Masterclass
Will business model innovation replace
strategic analysis?
Stan Abraham
Stan Abraham is Professor
Emeritus of Strategy and
Entrepreneurship at Cal
Poly Pomona, author of
Strategic Planning: A
Practical Guide for
Competitive Success, 2nd
edition (Emerald
Publishing, 2012) and a
Strategy & Leadership
contributing editor
(scabraham@
roadrunner.com).
DOI 10.1108/10878571311318222
usiness-model innovation has become the ‘‘buzzphrase du jour.’’ But what does it
B mean and how is it different from strategy development? For a single-business firm,
is its business model the same as its business strategy? Can an organization operate
effectively using one but not the other, or does it need both?
To answer such questions, this masterclass considers a number of recent business articles
and books that can help practitioners clarify the distinction between the strategy
development and business model approaches and decide which is appropriate for their
situation.
When most companies first open their doors, it is because they offer a product or service that
people need. By advertising the offering and pricing it affordably, the business grows its
sales, if it continues to be attentive to its customers’ needs. However, as the company grows
beyond a simple business, for example, developing multiple products for different kinds of
customers or expanding to other countries, keeping the business cohesive and motivating
managers becomes more difficult. Over time, changing industries, markets, technologies
and other environmental variables makes steering a company to long-term success a
formidable challenge, which is precisely why companies do strategic planning.
But there is a growing school of thought that says that a firm should focus first on
understanding its business model – how it is or is not making money and how it provides
value to customers – and then on changing its business model through innovation to set it
apart from its industry and put the business on a new profit trajectory.
For most companies, adapting to external opportunities and threats and capitalizing on
strengths and resources can be done either through strategic planning or business model
innovation. So which method is more suitable to your company and its circumstances? The
answer can be found by reviewing the similarities and differences between using strategic
planning and business models. You may find ultimately that doing both energizes strategic
thinking and gets managers more engaged in readying the company for the future.
Clarifying the role of strategy vis-à-vis business models
Joan Magretta distinguishes business models from strategy in this way: the former ‘‘explains
who your customers are and how you plan to make money by providing them with value; [the
latter], how you’ll beat competitors by being different.’’[1]
But in some people’s eyes the distinction barely exists. For example, one school of thought
urges business to focus exclusively on the business model. Yet the business-model concept
has limitations, compared with the strategic development approach.
VOL. 41 NO. 2 2013, pp. 31-38, Q Emerald Group Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 31
 Masterclass reading list (in alphabetical order by author)
Harvard Business Review (an anthology) Rebuilding Your Business Model (Harvard Business
Review Press, 2011).
Mark W. Johnson, Seizing the White Space: Business Model Innovation for Growth and Renewal
(Harvard Business Press, 2010).
Saul Kaplan, The Business Model Innovation Factory: How to Stay Relevant When the World Is
Changing (John Wiley & Sons, 2012).
Joan Magretta, Understanding Michael Porter: The Essential Guide to Competition and Strategy
(Harvard Business Review Press, 2012).
John Mullins and Randy Komisar, Getting to Plan B: Breaking through to a Better Business Model
(Harvard Business Press, 2009).
Alexander Osterwalder and Yves Pigneur in collaboration with 470 practitioners from 45 countries,
Business Model Generation (John Wiley & Sons, 2010).
Richard P. Rumelt, Good Strategy/Bad Strategy: The Difference and Why It Matters (Crown
Business, 2011).[22]

Strategy is how a company actually competes.[2] Given the range of possible strategies
(see Exhibit 5.1 – Spectrum of possible single-business strategies), it’s clear that many of
them – including differentiation, low-cost leadership, focus, acquisition, merger, being
acquired, and liquidation – cannot be configured or analyzed using the business-model
canvas. Moreover, the business model cannot help develop or assess a competitive
advantage, which is what a good strategic analysis can do. As strategy authority Michael
Porter opines, ‘‘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.’’[3]
For example, a supermarket’s strategy would be concentration, both market and product
development, and possibly acquisition; its business model would answer some basic
questions, such as:[4]
B How will it get people to shop in its stores? Will it attract customers by delivering value,
providing clean stores, training helpful staff, advertising ‘‘loss leader’’ pricing, promoting
club cards, having fresh produce, easy parking?

