The Business Model: An Integrative Framework for Strategy Execution

By

James Richardson

Shidler College of Business

University of Hawaii at Manoa
2404 Maile Way
Honolulu, HI 96822

Email: jamesr@hawaii.edu
Phone: 808-956-7270

September 2005

Electronic
Electroniccopy
copyavailable
availableat:
at:https://ssrn.com/abstract=932998
http://ssrn.com/abstract=932998
 The Business Model: An Integrative Framework for Strategy Execution

ABSTRACT

We have many useful frameworks for formulating business strategy, i.e., devising a theory of

how to compete. Frameworks for strategy execution are comparatively fragmented and

idiosyncratic. This paper proposes a business model framework to link the firm’s theory about

how to compete to its execution. The framework captures previous ideas about business models

in a simple logical structure that reflects current thinking in strategy. The business model

framework provides a consistent logical picture of the firm that is a useful tool for the strategist,

for teaching, and potentially for research on business models in strategy.

Electronic
Electroniccopy
copyavailable
availableat:
at:https://ssrn.com/abstract=932998
http://ssrn.com/abstract=932998
 The Business Model: An Integrative Framework for Strategy Execution

INTRODUCTION

The study of business strategy has yielded many useful frameworks for understanding

how firms compete effectively. The five-forces framework (Porter, 1980) organizes and gives

meaning to the numerous measures and characteristics of industries. The generic strategy

framework (Porter, 1980) reveals the fundamental approaches to gaining competitive advantage.

The generic building blocks framework defines the basic dimensions along which a firm can

outperform its competitors (Hill & Jones, 2001, p. 126). The SWOT analysis framework is

widely used to assess strategic situations. The VRIO framework (Barney, 2002, p. 159) tells us

under what conditions a firm’s resources can enable it to gain and sustain a competitive

advantage. The value-chain framework (Porter, 1985) allows us to analyze the firm’s activities

and sources of competitive advantage. And there are many more.

Some of the frameworks mentioned above, along with numerous ones not mentioned, can

be useful in strategy execution1—in putting the strategy into action. In particular, the value

chain and VRIO frameworks get us thinking about the activities and resources needed to execute

the strategy. But on the whole, the frameworks are most useful in strategy formulation

(Hrebiniak, 2005). As we move into execution, the standard frameworks leave us with a

fragmented and incomplete understanding of how the firm’s strategy should be translated into

action.

The strategy process is commonly divided into formulation and implementation—first

1

formulate then implement. Though somewhat artificial and not always reflective of practice
(Mintzberg, 1985), the division has proven useful for teaching and research. In this paper we
refer to implementation as execution in order to emphasize the active part of the process
(Hrebeniak, 2005; Bossidy & Charan, 2002).

Electronic copy available at: https://ssrn.com/abstract=932998

 Barney (2002, p.7) defines a firm’s strategy as its theory of how to compete. The

strategist’s task is to formulate a theory of how to compete then put it to the test through

execution. Porter (1996) has characterized the firm’s strategy as the totality of its activities and

not just a few critical or key ones. As one looks over the totality of a firm’s activities, how well

do they represent the firm’s theory of how to compete? If things are not going well, is it a good

theory but poorly executed? Or is it just a bad theory? The existing frameworks certainly shed

some light on such questions, but this is an area that could benefit from additional work

(Hebreniak, 2005).

In large part, the difficulty of framing strategy execution is inherent in the phenomena.

The firm’s theory of how to compete is a simplified abstraction from the complexity of any real

business situation. In each real competitive situation, the firm’s particular characteristics and

history, the circumstances in the industry, and the details of each competitor, present unique

challenges and opportunities. The strategy frameworks allow us to abstract from all of that detail

and capture the essential elements of competition. But as we move toward execution, the detail

becomes more important. The details of the firm’s products and services, its activities and

resources, its people, and nearly everything else about the firm, are the ingredients of execution.

Clearly, getting the details right is enormously important to effective strategy execution. And

frameworks for thinking about this problem, for helping to get the details right, are enormously

beneficial (Kaplan & Norton, 2000; Hrebiniak, 2005).

This paper proposes that the business model concept can be developed into a useful

integrative framework for strategy formulation and execution. The proposed business model

framework provides a consistent logical picture of the firm that helps to guide the myriad choices

and actions involved in execution. A business model is not a strategy (Porter, 2001). Rather, it

Electronic copy available at: https://ssrn.com/abstract=932998

is a conceptual framework that helps to link the firm’s strategy, or theory of how to compete, to

its activities, or execution of the strategy. The business model framework can help to think

strategically about the details of the way the firm does business.

