the business model: an integrative framework for strategy execution

The business model: an integrative framework for strategy executionJames RichardsonShidler College of Business, University of Hawaii, Manoa

� We have many useful frameworks for formulating business strategy, i.e., devising a theory of how to compete. Frameworks for strategy execution are comparatively frag-mented and idiosyncratic.

� This paper proposes a business model framework to link the fi rm’s theory about how to compete to its execution. The framework captures previous ideas about business models in a simple logical structure that refl ects current thinking in strategy.

� The framework is a useful tool for the strategist, for teaching, and for research on busi-ness models in strategy.

Copyright © 2008 John Wiley & Sons, Ltd.

strategy have benefi ted greatly from these frameworks. Anecdotal evidence can be found by simply observing the business landscape. Many observers have remarked that, over the last few decades, the intensity of competition has increased dramatically in many industries. Many factors contribute to the increased com-petition, including rapid technological change and greater foreign competition. But, not only are more competitors joining in, the competi-tion is getting more sophisticated. Through business education and trade books, the con-cepts and tools of strategy are now well known in the business world. The understanding of what makes effective strategy is widespread, and viable strategies are rarely unexploited for long (Hamel and Valikangas, 2003).

Strategy can be defi ned as the fi rm’s theory of how to compete (Barney, 2002), and many of the frameworks aim to assist the fi rm in devising a good theory. By good theory, we mean one that will, when executed, lead the fi rm to competitive advantage and superior performance. A good theory will, of course, need to be based on a sound knowledge of the particular industry, competitors, and fi rm. The strategy frameworks enable the strategist to

Strat. Change 17: 133–144 (2008)Published online in Wiley InterScience(www.interscience.wiley.com) DOI: 10.1002/jsc.821 Strategic Change

* Correspondence to: James Richardson Shidler College of Business, University of Hawaii at Manoa, 2404 Maile Way, Honolulu, HI 96822, USA. E-mail: [email protected].

Introduction

The study of business strategy has yielded many useful frameworks for understanding how fi rms compete effectively. The fi ve-forces framework (Porter, 1980) organizes and gives meaning to the numerous measures and characteristics of industries. The generic strategy frame-work (Porter, 1980) reveals the fundamental approaches to gaining competitive advantage. The generic building blocks framework defi nes the basic dimensions along which a fi rm can outperform its competitors (Hill and Jones, 2001). The SWOT analysis framework is widely used to assess strategic situations. The VRIO framework (Barney, 2002) tells us when a fi rm’s resources can enable it to gain and sustain a competitive advantage. The value-chain frame-work (Porter, 1985) allows us to analyze the fi rm’s activities and sources of competitive advantage. And there are many more.

It is widely believed, though perhaps diffi cult to prove, that students of business

Copyright © 2008 John Wiley & Sons, Ltd. Strategic Change

134 James Richardson

Copyright © 2008 John Wiley & Sons, Ltd. Strategic Change DOI: 10.1002/jsc

apply general principles to the fi rm’s specifi c situation and come up with a good theory of how the fi rm should compete.

Armed with a good theory, the strategist must put it to the test through implementa-tion or execution. Some of the frameworks mentioned above, along with numerous ones not mentioned, can be useful in execu-tion — in putting the theory into action. In particular, the value chain and VRIO frame-works get us thinking about the activities and resources needed to execute the strategy. But on the whole, the frameworks are most useful in the theory (strategy) formulation. As we move into execution, the frameworks leave us with a fragmented and incomplete under-standing of how the fi rm’s theory of how to compete should be translated into action. Porter has characterized the fi rm’s strategy as the totality of its activities and not just a few critical or key ones (Porter, 1996). As one looks over the totality of a fi rm’s activities, how well do they represent the fi rm’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? Our frameworks certainly shed some light on such questions, but this is an area that could benefi t from additional work.

In large part, the diffi culty of framing strat-egy execution is inherent in the phenomena.

The fi rm’s theory of how to compete is a sim-plifi ed abstraction from the complexity of any real business situation. In each real competi-tive situation, the fi rm’s particular characteris-tics 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 fi rm’s products and services, its activities and resources, its people, and nearly everything else about the fi rm, are the ingredients of execution. Clearly, getting the details right is enormously impor-tant to effective strategy execution. And frame-works for thinking about this problem, for helping to get the details right, are enormously benefi cial.

