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Using strategy to change your business model

Business models rose to prominence in the dot-com boom. Their usefulness may not have ended with the dot-com bust. George S Yip believes ...

By George Yip 01 June 2004)

Business models rose to prominence in the dot-com boom. Their usefulness may not have ended with the dot-com bust. George S Yip believes that business models may shed important light on how we understand and practise strategy.
Using strategy to change your business modelBusiness academics and consultants have been writing about strategy for over 40 years. Yet there is still great confusion as to what strategy is. The Internet boom and bust introduced a new term, “business model”, that may go a long way to clearing up the confusion.

In essence, companies use radical (or transformational) strategies to change their business models and routine strategies to change their market positions (Exhibit 1). So both types of strategy are dynamic and change oriented and it is not a matter of static versus dynamic strategy. All strategies are dynamic. Companies use routine strategies, such as a marketing strategy to increase market share, all the time. But they use radical strategies rarely – usually only when changes in their environment render their current business models obsolete or when they voluntarily choose to embrace a new business model. The root cause and rarity of radical strategies explains their low rate of success. First, having to replace an obsolete business model is inherently risky. Second, the rarity of use means that most companies and executives have little experience of devising and implementing radical strategies. After all, many business models work successfully for decades. For example, IBM’s mainframe computer business model worked from the mid-1960s to the PC revolution of the mid-1980s. Sears Roebuck’s catalogue retailing business model worked for nearly 100 years from the 1890s to the 1980s.

In a few rare cases, companies seek to change their business model while still operating from strength (although typically facing incipient environmental changes and threats), as Motorola did in shifting from its consumer electronics business model in the 1970s and 1980s to its high-technology industrial and mobile telecommunications business model in the 1980s. Similarly, in the 1990s Microsoft extended its business model from personal computer operating systems and software to include the Internet and the web. Even so, all radical (or transformational) strategies are inherently risky as they involve moving from one equilibrium position through disequilibria before arriving at a new equilibrium.

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