The paper first discusses the literature on strategy execution. Work on strategy execution

extends back many years and, especially recently, has seen some significant contributions

(Nadler & Tushman, 1997; Kaplan & Norton, 2000; Hrebiniak, 2005). It is important to

recognize that the proposed business model framework does not supplant or replace such

contributions. Rather, it serves to clarify the connection between strategy formulation and the

concepts and work of strategy execution. Second, the paper discusses how the business model

concept has been used in both the popular business press and scholarly publications. Next, the

business model framework for strategy is described and explained. An application of the

framework helps to clarify the ideas and show the framework’s usefulness. The paper closes

with a discussion of the usefulness of the framework for education as well as practice, and some

directions for future work.

EXISTING FRAMEWORKS FOR STRATEGY EXECUTION

Intermediate between the firm’s abstract theory of how to compete, and the myriad of

details in its operations, is a logical structure that links the theory to action. But this logical

structure does more than just explain activities in terms of the basic strategy. It helps to

complete the description of the strategy.

The widely used framework of levels of strategy (e.g., Hill & Jones, 2001) provides such

an intermediate logical structure. At the most abstract level we have the overall corporate

strategy, e.g., pursue growth into new markets, and the business strategy conceived in broad

terms, e.g., differentiate on superior technology. At the next level, a step toward operations, we

Electronic copy available at: https://ssrn.com/abstract=932998

have the functional strategies, e.g., marketing strategy, production strategy, and so on. A further

intermediate level is sometimes employed in the framework, where functional strategies are

translated into policies which are used to guide activities. In this framework, the functional

strategies help to link the basic business strategy to activities, but they also help to complete the

definition of the strategy.

But the levels of strategy framework only goes part way toward completing the logical

structure that links theory to action. To formulate functional strategies we begin to assign

objectives to activities, e.g. expand production capacity, in a way that is logically consistent with

the overall strategy. But consider the many choices that must be made about the details in

expanding production capacity—How should it be organized? Is flexibility important? What

about cost? Should it be outsourced? What sort of control systems are needed? And so on… If

we believe that getting all of these details right is critical to successful strategy execution, indeed

that all of these details are the strategy, then it would be helpful to have a consistent logical

picture of the firm to guide these choices and actions. No doubt, successful strategists have in

mind a consistent logical picture of their firms. What is proposed here is a specific framework to

create such a consistent logical picture of the firm—a framework that can be systematically

studied and taught to the student of strategy.

The need for systematic study and conceptual guidance in the strategy implemenation

process has long been recognized. For example, M.A.C./Stonich (1982) presented a framework

for strategy implementation that identifies the key components of implementation as

organizational structure, human resources, organizational culture, and management processes.

They discussed a process for ensuring fit among these elements with strategy. Similar

Electronic copy available at: https://ssrn.com/abstract=932998

discussions of the process of strategy implementation can be found in strategic management

textbooks since that time.

More recently, scholars have applied knowledge of organization design (Nadler and

Tushman, 1997) and systematic study of strategy execution processes (Kaplan & Norton, 2000;

Hrebiniak, 2005) to improve our understanding of strategy execution. Nadler and Tushman

(1997) describe a process of designing organizational architecture which includes the work, the

people, formal organizational arrangements, and the informal organization. The design objective

is congruence of the architectural elements with each other and with the strategy. Kaplan and

Norton (2000) have developed a strategy mapping framework based on their balanced scorecard

(Kaplan & Norton, 1992). The strategy mapping process serves to clarify and communicate the

links between the strategy and the objectives and metrics of the balanced scorecard. Hrebiniak

(2005) presents a model of the strategy execution process with a comprehensive and detailed

discussion about the content and process of each step, including formulating business strategy

and short-term objectives, designing business structure and integration, and employing incentives

and controls.

Since the earliest work and especially in the recent work on strategy execution, the

objective has been to ensure fit and congruence among the components of execution and the

strategy. The textbook presentations of the strategy process all point out the critical need to

match or fit the strategy with the structure, culture, processes, controls, and so on. What

typically follows is a wide ranging and complex discussion of various concepts, research

findings, tools, and guidance for the various aspects of execution. The need for an overall

framework to clarify the connections between the strategy and choices about execution has been

recognized and recently addressed by Kaplan and Norton (2000) with their strategy maps and by

Electronic copy available at: https://ssrn.com/abstract=932998

Hrebiniak (2005) with his model of the strategy execution process. Within both of these

frameworks, the essential connections between strategy and execution are provided by two steps:

1) recognizing the demands the strategy will place on the organization, and 2) setting short term

objectives. Step one provides a status and readiness report on the ability of the organization to

execute the strategy. Step two sets clear goals for the organization to move toward strategic

objectives and to strengthen organizational capabilities. While the two frameworks share these

steps, they are not equivalent or interchangeable. Hrebiniak provides an arguably more

comprehensive model of the whole execution process and all of the components. A nice feature

of the strategy maps is a clear picture of the links between the overall strategy and short-term

objectives (balanced scorecard). Indeed, one could place the strategy mapping process within

Hrebiniak’s model for an effective combination.

