You should change your business model! We regularly hear this injunction from mentors coaching startups or from strategy consultants called by managers to improve the performance of their (small or large) company. This may be true… or not. The justification of this recommendation should stem from the answer to a vital question for companies: Do you have the right business model for your strategy?
Indeed, since the term business model was first used by Peter Drucker (1954) and conceptualized by Joan Magretta (2002), the debate surrounding the definition of a business model seems over. A business model is now widely accepted as the operational logic chosen by the company to realize its strategy through a specific combination of resources, used in an appropriate organization to operate the business internally and externally, in order to deliver profitably to customers a value proposition attached to its offer (definition adapted from Ramon Casadesus-Masanell and Joan Enric Ricart, 2010).
Predicting strategy–business model alignments
This being said, new questions arise from this business model definition such as: Building on traditional models of strategy, can we also identify models of business model reflecting those strategy models? In other words, can we theoretically predict strategy–business model alignments? If so, what is the impact on company performance of sticking to or deviating from these theoretically predicted alignments?
Answering these questions has become even more critical for small businesses and startups which, by definition, and by comparison with large companies, possess a limited set of resources available that does not allow them to regularly review their business model and redesign it when necessary, thus increasing the likelihood and extent of strategy–business model misalignment.
In a recent study published by the Journal of Small Business and Enterprise Development, we highlight the existence of such theoretically predicted strategy–business model alignments, and the performance implications of deviating from these alignments in the context of French manufacturing small and medium-sized enterprises (SMEs).
Our study is based on a sample of 156 SMEs from 13 manufacturing activities, surveyed in March 2011, with between 10 and 250 employees and generating a maximum turnover of €50 million. The breakdown of company size is representative of the size breakdown of the population of French manufacturing SMEs (INSEE, 2013).
There is no best strategy nor best business model: What matters is fit!
Raymond Miles and Charles Snow’s framework of strategy is perfectly adapted to explore the ex-ante performance of implementing an intended strategy. This framework posits that companies constantly cycle through combinations of entrepreneurial choices (in which product-market domains do they want to operate? How large and stable should the domains be?), engineering choices (which types of technologies to be used for production and distribution), and administrative choices (which types of organizational structure and processes to direct and monitor activities while allowing adaptation and innovation). According to Raymond Miles and Charles Snow, there is no best strategy delivering the highest business performance. What matters is aiming simultaneously at external fit with the company’s environment and internal fit between entrepreneurial, engineering, and administrative choices. They therefore categorize companies as Defenders, Prospectors, and Analyzers characterized by the coherence—the fit—of their respective models of strategy[1].
Even though this framework is not the most known among strategy practitioners, be they managers or consultants, Raymond Miles and Charles Snow’s strategy models have received strong empirical support and are considered as good predictors of business performance, with the greatest degree of validity (Donald C. Hambrick, 2003). This framework is therefore particularly adapted to characterize the entrepreneurial, engineering, and administrative choices of each strategy model and translate them into predicted configurations of business model.
For the purpose of our research, we view these theoretically predicted business model configurations as ideal combinations of business model, which facilitate top managers’ decision process when designing their company’s strategy and its implementation. Consequently, any deviation from the predicted business model configuration should affect performance negatively.
It pays off to stick to the theoretically predicted model
The results of our study rule out the assumption that some business models are superior to others as well as the recent claims from certain scholars and practitioners arguing that strategy formulation is useless if you have the “right” business model. There is no ex-ante “right” business model. Contrarily, our study provides empirical support to the call by David Teece (2010), urging researchers and managers to couple business model design with strategy formulation.
Our study highlights three significant findings. We first show the existence of theoretically predicted “ideal” strategy–business model alignments, where the realization of entrepreneurial, engineering and administrative choices is characterized by differentiated sets of theoretically predicted combinations of business model components across strategy models. This not only supports the assumption that strategy and business model are two different concepts that should not be mixed-up, but also evidence the strategy-dependency of business model. Strategy and business model are the two sides of the same coin.
We also demonstrate the negative performance implication of deviating from ideal strategy–business model alignments. When deviating from the ideal business model configuration associated with its strategy, a company will hamper the effective implementation of its strategic choices, and consequently underperform. A company, operating on the niche market of energy maintenance with a defender-like focused value proposition to guaranty energy savings via a “pay for performance” revenue model, may be endangered by a cost structure emphasizing internal resources—fixed costs—as opposed to variable costs, if it does not deliver on its promise to clients. This “misfit” in turn will prevent the intended strategy from being realized, and strategic and performance objectives from being achieved. Consequently, the greater the deviation from the theoretically predicted ideal combination of strategy attributes and business model components, the lower the performance, and conversely.
Finally, we provide guidance to managers to predict ex-ante the effective implementation of strategic choices through their business model. By providing a business model representation of Raymond Miles and Charles Snow’s strategy models, we offer managers some best practices for maneuvering in situations where companies face the challenge of effectively implementing entrepreneurial, engineering, and administrative choices. Indeed, we show that, from a performance standpoint, the profile-specific typology of business model configurations mirrors the “ideal” realization of Defender, Prospector, and Analyzer choices. This brings also a practical answer to the critical issue of business model innovation when companies decide to change their plan of action under the pressure of external contingencies and engage in a new cycle of strategic choices. A company with an analyzer profile, forced by disrupting competitors to adopt a prospector-like entrepreneurial orientation to “disrupt the disrupters”, may be weakened by its focus on mainstream clients, which will be little inclined towards disruptive innovation. This company should favor intense market intelligence, benchmarking and open innovation.
In closing, our study revealed differentiated theoretically predicted ideal strategy–business model combinations across strategy models, thus supporting the argument that strategic choices constitute the raw material of business models. It also confirmed the existence of ideal combinations of strategy–business model alignments and the negative performance implication of deviating from the strategy–business model alignment. By showing the performance superiority of strategy–business model conforming to theoretical predictions, our research complements other studies that have supported the idea that theoretically predicted strategic choices outperform hybrid choices.
[1] Focused on delivering superior quality or lower prices to a stable and narrow product/market domain, Defenders concentrate on updating their current technology to maintain efficiency. Unlike Defenders, Prospectors permanently conduct an entrepreneurial quest for innovation in product and market development. Accordingly, as opportunity management requires flexible operations, Prospectors are reluctant to invest in resources related to any given technology or optimization of production processes. Analyzers continually adjust their entrepreneurial choices to maintain a stable core of products and customers while simultaneously bringing out improved or price-competitive versions of products initially developed by Prospectors (Raymond Miles and Charles Snow, 2003).
