When starting new, changing or expanding an existing business, a company should (re-) define its strategy and methods of turning the strategy into the actual business. The business model is a tool to demonstrate how company creates revenues or value to the customers, depending on the definition of business model used. The business model portfolio provides an overall visual outlook of business models that have been evaluated based on their profitability and risk factors.
Authors: Anne Virtanen and Brett Fifield
A strategy defines company’s goals and objectives. It determines what a company wishes to achieve and how in a long run. (Tracy 2015.) A business model can be defined in multiple ways. It’s meaning can vary from assumptions of company’s actions to methods and actions towards creating revenues and value for customers. The business model describes the components that are required to follow the strategy. Both, the strategy and the business models are not static, but changing due to external or internal forces. (Ovans 2015; Gorchels 2012.)
A business model canvas is a single page tool to define how the value is created to the certain customer segment. It contains nine different parts that define the customer segment, the value proposition, the channels, the customer relationships, the revenue stream, the key activities, resources and partnerships and finally the cost structure. The purpose of the canvas is to provide a single page template to design a complete business model. Existing business models can be assessed based on their profitability and risk factors and placed into a business model portfolio. It contains two parts, the exploit part for existing business models and the explore part for innovative business models. Once the business models have been evaluated and placed to the portfolio, it gives an overall situation of the models included. (Osterwalder & Pigneur 2010.)
Action research for business model development
An action research study by Virtanen (2020) focused on developing business models and business model portfolio for a Finnish local food distributor extending its business from B2C to B2B segment. The initial versions of business models were created according to a written high-level business plan and strategy assessment.
An action research with three research cycles took place during the pilot phase with a goal to develop the business models to correspond the actual business instead of assumptions of what may be needed. Within each cycle, actions took place including the sales transactions, event and co-creation with customers. At the end of each cycle, the data collected and analyzed from actions were compared to the initial business models. The differences that were validated to be a continuous part of the models were added to the them. Each of the cycles gave more insight of what needs to be done to make the value proposition happen to each customer segment and the models were changed constantly. After the three cycles, the models were finalized and assessed by the risks and profitability and placed to the business model portfolio to gain a visual outlook of different models.
For a local food distributor, a multi-sided business model was required from the beginning. In this multi-sided business model, the other side presented the producers and another local businesses, such as restaurants, catering services and city food services. In the multi-sided business model, both sides are required to enable the business, and with the case in question, there is nothing to sell to local businesses if producers are not involved, and the other way around.
During the research, the initial business model for local businesses was divided into four business models, separated by customer segmentation, value proposition or delivery options. The business model for the producers was developed but not divided. In addition to these, total of five business models, two models were created for future business idea evaluation. Since these models were placed into the business model portfolio, it gave the case company a visual aid to evaluate if all models will be valid in the future as well or if the strategic decision will be made to focus only on a few of them.
Once a company defines its strategy and business models, it must keep in mind, that they must be evaluated regularly. It is suggested by Osterwalder et al. (2010, 200-202) that the surroundings of business are also evaluated to identify possible changes with market, with the industry-specific situation, with the ever-changing trends and with global situation. Whilst the surroundings have been mapped, it is easier to evaluate the models against the changes occurring around the company.
It is important for a company to evaluate the differences in the business models, look for the new business innovations or possibilities that these models do not respond to. These possibilities may contain profitable and sustainable models that fulfill the customer’s needs and are not available currently for the customers.
It is also important to define the common values of all business models, e.g. what are the common activities or resources all models have and how can they be developed. By identifying the common elements and improving them provides benefits to all the models and make them all more sustainable. Since the case company of the study had both B2C and B2B businesses, the comparison between these models should also be done to identify the common elements between these models as well for the synergy benefits.
Although a company tends to have more than one business model where the revenue is created, it does not mean that the company should have them all. Especially with the small companies, focusing on few models will help to serve the customers better and with deep knowledge. To further improve the company’s operations, the service design techniques can be used. The service design puts the customer experience and customer needs in the middle and focuses on improving and developing those. The service design process contains steps from generation of ideas to prototyping and validating the improvements or new services. (Meroni & Sangiorgi 2015; Reason, Løvlie & Brand 2015.)
Benefits of a business model portfolio
A company’s strategy sets the company’s long-term goals and objectives. The business models can be used to define the components through which the strategy can be reached. If the business portfolio and business models are created based on the actual data, they are more reliable and valuable than those that are based on assumptions. Both, internal and external forces have impact on the business models and the business model portfolio and therefore, they should not be static but constantly changing. For the company, business models provide a picture of what is needed to serve customers and create value for them. The business model portfolio provides an outlook of the existing and emerging business models and their profitability and risk assessment. Based on all of these, a company has an opportunity to manage its operations better, identify the development needs and serve the customers better.
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Ovans, A. 2015. What Is a Business Model? Harvard Business Review. [Cited 17 Dec 2019]. Available at: https://hbr.org/2015/01/what-is-a-business-model
Reason, B, Løvlie, L, & Brand. 2015. Service Design for Business : A Practical Guide to Optimizing the Customer Experience. Hoboken, New Jersey: John Wiley & Sons.
Tracy, B. 2015. Business Strategy (the Brian Tracy Success Library), AMACOM, Saranac Lake.
Virtanen, A. 2020. Building a Business Model Portfolio. Case Heila Ltd. Master’s thesis. LAB University of Applied Sciences, Faculty of Business and Hospitality Management. Lahti. [Cited 18 Dec 2019]. Available at: http://urn.fi/URN:NBN:fi:amk-202002042029
Anne Virtanen is studying in the International Business Development program at LAB University of Applied Sciences
Brett Fifield is a Principal Lecturer in International Business at LAB University of Applied Sciences
Illustration: https://pxhere.com/fi/photo/1562521 (CC0)
Reference to this article
Virtanen, A. & Fifield, B. 2020. Using business models to implement the business strategy. LAB Pro. [Cited and date of citation]. Available at: https://www.labopen.fi/lab-pro/using-business-models-to-implement-the-business-strategy/