The aim of this paper is to show how the business model can provide an overall

framework that helps to simplify and clarify the fit between the elements of execution and the

strategy. The business model framework does not supplant or replace organization design or

models of the strategy execution process. Rather, it provides a structure or conceptual

framework for connecting these processes to the overall strategy.

THE BUSINESS MODEL CONCEPT IN THE LITERATURE

A key-word search for “business model” in the business literature reveals thousands of

entries. The concept of a business model has found wide acceptance in the popular business

press and has received considerable attention in the academic literature as well. The concept was

popularized in connection with the dot-coms or e-commerce where a start-up’s business model

was a key point of interest for investors. The internet enabled firms to pursue new business

Electronic copy available at: https://ssrn.com/abstract=932998

models and raised the possibility that a better business model might confer a competitive

advantage.

There is general agreement on the basic definition of a business model. It is simply a

description of how a firm does business. It is not a complete description of the complex social

system of a business that would include all of the actors, relationships, and processes. Rather, it

is a description of the logic that lies behind the actual processes (Peterovic et al., 2001). The

business model can be seen as the conceptual and architectural implementation of a business

strategy and as the foundation for the implementation of business processes (Osterwalder &

Pigneur, 2002).

Morris, et al. (2002) and Peterovic et al. (2001) have provided good summaries of the

existing business model literature. Earlier authors tended to emphasize one or two components

when they talked about a business model. Some focused on the sources of revenue, some

focused on the means of delivering products and services, and some focused on the central

business idea or value proposition of the firm. Later authors, in both the popular business press

and the academic literature, have defined the concept more broadly to include all of these

components (and more).

In our effort to develop a comprehensive yet concise framework, it is useful to review the

components of a business model as presented by various authors. Table 1 presents a synopsis of

business model components compiled by Morris et al. (2002). Some of the perspectives are e-

commerce specific, while others are generally applicable to any company.

______________________

-Insert Table 1 About Here-

______________________

Electronic copy available at: https://ssrn.com/abstract=932998

 There are a number of common themes, but there is also a great deal of variation in these

models. The number of components varies from four to eight. A total of twenty-four different

items are mentioned as components of a business model, with fifteen of these receiving multiple

mentions. Of these, the most frequently included are the firm’s value offering or value

proposition (11 mentions), profit/revenue/economic model (including revenue sources) (10

mentions), customer interface/relationship (8 mentions), partner network and roles (7 mentions),

internal infrastructure/connected activities (6 mentions), and target markets/segments (5

mentions) (Morris, et al., 2002). Some of these items probably overlap, such as customer

relationships and target markets. Still, the potential complexity and the number of choices about

what to put in the business model clearly deserve some attention.

Some of these authors were focused on e-business, but a number of them have provided

useful general business model frameworks. For example, Hamel (2000) defines a business

model as simply a business concept that has been put into practice. He identifies four main

business model components—core strategy, strategic resources, the value network, and the

customer interface. The business model framework by Petrovic, Kittl and Teksten (2001) is

divided into seven sub-models—the Value Model, the Resource Model, the Production Model,

the Customer Relations Model, the Revenue Model, the Capital Model and the Market Model.

They present their framework as a description of the logic of a business system for creating value

that lies behind the actual processes. Chesbrough and Rosenbloom (2002) identify six functions

of a business model, the value proposition, the target market segment and revenue sources, the

value chain and complementary assets, the cost structure and profit potential, the position of the

firm in the value network, and the competitive strategy of the firm. Morris, et al. (2002) list six

components with three levels. The six components are the offering, market factors, internal

10

Electronic copy available at: https://ssrn.com/abstract=932998

capabilities, competitive strategy, economic factors, and personal/investor factors. The three

levels, foundation, proprietary, and rules, allow for the representation of increasingly firm

specific and detailed aspects of the six components of the business model.

As we develop a business model framework for strategy we want to capture the common

themes and many of the elements listed above. The goal is to provide a comprehensive picture

of the way the firm does business. At the same time we want to orient the framework to strategy

and provide a simplified logical structure. A key idea is that the business model represents the

logic that lies behind the detailed business processes (Peterovic, et al., 2001). For our purpose,

the logic is the execution of strategy to gain competitive advantage.