Exhibit 5.1 Spectrum of possible single-business strategies

Stay in the same business
† Concentration (product development, including technological innovation)
† Concentration (market development, including globalization)
† Vertical integration (forwards or backwards)
† Acquisition (horizontal integration) or merger
† Forming strategic alliances (including outsourcing, licensing, joint ventures, etc.)
† Retrenchment
† Turnaround or bankruptcy (Chapters 11 and 13 of U.S. Code Title 11)
† Harvest
† Be acquired (signifies a change of ownership, but company remains a going concern)
† Differentiation
† Low-cost leadership
† Focus or niche player

Exit the business

† Liquidation or bankruptcy (see Chapter 7 of U.S. Code Title 11)
† Enter another industry
† Diversification through acquisition (related or unrelated)
† Internal diversification

Source: Stanley C. Abraham, Strategic Planning: A Practical Guide for Competitive Success, 2nd ed

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B How will it make money? Will it control costs by efficient warehousing and distribution to its
stores, tight inventory control, selling more private-label products?
B How will it grow? Will it produce growth by expanding stores that can be efficiently served
by existing warehouses, acquiring smaller supermarket chains?
A business model innovation approach can be successful at identifying and refining the
operational competencies needed to outperform rivals. For example, California-based
Trader Joe’s pursues a strategy of differentiation as an effective way of competing with much
larger chain grocery competitors. Its business model, which has evolved over time, is unique
in the industry: carry fewer products than chain groceries, sell its own private-label products,
keep the size of its stores intentionally small, continually innovate new products and revise
product ingredients based on customer feedback, sell kitchen-tested products, employ
creative marketing to introduce new private-label groceries and provide extraordinary
value.[5]
Perhaps the most well-known examples of business-model innovation come from Apple, Inc.
Its combinations of technology/product/service innovations also resulted in a number of
industries re-inventing themselves.[6]
B The iPod and iTunes redefined the music-distribution business and ultimately affected the
production of music. By making songs available for 99 cents each, consumers were
guaranteed many features that were more attractive than even the free music pirates
could not offer – such as, a music retail store of infinite shelf width, a music catalog that
explicitly identified every song in every known rendition or recording of that song and, full
digital quality. The new business model also caused a revolution in the hardcopy
distribution of music.
B The iPhone revived the cell-phone business model. Previously, cell phones were sold as
hardware accessories by the telecom carriers that had little interest in developing
handsets, because the lion’s share of revenues went into monthly carrier charges. The
iPhone spurred a rush in technological development, transforming mere cell phones into
hand-held, big-ticket computers and entertainment devices. These computers benefited
from a concurrent technology boom – applications software for almost every imaginable
customer need, selling for as little as $1.00. Software developers – approved and
licensed by Apple in a closed platform – found new revenue streams.
B The Apple stores brought all of its products directly to consumers. In a unique
environment that lets customers try out and get more information on its various products,
Apple offered a B2C business model with superb customer service.
The iPod, iTunes, and iPhone, along with the iPad – which started the rush to create portable
communication and entertainment tablets with high resolution and whose impact on related
industries are still unclear – are product innovations that allowed Apple to create new
business models and upend industries. A germane question is, was their genesis in Steve
Job’s creative differentiation strategy, and if so was the full potential of these inventions
achieved through business model innovation?

Exclusive focus on business models

Mark W. Johnson, cofounder and chairman of Innosight, in his book, Seizing the White
Space: Business Model Innovation for Growth and Renewal, Harvard Business Press, 2010,
defines business model as consisting of four interlocking elements that, taken together,
create and deliver value.[7] The four elements are:
B Customer value proposition: ‘‘An offering that helps customers more effectively, reliably,
conveniently, or affordably solve an important problem (or satisfy a job-to-be-done) at a
given price.’’[8]
B Profit formula: ‘‘The economic blueprint that defines how the company will create value for
itself and its shareholders. It specifies the assets and fixed cost structure, as well as the
margins and velocity required to cover them.’’[9]

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VOL. 41 NO. 2 2013 STRATEGY & LEADERSHIP PAGE 33
 ‘‘ Business models explains who your customers are and how
you plan to make money by providing them with value;
strategy identifies how you’ll beat competitors by being
different. ’’