Intermediate between the fi rm’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 activi-ties in terms of the basic strategy. It helps to complete the description of the strategy.

The widely used framework of levels of strategy 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., dif-ferentiate on superior technology. At the next level, a step toward operations, we have the functional strategies, e.g., marketing strategy, production strategy, and so on. A further inter-mediate level is sometimes employed in the framework, where functional strategies are translated into policies which are used to guide activities. In this framework, the func-tional strategies help to link the basic business strategy to activities, but they also help to complete the defi nition of the strategy.

However, the levels of strategy framework only go part way toward completing the logical structure that links theory to action. Given a set of functional strategies we can begin to assign activities to objectives, e.g., expand

The strategy frameworks enable the strategist to

apply general principles to the fi rm’s specifi c situation and come up with a good

theory of how the fi rm should compete. Armed with a good theory, the strategist must put it to

the test through implementation or

execution

An integrative framework for strategy execution 135


production capacity, in a way that is logically consistent with the overall strategy. But con-sider the many choices that must be made about the details in expanding production capacity — How should it be organized? 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 fi rm to guide these choices and actions. No doubt, successful strategists have in mind a consistent logical picture of their fi rms. What is proposed here is a specifi c framework to create such a consistent logical picture of the fi rm — a framework that can be systematically studied and taught to the student of strategy.

Afuah and Tucci, 2001) and more generally (e.g., Chesbrough and Rosenbloom, 2000). The basic idea is that a fi rm’s business model describes the way it delivers its products and services to customers and the way it makes money. Several authors have suggested using the business model as an integrative tool for strategy (Yip, 2004; Hedman and Kalling; 2003, Amit and Zott, 2001). The proposed framework builds on these ideas and organizes them into a simple and meaningful structure grounded in current theories. Using the frame-work to describe the elements of a fi rm’s busi-ness model gives a clearer understanding of how the fi rm’s strategy is embodied in its activities. The framework is useful as a teach-ing device as well as a practical tool for the strategist. It should also prove useful in future research on business models in strategy.

The paper fi rst discusses the business model concept and how it has been used in both the popular business press and scholarly publica-tions. Next, the business model framework for strategy is described and explained. An applica-tion 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 prac-tice, and some directions for future work.

The business model concept in the literature

A keyword search for ‘business model’ in the business literature reveals thousands of entries. The concept of a business model has found

However, the levels of strategy framework only

go part way toward completing the logical

structure that links theory to action

The proposed business model framework

provides a consistent logical picture of the fi rm

that helps to guide the myriad choices and actions involved in

execution

This paper proposes that the business model concept can be developed into a useful inte-grative framework for strategy formulation and execution. The proposed business model framework provides a consistent logical picture of the fi rm that helps to guide the myriad choices and actions involved in execu-tion. A business model is not a strategy (Porter, 2001). Rather, it is a conceptual framework that helps to link the fi rm’s strategy, or theory of how to compete, to its activities, or execu-tion of the strategy. The business model frame-work can help to think strategically about the details of the way the fi rm does business.

The concept of a business model became part of popular business jargon in connection with the dot-com era of the 1990s. More recently, business scholars have taken up the term and worked to defi ne and refi ne the concept both for electronic commerce (e.g.,



wide acceptance in the popular business press and has received considerable attention in the academic literature as well. The concept was fi rst popularized in connection with the dot-coms or e-commerce, where a start-up’s busi-ness model was a key point of interest for investors. The internet enabled fi rms to pursue new business models and raised the possibility that a better business model might confer a competitive advantage.

There is general agreement on the basic defi nition of a business model. It is simply a description of how a fi rm 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 and Pigneur, 2002).

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

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 com-ponents when they talked about a business model. Some focused on the sources of revenue, some focused on the means of deliv-ering products and services, and some focused on the central business idea or value proposi-tion of the fi rm. Later authors, in both the popular business press and the academic

literature, have defi ned 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 pre-sented by various authors. Table 1 presents a synopsis of business model components com-piled by Morris et al. (2002). Some of the perspectives are e-commerce specifi c, while others are generally applicable to any company.