THE BUSINESS MODEL FRAMEWORK

From the discussion above we can see that in both the popular business press and the

academic literature, the business model has evolved into a comprehensive and generally useful

concept for thinking about how a firm does business (Magretta, 2002). The objective here is to

show how, with a little development, the business model framework can be used in the strategy

process to design or check on how the firm is executing its strategy. We have organized and

defined the components of the business model framework to reflect current thinking about

strategy. We have also attempted to simplify and clarify the framework while still capturing the

essential components of business models from the works cited in the previous section.

A recurring theme in discussions of both business models and strategy is value. We have

organized the business model framework around the concept of value. The three major

components of the framework--the value proposition, the value creation and delivery system, and

value capture reflect the logic of strategic thinking about value. The essence of strategy is to

create superior value for customers and capture a greater amount of that value than competitors

11

Electronic copy available at: https://ssrn.com/abstract=932998

(Porter, 1985). The business model framework organizes the components of strategy and

execution around that idea.

The Business Model Framework

The value proposition—what the firm will deliver to its customers, why they will be

willing to pay for it, and the firm’s basic approach to competitive advantage.

• The offering

• The target customer

• The basic strategy to win customers and gain competitive advantage (generic

strategy and building blocks of competitive advantage)

The value creation and delivery system—how the firm will create and deliver that

value to its customers and the source of its competitive advantage

• Resources and capabilities (VRIO)

• Organization: the value chain, activity system, and business processes

• Position in the value network: links to suppliers, partners, and customers

Value capture—how the firm generates revenue and profit

• Revenue sources

• The economics of the business

Within the simplified framework we have incorporated most of the components of the

more comprehensive and generalized business model frameworks cited in the previous section.

Below, we discuss each of the three components to show how the framework can be used to

think strategically about the way a firm does business.

12

Electronic copy available at: https://ssrn.com/abstract=932998

The value proposition

Like the business model, the value proposition has become part of popular business

jargon. However, it has not been used as much in scholarly writings, at least outside of the e-

business and entrepreneurship literature. Still, the strategy literature has a central role for value

creation (Porter, 1985) and it is but a small step to include the value proposition.

The value proposition generally refers to the reasons a customer will value a firm’s

(proposed) offering. Here, the elements of the value proposition are somewhat broader in

concept. It includes the offering, or what the firm provides, as usual. It also explicitly includes

the intended customer or target market. It seems imprudent to talk about the value of an offering

without talking about to whom, so we fold these components together into the value proposition.

The third element of the value proposition is perhaps more unusual and not so obvious. It

raises the question of the firm’s reason for existence. Beyond what the firm will offer and to

whom, it is important to ask why the market is not already well served by other firms. How is

the firm going to do something better? Will it be able to attract customers? How is it going to

compete? These are the basic questions answered by a firm’s generic strategy—its basic

approach to winning customers and gaining competitive advantage.

The strength of the firm’s value proposition rests on this third element, its strategic

positioning. A firm that plans to offer the same product to the same target market that is well

served by many existing firms does not have a strong value proposition. Conversely, a firm that

offers its target customers a greater value than its competitors has a strong value proposition.

The value proposition represents the value the firm will offer to a customer relative to the

competition.

13

Electronic copy available at: https://ssrn.com/abstract=932998

 Without all three of these elements, a firm will not have a solid value proposition upon

which to build a firm. At a minimum, the firm will need an offering that identifiable customers

will be willing to pay enough for in a competitive market to allow the firm to be viable.

Preferably, the firm will have a value proposition that includes potential for competitive

advantage—such as a superior, or differentiated offering, or perhaps lower costs in serving the

target market.

By our definition, the value proposition is a basic statement of the firm’s theory about

how to compete. It states that the firm will offer such and such to so and so in a way that offers

superior value compared to competitors. The various frameworks and tools of strategy can be

applied to devising a good theory about how to compete. The resulting theory can then be

summarized in the firm’s value proposition.

Value creation and delivery system

The second component of the business model further details the firm’s theory of how to

compete by describing how that theory is put into action. It begins to flesh out the organization

and architecture of the firm that creates and delivers the value proposition. It also specifies and

describes the firm’s sources of competitive advantage, i.e., its resources and capabilities. It

shows the logic of the firm’s structure and how the organization is consistent with the firm’s

basic strategy.

Under value creation and delivery, we include the numerous activities that a firm

undertakes to create, produce, sell, and deliver their offering to customers. The value chain

(Porter, 1985) and the surrounding value network (Gulati, et al., 2000) provide a basic sketch of

14

Electronic copy available at: https://ssrn.com/abstract=932998

the firm’s value creation and delivery system. More detailed activity networks (Porter, 1996)

can further elucidate the strategy and organization.