B Key resources: ‘‘The unique people, technology, products, facilities, equipment, funding,
and brand required to deliver the value proposition to the customer.’’[10]
B Key processes: ‘‘The means by which a company delivers on the customer value
proposition in a sustainable, repeatable, scalable, and manageable way.’’[11]
Making changes in any one area, according to Johnson, is considered an ‘‘adjacency
move’’ and doesn’t require a new business model. However, when a change in one area
requires changes in all the other areas, a new business model is required – moving the
company into the ‘‘white space’’ of the book’s title. A new business product may be needed,
for example, for existing customers in existing markets, making the product accessible to a
larger market previously shut out because current offerings are too expensive, complex, or
time-consuming, or when some combination of market shifts, innovative technology, or
government policy creates massive industry upheaval.

Innovation consultant Saul Kaplan, author of The Business Model Innovation Factory: How to
Stay Relevant When the World Is Changing, believes that a company’s business model
needs to be changed if its ability to create, deliver, or capture value declines. The main
reason why organizations fail at business-model innovation is too much ‘‘tweaking’’ –
incremental attempts at improvement in a myriad projects when more radical change to its
business model is the answer. The easiest route to business-model innovation is through
adjacencies – changing parts of the business model. And Kaplan is an enthusiastic
supporter of experimenting with and pilot-testing new business models; if a model fails, you
learn a valuable lesson and don’t lose much, whereas if it succeeds, you can scale it up with
confidence.[12]
Internationally recognized innovation researchers Alexander Osterwalder and Yves Pigneur
have written a useful, well-crafted book about business models that begins with a definition:
‘‘A business model describes the rationale of how an organization creates, delivers, and
captures value.’’[13] The book presents a Business Model Canvas composed of nine
building blocks, summarized as follows:[14]
B Customer segments – defines the different groups of people or organizations a company
aims to reach and serve.
B Value propositions – describes the bundle of products and services that create value for
a specific customer segment.
B Channels – describes how a company communicates with and reaches its customer
segments to deliver a value proposition.
B Customer relationships – describes the types of relationships a company establishes with
specific customer segments.
B Revenue streams – represents the cash a company generates from each customer
segment – how, how much, and in what proportion?
B Key resources – describes the most important assets required to make a business model
work – what key resources do our value propositions require?
B Key activities – describes the most important things a company must do to make its
business model work.

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PAGE 34 STRATEGY & LEADERSHIP VOL. 41 NO. 2 2013
B Key partnerships – describes the network of suppliers and partners that make the
business model work.
B Cost structure – describes all costs incurred (resources and activities) to operate a
business model.
The authors’ model (see ‘‘The Business Model Canvas’’, Exhibit 1) addresses both efficiency
and value-creation. It is a useful tool to depict a company’s current business model and
illustrate its possibilities for adaption. Five sources for changing the business model,
presented in the book, include:[15]
B Resource-driven. Based on analysis of the Key Partnerships – what different resources
(including acquisitions) would suggest changes in other building blocks and hence a new
business model worth pursuing?
B Offer-driven. Based on analysis of the Value Proposition – what different value
propositions would suggest changes in other building blocks and hence a new business
model worth pursuing?
B Customer-driven. Based on analysis of the Customer Segments – what different
customers and markets, anywhere, would suggest changes in other building blocks and
hence a new business model worth pursuing?
B Finance-driven. Based on analysis of the Cost Structure and Revenue Streams – what
new revenue streams, pricing structures, or cost savings would suggest changes in other
building blocks and hence a new business model worth pursuing?
B Multiple-epicenter-driven. Based on analysis of the Key Partnership, Value Proposition,
and Customer Segments – what innovations involving multiple epicenters would suggest
changes in other building blocks and hence a new business model worth pursuing?