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. They found a total of 24 different items mentioned as components of a business model, with 15 of these receiving multiple mentions. Of these, the most fre-quently included are the fi rm’s value offering or value proposition (11 mentions), profi t/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). Some of these items probably overlap, such as customer rela-tionships and target markets. Still, the poten-tial 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. Osterwalder and Pigneur (2002) have argued that the various components fall into three general categories — revenue/product as-pects, business actor and network aspects, and marketing-specifi c aspects. Hamel (2000) defi nes a business model as simply a business concept that has been put into practice. He identifi es four main business model compo-nents — core strategy, strategic resources, the value network, and the customer interface. The business model framework by Peterovic et al. (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. Rayport and Jaworski (2001) divide an e-business model into four main compo-nents — the value cluster, the marketspace offering, the resource system and the fi nancial model. Chesbrough and Rosenbloom (2000) identify six functions of a business mod-el — the value proposition, the target market segment and revenue sources, the value chain and complementary assets, the cost structure and profi t potential, the position of the fi rm in

the value network, and the competitive strat-egy of the fi rm. Morris et al. (2002) list six components with three levels. The six compo-nents are the offering, market factors, internal capabilities, competitive strategy, economic factors, and personal/investor factors. The three levels — foundation, proprietary, and rules — allow for the representation of increas-ingly fi rm-specifi c and detailed aspects of the 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 fi rm does business. At the same

Table 1. Alternative components of business models

Source No. of components

Specifi c components E-commerce/general

Afuah and Tucci (2001) Eight Customer value, scope, price, revenue, connected activities,

implementation, capabilities, and sustainability

E

Dubosson-Torbay et al. (2001)

Four Products and services, relationship with customers, infrastructure and

network of partners, fi nancial aspects

E

Timmers (1998) Five Architecture for product/service/ information fl ows, business actors and

their roles, potential benefi ts of the actors, sources of revenue, marketing strategy

E

Rayport and Jaworski (2001)

Four Value cluster, market space offering, resource system, fi nancial model

E

Donath (1999) Five Understanding the customer, marketing tactics, corporate governance,

intranet, and extranet capabilities

E

Gordijn et al. (2000) Eight Actors, market segment, value offering, value activity, stakeholder

network, value interfaces, value ports, value exchanges

E

Hamel (2000) Four Core strategy, strategic resources, value network, customer interface

G

Peterovic et al. (2001) Seven Value model, resource model, production model, customer relations

model, revenue model, capital model, market model

E

Chesbrough and Rosenbaum (2000)

Six Value proposition, target markets, internal value chain structure, cost

structure and profi t model, value network, competitive strategy

G

Amit and Zott (2001) Three Transaction content, transaction structure, transaction governance

G

Source: Adapted from Morris et al. (2002).



time we want to orient the framework to strat-egy and provide a simplifi ed logical structure. A key idea is that the business model repre-sents 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 aca-demic literature, the business model has evolved into a comprehensive and generally useful concept for thinking about how a fi rm does business (Magretta, 2002). The objective here is to show how, with a little develop-ment, the business model framework can be used in the strategy process to design or check on how the fi rm is executing its strategy. We have organized and defi ned the components of the business model framework to refl ect current thinking about strategy. We have also attempted to simplify and clarify the frame-

work while still capturing the essential com-ponents from the works cited.

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 — refl ect the logic of strategic thinking about value. The essence of strategy is to create superior value for cus-tomers and capture a greater amount of that value than competitors.

The Business Model Framework

The value proposition — what the fi rm will deliver to its customers, why they will be willing to pay for it, and the fi rm’s basic approach to competitive advantage.� The offering.� The target customer.� The basic strategy to win customers and

gain competitive advantage.The value creation and delivery system — how the fi rm will create and deliver that value to its customers and the source of its competitive advantage.� Resources and capabilities.� Organization: the value chain, activity

system, and business processes.� Position in the value network: links to sup-

pliers, partners, and customers.Value capture — how the fi rm generates revenue and profi t.� Revenue sources.� The economics of the business.

Within the simplifi ed framework we have incorporated most of the components of the more comprehensive and generalized business model frameworks cited above. Below, we discuss each of the three components to show how the framework can be used to think strategically about the way a fi rm does business.

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 — refl ect 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



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 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 fi rm’s (proposed) offering. Here, the elements of the value proposition are somewhat broader in concept. It includes the offering, or what the fi rm sells, 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.

plans to offer the same product to the same target market that is well served by many exist-ing fi rms does not have a strong value proposi-tion. Conversely, a fi rm that offers its target customers a greater value than its competitors has a strong value proposition. The value proposition represents the value the fi rm will offer to a customer relative to the competition.