The value chain, activity system, and value network present activities as structural

elements, i.e., a name in a box on a diagram. Activities and links are identified in a static

structural model of the firm. It is possible to go beyond a structural model and include process

descriptions, e.g. flow charts. Indeed, certain processes may be an important part of the strategy,

e.g., an innovative process for taking and fulfilling customer orders. In that case, a description of

the processes is an important part of the business model. A process may correspond to an

activity, encompass multiple activities, or be part of activity. For example, the process of

inventory management could encompass sales activities, purchasing activities, inbound logistics

activities, and warehousing and delivery activities. While the process of taking an order would

usually be part of the sales activities. Process descriptions would provide a richly detailed

picture of the firm’s operations and strategy execution.

In the larger value creation network of which the firm is a part, activities will be divided

among suppliers, the firm, perhaps partners or complementors, and distributors. The resources

and capabilities of the various actors and the division of activities among them should match the

value proposition. That is, they should be able to create and deliver the value proposition. At a

practical level, the allocation of activities can be done to simply ensure effective delivery of the

value proposition. But strategic considerations should dictate the choices made within the

business model framework.

The design of the firm should not only reflect the firm’s theory of how to compete, it

should also confer the intended competitive advantage (Barney, 1999). If the firm proposes to

compete on low cost, the activities should be divided up and conducted accordingly. Similarly, a

15

Electronic copy available at: https://ssrn.com/abstract=932998

differentiation strategy should be reflected by activities that create and deliver that

differentiation. But to confer competitive advantage, the design of the firm will require more

than a sensible allocation of activities consistent with the value proposition. Careful

consideration must be given to the ability of the firm to sustain a competitive advantage. For

example, buying cheap inputs from a low-cost supplier cannot sustain an advantage if that option

is available to competitors. The VRIO framework (Barney, 2002) is helpful in understanding the

bases for sustained competitive advantage. Applying the VRIO test to the various resources and

capabilities in the value network, the firm can identify its sources of sustainable competitive

advantage. The design of the firm (the allocation of activities) should give it some measure of

control, if not ownership of these resources and capabilities.

Value capture

Because a firm devises a strong value proposition and successfully creates and delivers

that value does not mean it will earn superior returns, or even be viable. It must also have a

model that produces revenue and provides for a profit margin over its costs. This component of

the business model includes what is often called the revenue model as well as the economic

model. The revenue model describes the sources of revenue or different ways that the firm

receives money in exchange for its services. The economic model covers the costs, margins, and

various financial aspects of the firm.

Many discussions of business models, particularly the earlier ones circa the mid 1990’s,

focused on the revenue model. Lists of types of revenue models were produced (Rappa, 2003),

including subscription models versus sales models, advertising models, and so on. The idea is to

consider alternative means of exchange that customers will find attractive.

16

Electronic copy available at: https://ssrn.com/abstract=932998

 The economic model of the firm is a concept generally used in the entrepreneurship

literature. It refers to the revenues, costs, and expenses that go into the profit equation. It also

includes the timing of exchanges. The economic model of the firm is reflected in the operating

cash flow statement. Note that the ability of the firm to gain a competitive advantage and

generate superior profit margins is reflected in its economic model.

These two elements, the revenue model and the economic model, combine to explain

how the firm will make money. They describe the various revenue streams, the cash flow, and

the margins. A creative and thoughtful approach to value capture is an essential component of

building a successful business model. The firm’s value creation and delivery system must be

designed with both the value proposition and value capture in mind.

BUSINESS MODELING VERSUS ACTIVITY MAPPING AND STRATEGY MAPPING

To compare the business model framework with two prominent strategy execution frameworks,

consider the questions the strategist must answer to complete each framework:

Activity mapping (Porter, 1996):

• What activities does the firm undertake?

• How are the activities linked?

• How do the activities implement strategic themes?

• How do the activities fit together to deliver the strategic positioning?

Strategy mapping (Kaplan & Norton, 2000):

• What are the overall strategic objectives?

• What are the key performance objectives and measures (Balanced scorecard)?

17

Electronic copy available at: https://ssrn.com/abstract=932998

 • How do the key performance objectives link to the strategic objectives?

Business model:

• What is distinctive or better about the firm’s offering? (value proposition)

• What is the offering?

• Who is the target customer?

• Why will they buy it? What is the basic competitive strategy? (Generic strategy and
Generic building blocks of competitive advantage)

• How will the firm create and deliver its distinctive offering?

• What activities does the firm undertake? (Value chain)

• How does the firm fit into the larger value creation network? (extended value chain)

• What distinctive resources and capabilities does the firm have/need? (VRIO)

• How are the activities linked together and with competitive performance dimensions?
(Generic building blocks, Strategy map, Activity system map, process models)

• How will the firm profit?