The business model canvas

As one might expect, besides considering various drivers in creating better business
models, a business model could change as a result of changing industry and market forces

Exhibit 1 The business model canvas

Key Key Value Customer Customer

Partners (KP) Ac
vi
es (KA) Proposi
on (VP) Rela
onships (CR) Segments (CS)

Key Channels (CH)

Resources (KR)

Cost Revenue
Structure (CS) Streams (RS)

Sources: Alexander Osterwalder and Yves Pigneur (and others), Business Model Generation:
A Handbook for Visionaries, Game Changers, and Challengers (Hoboken, N.J.: John
Wiley & Sons: 2010), 44

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 and other environmental trends. So in theory the business model approach can be used to
carry out a full SWOT analysis of a company. Finally, using the Strategy Canvas’ analytical
framework of eliminate-raise-reduce-create, the business-model canvas can even be used
to seek out ‘‘blue oceans,’’ new value propositions that aren’t embattled by rivalries.[16]

Three cases: Dell, Progressive and Netflix

Three famous examples of companies entering an industry and taking it by storm using a
unique business model are Dell, Inc., Progressive Insurance, and Netflix.
Dell. Before Dell came on the scene in 1985, companies that were purchasing computers for
their employees bought the same computer for everyone and in the process got significant
volume discounts. In fact, computer makers competed on price for large contracts, reducing
profit margins. Dell’s pitch to corporations was that for the same price or less, employees
could specify the computer they wanted. Engineers, salespeople, and accountants all had
different needs based on the way they used computers and so wanted equipment with
different features and performance. Dell offered mass customization by pioneering the
‘‘configure to order’’ approach to manufacturing. Dell did this with a JIT assembly process
using standard components to produce essentially customized products and shipping them
off individually. Demand shot up, and the company grossed more than $73 million its first
year of trading. Although Dell entered the industry producing computers for customers just
like its more established competitors, the way it did it – its business model – was radically
different.[17]
Progressive Insurance. After the State of California mandated rollbacks in auto-insurance
premiums, the auto-insurance industry struggled through the 1980s awash in red ink. By the
late 1990s, one company, Progressive Insurance, cut its costs by formulating a number of
unique business practices that benefited their customers. For example, it settled claims on
the spot around-the-clock instead of allowing the process to take weeks or months. Although
Progressive Insurance, like its competitors, provided auto insurance for drivers, the way it
did it – its business model – was radically different. The result was that it grew six times
faster than the industry and achieved a net profit margin of 8 percent compared to the
underwriting losses experienced by its competitors at the time.[18]
Netflix. For years, Blockbuster was the worldwide leader in movie rentals, growing in 2002 to
over 9,000 stores with sales of $6.1 billion.[19] Other than mom-’n-pops, there was nowhere
else to rent movies. One of its customers, Reed Hastings, who earlier had started his own
software company and sold it for $750 million, kept being fined late fees for failing to return
the rented movie on time. He decided to start another company, Netflix, to rent movies that
would not charge late fees, would not bear the overhead of brick-and-mortar stores and
would give customers advice and reviews on which movies to rent by way of proprietary
software.
Netflix’s original business model sent the rented DVD by mail with a built-in return envelope
that the subscriber would use to mail the movie back. The goal of delivering the movie by
‘‘next business day’’ was achieved through a network of distribution centers. Its subscribers
grew rapidly and, when they passed the 3 million mark in 2003, Netflix moved into the black
and has been growing ever since. Nowadays millions of customers go to the Netflix website,
choose from several subscription plans, and have access to its ever-expanding library of
movies via online delivery.[20]

‘‘ A business model describes the rationale of how an

organization creates, delivers, and captures value. ’’

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‘‘ A business model approach has limitations. It won’t help an
organization develop a competitive advantage, outperform its
competition, acquire or merge with another organization, or
diversify. ’’

Like the previous two examples, although Netflix rented movies just like Blockbuster and its
other competitors did, the way it did so – its business model – was radically different.
Blockbuster, despite trying to later mimic Netflix and burdened by the overhead of all its
stores, lost money for many years and, in September 2010, filed for bankruptcy protection; it
was acquired by Dish Network in an auction on April 6, 2011, for $320 million.[21]

The benefits of adopting both approaches

Some authors blur the distinction between business models and strategies, but they are
different. Every viable organization has a business model. As it grows or responds to
changes in its environment, that business model changes. Various tools, like The Business
Model Canvas can promote understanding of the current business model and help decide
whether it just needs to be tweaked or replaced.
But a business model approach has limitations. It won’t help an organization develop a
competitive advantage, outperform its competition, acquire or merge with another
organization, or diversify. For those kinds of things, strategies and strategic analysis are
needed. Strategy marries external analyses – the industry and competition, markets, and
other environmental trends – with an organization’s capability and resources to find ways to
become a stronger competitor (or find a marketspace with no competition) and grow.
An organization needs both.

