choices. Depending on the place in time on the Competitive Advantage Cycle, a business may be confronted with one or two types of major challenges: (a) to close the Strategic Positioning Gaps (between the current set of Strategic Choices and the newly-defined one) and (b) to close the Strategic Coherence Gaps (between the existing set of capabilities and those required to fully enable the Strategic Choices - current or new ones, as the case may be). Closing these Strategic Gaps is the role of the Strategy Execution process.

How should the canvas look like?

In order to be in full alignment with the Strategy and become a useful tool as part of Strategy's tool-set, the canvas (deserving to be called Strategic Business Model Canvas) should be based on the Strategy components and causal relationships described above. It is illustrated below.

What you see here is a clear layout with all the components placed consistently in their right places. The Business Goals are at the top, the Strategic Position (our mix of Strategic Choices) are below, defining which Customers do we target and how do we create the Competitive Factors of our Value Proposition that allows us to win and retain the targeted Customers.

Further below, and enabling our Strategic Positioning, is the Capabilities System, divided in two areas: Market Capabilities (market stakeholders inter-relationship capabilities) and Internal Capabilities. The eight capabilities building blocks, in both areas, should be self-explanatory, at this level of simplified representation.

Take a good look at the diagram above and imagine how would you use it in the Strategy Formulation process. For instance, imagine that you place a number of Strategic Choices in the two Strategic Positioning boxes. Would you find it easier to identify which existing & required capabilities should you enhance, create or acquire, in order to define with more clarity the Strategic Gaps? Why is this so important? Because these Strategic Gaps, which we need to close, are representing the essential input into our Strategic Planning process).

Strategic Model Causality

The strategically-balanced structure and placement of the building blocks in the Strategic Business Model Canvas (SBM Canvas) above is not the only benefit. Given the correct layered approach of this model, you can do two more things.

On one hand, you can easily identify the causal relationships between the model's components (see the generic diagram below). This is very important, because the causality will always flow from bottom towards the top, giving clarity to the role of each and every capability that you place in the Capabilities System area.

The second benefit is the use of the Strategic Business Model Canvas in linking the Strategic Gaps, identified on the Strategy Formulation side, to the components of the Strategic Plan, on the Strategy Execution side. The translation from the Strategic Gaps placed on the canvas to the set of Objectives, KPI & KRI Measures and Initiatives in the Strategic Plan is now much simpler, clearer and providing a surprising level of traceability.

● The Business Goals link to the Financial perspective in the Strategic Plan. ● The Strategic Choices and the Market Capabilities link to the Customer perspective ● The upper layer of Internal Capabilities links to the Internal Processes perspective ● The bottom layer links to the Learning & Growth perspective.

Piece of cake Strategy Formulation-to-Execution traceability!

Innovating the Business Model

After reading the above sections, do you still think highly of the much-adulated 9-box Business Model Canvas, used as a Strategy [Formulation] tool? For those inclined to answer Yes to this question, based on the argument that your business model innovation may be stimulated by the 9 boxes, I'd like to recommend the alternative of an extensive empirical research performed by a team at the University of St Galen (coordinated by Prof. Oliver Gassmann), leading to the identification of the main 55 models found in the businesses researched (the 350 most revolutionary business model innovations of the past 50 years). I quote from the book they've published at the end of their research project (Business Model Navigator - Oct 2014):

To our surprise, we discovered that over 90 per cent of all business model innovations simply recombine existing ideas and concepts from other industries and are based on 55 core business model patterns.

So, do you want to innovate the business model of your company (start-up or mature business)? Find your inspiration by exploring the 55 business model patterns of the Business Model Navigator (based on a systematic empirical research), rather than by staring at the BMC's 9 boxes, which represent someone's unbalanced selection of nine things that he thinks to be important for a business. If you want another source of inspiration, go to the 36 Types of Business Modelsdescribed by Peter Fisk in Gamechangers (8 Design ... Innovating a Better Business Model), grouped in six categories: Maker models, Channel models, Crowd models, Payment models, Exchange models and Asset models.

What comes next (Strategy Process)?

The Strategic Business Model Canvas (SBM Canvas) is just a drawing board for the Business Goals (Winning Aspirations), for the Strategic Choices and for the Capabilities System components, as well as for the relationships and correlations between them.

But a tool, even if we call it 'canvas' is not the process during which it is used and not even attempting to describe the process. What is required for a successful Strategy Formulation process is a clear workflow, as part of a mature and field-tested methodology. See below such a workflow diagram.

You can download this diagram with better resolution from SlideShare.

Since describing the Strategy Formulation workflow and methodology steps outside of this article's subject, I'll leave that for a future article.

Your feedback is very valuable for me, so I'm looking forward to it. Thank you.

#strategy #balancedscorecard #management #businessmodel #business