• How does the firm get revenue? (revenue model)

• How does the firm make money? (economic model, operating cash flow model)

Note how the questions about activities, linkages, strategy, and objectives are encompassed by

the broader set of questions answered within the business model framework. Frameworks and

tools from the strategy literature that are useful for answering each of the business model

questions are shown in parentheses.

18

Electronic copy available at: https://ssrn.com/abstract=932998

 APPLICATION OF THE BUSINESS MODEL FRAMEWORK

A description of Walmart’s business model will illustrate how the framework provides an

overall picture of the firm that shows how the basic strategy is executed. Table 2 describes the

Walmart’s business model following the framework.

______________________

-Insert Table 2 About Here-

______________________
_____________________

-Insert Figure 1 About Here-

______________________

By looking at Walmart’s business model, we can see how their various activities and

their position in the value network work to implement their strategy. We can see how their value

creation and delivery system both delivers the value proposition and confers competitive

advantage on the firm. And we can see how they work to capture value for the firm. The

business model helps to clarify how the myriad details of the way Walmart does business serve

to execute the strategy and lead to superior performance.

DISCUSSION

The business model framework provides a simple and logical structure for the strategist

to think about how the many activities of the firm work to execute the strategy. The business

model provides an intermediate logical structure between the firm’s theory of how to compete

and its activities. A well thought out business model does more than link the strategy, or theory

of how to compete, with activities. It serves to complete the description of the strategy. If the

strategy is the many activities of the firm (Porter, 1996), then the business model framework

helps to create a consistent logical picture of how all of the firm’s activities form a strategy.

19

Electronic copy available at: https://ssrn.com/abstract=932998

 The business model framework also provides a simple logical structure for the student of

strategy to see how strategy formulation and implementation are linked. Presently, strategic

management textbooks typically flow from a conceptually well developed presentation of

strategy formulation to a more fragmented and idiosyncratic discussion of implementation. The

business model framework could help to organize the discussion of implementation and link it

back to strategy formulation. In principle, designing the implementation of a strategy is not a

separate process from formulating the strategy. Rather, it is the process of completing the

description of the strategy by thinking through how all of the firm’s activities should be

organized and conducted. The business model framework helps the student to see this, and to do

the necessary thinking. Also, the business model framework makes decisions about which

activities should be within the firm (vertical integration, outsourcing, partnering, etc.) part of

business strategy, as they should be (Barney, 2002). This is in contrast to many textbooks that

treat such decisions separate from business strategy and part of corporate strategy.

The business model framework might be useful in strategy research. For example, it

could facilitate study of how alternative business models affect performance. Two firms with

similar strategies and business models could be more systematically compared. For example,

what are the key differences between Walmart’s and Kmart’s similar strategies and business

models, and do they help account for the very different performance of these firms?

The business model framework presented here does not represent a theory about which

model will lead to competitive advantage and superior performance. It can incorporate theories

like VRIO to help design the firm. This is an area for future work—to incorporate additional

theories about the organization and conduct of activities that will help guide the strategist in

designing better business models.

20

Electronic copy available at: https://ssrn.com/abstract=932998

 REFERENCES

Afuah, A. & Tucci, C. 2001. Internet Business Models and Strategies. Boston: McGraw Hill.

Amit, R. & Zott, C. 2001. Value creation in e-business. Strategic Management Journal, 22:
493-520.

Barnes-Vieyra, P. & Claycomb, C. 2001. Business-to-business e-commerce: models and

managerial decisions. Business Horizons, 44(3): 13-20.

Barney, J.B. 1991. Firm resources and sustained competitive advantage. Journal of
Management, 17:.

Barney, J.B. 2002. Gaining and Sustaining Competitive Advantage, Second Edition. Reading,
Mass.: Addison-Wesley.

Barney, J.B. 1999. How a firm’s capabilities affect boundary decisions. Sloan Management
Review, 40(3):137-145.

Bossidy, L. & Charan, R., Execution: The Discipline of Getting Things Done, New York,
Crown Business, 2002.

Boulton, R.E.S., Libert, B.D., & Samek, S.M. 2000. A business model for the new economy.
The Journal of Business Strategy, 21(4), 29-35.

Chesbrough, H. & Rosenbloom, R. S. 2000. The role of the business model in capturing value
from innovation: evidence from Xerox Corporation’s technology spinoffs. Industrial and
Corporate Change, 11(3): 529-555.

Dubosson-Torbay, M. Osterwalder, A. & Pigneur, Y. 2001. E-business model design,

classification and measurements. Thunderbird International Business Review, 44(1): 5-23.

Gulati, R., Nohria, N., & Zaheer, A. 2000. Strategic networks. Strategic Management Journal,
21: 203-215.

Hamel, G. 2000. Leading the Revolution. Boston: Harvard Business School Press.