Notes
1. Joan Magretta, ‘‘Why business models matter,’’ in Harvard Business Review on Rebuilding Your
Business Model, op. cit., p. 69.
2. Stanley C. Abraham, Strategic Planning: A Practical Guide for Competitive Success, 2nd ed.,
Emerald Publishing (UK), 2012, p. 10.
3. As quoted in Joan Magretta, Understanding Michael Porter: The Essential Guide to Competition and
Strategy (Harvard Business Review Press, 2012), p. 200.
4. Stanley C. Abraham, op. cit., p. 13-14.

5. Stan Abraham, ‘‘Talking strategy: Dan Bane, CEO of Trader Joe’s,’’ Strategy & Leadership, Vol. 30,
No. 6 (2002), pp. 30-32.
6. David W. Crain, personal communication, October 21, 2012.
7. Echoed in Mark W. Johnson, Clayton M. Christensen, and Henning Kagermann, ‘‘Reinventing your
business model,’’ in Harvard Business Review on Rebuilding Your Business Model (Harvard
Business Review Press, 2011), pp. 39-65 (a collection of articles on the subject published in HBR).
8. Mark W. Johnson, op. cit., p. 25.
9. Mark W. Johnson, op. cit., p. 31.
10. Mark W. Johnson, op. cit., p. 39.
11. Mark W. Johnson, op. cit., p. 39.
12. Saul Kaplan, The Business Model Innovation Factory: How to Stay Relevant When the World Is
Changing (Wiley, 2012).

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VOL. 41 NO. 2 2013 STRATEGY & LEADERSHIP PAGE 37
 13. Alexander Osterwalder and Yves Pigneur in collaboration with 470 practitioners from 45 countries,
Business Model Generation (John Wiley & Sons, 2010), p. 14.
14. Alexander Osterwalder and Yves Pigneur, op. cit., pp. 16-41.
15. Alexander Osterwalder and Yves Pigneur, op. cit., pp. 138-139.

16. Alexander Osterwalder and Yves Pigneur, op. cit., pp. 199-231 for the whole paragraph.
17. Stanley C. Abraham, Strategic Management for Organizations (Bridgepoint Education, San Diego,
CA, 2012), p. 27.
18. J.L. Abraham and D.J. Knight, ‘‘Strategic innovation: leveraging creative action for more profitable
growth,’’ Strategy & Leadership, Vol. 29 No. 1 (2001), pp. 21-26.
19. Blockbuster Inc., ‘‘Blockbuster reports fourth quarter and full year results – revenues top $6.1
billion,’’ PRNewswire news release March 9, 2005, retrieved November 8, 2011, from http://phx.
corporate.ir.net/phoenix.zhtml?c ¼ 99383&p ¼ irol-newsArticle&ID ¼ 683275&highlight =

20. Stanley C. Abraham, Strategic Management for Organizations, op. cit., pp. 27-28.
21. Ben Fritz, ‘‘Winner emerges for DVD chain; latecomer Dish Network bids highest for the assets of
bankrupt Blockbuster,’’ Los Angeles Times, April 7, 2011, retrieved November 7, 2011 from http://
pqasb.pqarchiver.com/latimes/access/2312673351.html?FMT ¼ ABS&FMTS ¼ ABS:FT&type ¼
current&date ¼ Apr ¼ 7%2C þ 2011&author ¼ Ben þ Fritz&pub ¼ Los þ Angelesþ Times&
edition ¼ &startpage ¼ B.1&desc ¼ VIDEO þ RENTALS%3B þ Winner þ emerges þ for þ
DVD þ chain%3B þ Latecomer þ Dish þ Network þ bids þ highest þ for þ the þ assets þ
of þ bankrupt þ Blockbuster
22. See Stan Abraham, ‘‘Crafting good strategy is hard work and involves tough choices,’’ (book review
of Richard P. Rumelt, Good Strategy/Bad Strategy: The Difference and Why It Matters, Crown
Publishers, 2011), Strategy & Leadership, Vol. 40, No. 1 (January/February 2012), pp. 45-48.

Corresponding author
Stan Abraham can be contacted at: scabraham@roadrunner.com

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