Hamel, G. & Valikangas, L. 2003. The quest for resilience. Harvard Business Review, 81(5):
52-63.

Hamermesh, R. C., Marshall, P.W., & Pirmohamed, T. 2002. Note on business model analysis
for the entrepreneur. Harvard Business School teaching note 9-802-048.

Hbreniak, L.G. 2005Making Strategy Work: Leading Effective Execution and Change, New
Jersey, Wharton School Publishing.

21

Electronic copy available at: https://ssrn.com/abstract=932998

Hedman, J, & Kalling,T. 2003. The business model concept: theoretical underpinnings and
empirical illustrations. European Journal of Information Systems, 12(1): 49.

Hill, C.W.L. & Jones, G. R. 2001. Strategic Management: An Integrated Approach, Fifth
Edition. Boston, Houghton Mifflin Company.

Kaplan, R.S. & Norton, D.P. 2000. Having Trouble with Your Strategy? Then Map It, Harvard
Business Review; 78(5): 167.

Lumpkin, G.T. & Dess, G. 2004. E-business strategies and internet business models: how the
internet adds value. Organizational Dynamics, 33(2): 161.

Madhadevan, B. 2000. Business bodels for internet-based e-commerce: an anatomy,” California

Management Review; 42(4): 55-69.

Magretta, J. 2002. Why business models matter. Harvard Business Review, 80(3):

Management Analysis Center (MAC)/ Stonich, P.J. (ed.) 1982. Implementing Strategy: Making
Strategy Happen, Cambridge, Ballinger Publishing.

Mitchell, D. & Coles, C. 2003. The ultimate competitive advantage of continuing business model
innovation. The Journal of Business Strategy, 24(5): 15.

Mintzberg, H. 1985. Of strategies, deliberate and emergent. Strategic Management Journal,

6(3): 25-272.

Morris, M., Schindehutte, M., Allen, J.. Richardson, J. & Brannon, D. 2002. The entrepreneur’s
business model: theoretical, conceptual and empirical foundation. Working paper, Univ. of
Hawaii College of Business.

Nadler, D.A. & Tushman, M.L. 1997. Competing by Design: The Power of Organizational
Architecture, New York, Oxford University Press.

Osterwalder, A. & Pigneur, Y. 2002. An e-business model ontology for modeling e-business,"
Proceedings of the 15th Bled Electronic Commerce Conference, Bled, Slovenia: 1-12.

Peterovic, O., Kittl, C., & Teksten, R.D. 2001. Developing business models for e-business, Paper
presented at the International Conference on Electronic Commerce 2001, Vienna.

Porras, J. 2000. Electronic commerce internet strategies and business models—a survey,”
Information Systems Frontier, 1(4): 389-399.

Porter, M. E. 1980. Competitive Strategy. New York: Free Press.

Porter, M. E. 1985. Competitive Advantage. New York: Free Press.

Porter, M. E. 1996.What is strategy? Harvard Business Review, 74(6): 61.

22

Electronic copy available at: https://ssrn.com/abstract=932998

Porter, M. E. 2001. Strategy and the internet. Harvard Business Review, 79(3): 62-78.

Rappa, M. 2001. Business models on the web, Managing the digital enterprise, on-line guide,
North Carolina State University, http://digitalenterprise.org/index.html.

Rayport, J.F. & Jaworski, B.J. 2001. e-Commerce, New York: McGraw-Hill/Irwin.

Timmers, P. 1998. Business models for electronic markets, Journal on Electronic Markets, 8
(2): 3-8.

Weill, P. & Vitale, M.R. 2001. Place to space: Migrating to eBusiness Models. Boston: Harvard
Business School Press.

Yip, G. S. 2004. Using strategy to change your business model. Business Strategy Review,
15(2): 17.

23

Electronic copy available at: https://ssrn.com/abstract=932998

 TABLE 1

ALTERNATIVE COMPONENTS OF BUSINESS MODELS

Source # of Specific Components E-

Com- Commerce
ponents /General

Afuah & Tucci Customer value, scope, price, revenue, connected

(2001) Eight activities, implementation, capabilities, and E
sustainability
Dubusson- Products and services, relationship with
Torbay, Four customers, infrastructure and network of partners, E
Osterwalder & financial aspects
Pigneur (2001)
Timmers Architecture for product/ service/ information
(1998) Five flows, business actors and their roles, potential E
benefits of the actors, sources of revenue,
marketing strategy
Rayport & Value cluster, market space offering, resource
Jaworski Four system, financial model E
(2001)
Donath (1999) Understanding the customer, marketing tactics,
Five corporate governance, intranet, and extranet E
capabilities.
Gordijn, Actors, market segment, value offering, value
Akkermans & Eight activity, stakeholder network, value interfaces, E
Van Vliet value ports, value exchanges
(2000)
Hamel (2001) Four Core strategy, strategic resources, value network, G
customer interface
Petrovic, Kittl Value model, resource model, production model,
& Teksten Seven customer relations model, revenue model, capital E
(2001) model, market model
Chesbrough & Value proposition, target markets, internal value
Rosenbaum Six chain structure, cost structure & profit model, G
(2000) value network, competitive strategy
Amit and Zott Three Transaction content, transaction structure, G
(2001) transaction governance
Source: Adapted from Morris, et al. (2002)

24

Electronic copy available at: https://ssrn.com/abstract=932998

 TABLE 2

THE BUSINESS MODEL FRAMEWORK FOR WALMART

Value proposition:
• Offering—a wide variety of brand name or recognized quality merchandise at a lower
price than competitors, reliable stocking, and a satisfactory level of customer service.

• Target customer—though they targeted small towns and rural customers in their early
years, they are now very broadly positioned in suburban and urban markets as well.

• Generic strategy and building blocks of competitive advantage—Walmart strives to

maintain the lowest costs in the discount retailing industry which enables them to offer
the lowest prices and be comparatively profitable. Walmart focuses on efficiency.
Walmart also focuses on a high level of customer responsiveness in terms of
merchandising and inventory maintenance to increase sales volume.

Value creation and delivery:

• Value chain—Walmart’s value chain is straightforward (see diagram)—they purchase

and bring in goods from suppliers and offer them for sale at their stores.

• Position in the value network—As a retailer, Walmart is postioned at the end of the value
network selling goods produced by other firms to the final customer. Though most of the
goods are purchased from suppliers with brand names, Walmart does have some store
brands, primarily in soft goods, that are produced for Walmart by contract manufacturers.
A key area for Walmart is the design and allocation of activities around purchasing and
inbound logistics between Walmart and its suppliers.

• Distinctive resources and capabilities

o Purchasing and inbound logistics: Efficiency and low cost drive the design and
management of their store network and distribution system, but maintaining stock
is of paramount importance. Walmart has developed their purchasing and
inbound logistics to the point where it gives them a competitive advantage, i.e., it
is VRIO. In their early years, before they had the purchasing volume to sway
major manufacturers, Walmart was compelled to warehouse and deliver to their
stores in order to achieve the simultaneous low inventory levels and high stock
maintenance they sought. The internal warehousing and delivery system they
developed turned out to be better than manufacturers could have provided and
Walmart continues to use it even though they have tremendous purchasing power
today.

25

Electronic copy available at: https://ssrn.com/abstract=932998

 o Human resources management: well developed HRM activities have kept costs
low (low pay, low turnover, low shrinkage, etc.) but also motivated employees to
maintain satisfactory service levels (strong culture, incentives, etc.).

• How activities link to competitive performance

o Purchasing and inbound logistics: Though it evolved out of necessity, the design
of the purchasing and inbound logistics activities and the choice about which
activities Walmart would do versus suppliers have increased efficiency and
customer responsiveness. It has served to deliver their value proposition (low
prices and high stock maintenance) as well as confer competitive advantage on
the firm (see activity map).

(Note: A thorough treatment of Walmart’s value creation and delivery system would
include discussion their entire value chain, an activity map, and possibly some
key process descriptions, like stock replenishment. Resources and capabilities
that are VRIO would be identified for each activity or process.)

Value capture: Though value capture seems to offer little room for design in discount retailing,
Walmart has done better than competitors here as well.

• Revenue model—they recieve payment for goods purchased by customers at their stores.

• Economic model—keeping costs low is key to realizing margins at discount prices, and
Walmart works hard to keep costs of operations low. They also focus on another key
cost driver—volume. Volume reduces the impact of fixed costs and gives them
purchasing power with suppliers. In addition to low prices, Walmart uses market
saturation, good locations, adequate sizing of stores, and excellent merchandising and
stock maintenance to increase volume. Since its early days, Walmart has led the discount
retailing industry in volume of sales per square foot.

26

Electronic copy available at: https://ssrn.com/abstract=932998

 FIGURE 1

WALMART VALUE CHAIN AND ACTIVITY MAP

Supplier Administration

Human resource management

Purchasing

Inbound Sales
Service
logistics &
Marketing

Walmart activity map for purchasing and inbound logistics

Electronic
Volume POS data
data
purchasin h i collection

Responsive
Low merchandisin
Regional g
warehousing
stockouts
Tightly
linked
li
Wide
selection of
popular items
Frequent High
delivery
t t inventory
turnover

27

Electronic copy available at: https://ssrn.com/abstract=932998