Without all three of these elements, a fi rm will not have a solid value proposition upon which to build a fi rm. At a minimum, the fi rm will need an offering that identifi able custom-ers will be willing to pay enough for in a competitive market to allow the fi rm to be viable. Preferably, the fi rm will have a value proposition that includes potential for com-petitive advantage — such as a superior, or differentiated offering, or perhaps lower costs in serving the target market.

By our defi nition, the value proposition is a basic statement of the fi rm’s theory about how to compete. It states that the fi rm 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 fi rm’s value proposition.

The value creation and delivery system

The second component of the business model further details the fi rm’s theory of how to compete by describing how that theory is put into action. It begins to fl esh out the organiza-tion and architecture of the fi rm. It also specifi es and describes the fi rm’s sources of competitive advantage, i.e., its resources and capabilities. It shows the logic of the fi rm’s structure and how the organization is consis-tent with the fi rm’s basic strategy.

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

The strength of the fi rm’s value proposition rests on its strategic positioning. A fi rm that plans to offer the same product to the same target market that is well served by many existing

fi rms does not have a strong value proposition

The third element of the value proposition is perhaps more unusual and not so obvious. It raises the question of the fi rm’s reason for existence. Beyond what the fi rm will offer and to whom, it is important to ask why the market is not already well served by other fi rms. How is the fi rm 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 fi rm’s generic strategy — its basic approach to winning customers and gaining competitive advantage.

The strength of the fi rm’s value proposition rests on its strategic positioning. A fi rm that



sketch of the fi rm’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 identifi ed in a static structural model of the fi rm. It is possible to go beyond a structural model and include process descriptions, e.g., fl ow charts. Indeed, certain processes may be an important part of the strategy, e.g., an innovative process taking and fulfi lling customer orders. In that case, a description of the processes is an important part of the business model. A process may cor-respond to an activity, encompass multiple activities, or be part of activity. For example, the process of inventory management could encompass sales activities, purchasing activi-ties, inbound logistics activities, and ware-housing and delivery activities. While the process of taking an order would usually be part of the sales activities. Process descrip-tions would provide a richly detailed picture of the fi rm’s operations and strategy execution.

In the larger value creation network of which the fi rm is a part, activities will be divided among suppliers, the fi rm, 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 fi rm should both refl ect the fi rm’s theory of how to compete and confer the intended competitive advantage. If the fi rm proposes to compete on low cost, the activities should be divided up and con-ducted accordingly. Similarly, a differentia-tion strategy should be refl ected by activities that create and deliver that differentiation.

But to confer competitive advantage, the design of the fi rm will require more than a sensible allocation of activities consistent with the value proposition. Careful consider-ation must be given to the ability of the fi rm 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 com-petitive advantage. Applying the VRIO test to the various resources and capabilities in the value network, the fi rm can identify its sources of sustainable competitive advantage. The design of the fi rm (the allocation of activities) should give it some measure of control, if not ownership of these resources and capabilities.

Value capture

Because a fi rm devises a strong value proposi-tion 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 profi t margin over its costs. This component of the business model includes what is often called the revenue model as well as the eco-nomic model. The revenue model describes the sources of revenue or different ways that the fi rm receives money in exchange for its services. The economic model covers the costs, margins, and various fi nancial aspects of the fi rm.

Many discussions of business models, par-ticularly the earlier ones circa the mid-1990s, focused on the revenue model. Lists of types of revenue models were produced (Rappa, 2001), including subscription models versus sales models, advertising models, and so on. The idea is to consider alternative means of exchange that customers will fi nd attractive.

The economic model of the fi rm is a concept generally used in the entrepreneurship litera-ture. It refers to the revenues, costs, and expenses that go into the profi t equation. It also includes the timing of exchanges. The



economic model of the fi rm is refl ected in the operating cash fl ow statement. Note that the ability of the fi rm to gain a competitive advantage and generate superior profi t margins is refl ected in its economic model.

These two elements, the revenue model and the economic model, combine to explain how the fi rm will make money. They describe the various revenue streams, the cash fl ow, and the margins. A creative and thoughtful approach to value capture is an essential com-ponent of building a successful business model. The fi rm’s value creation and delivery system must be designed with both the value proposition and value capture in mind.

How the business model articulates the strategy

A well-designed business model defi nes and organizes the activities of the fi rm to execute the strategy. The activities are chosen and organized to create and deliver the value prop-osition, i.e., to implement the fi rm’s theory of how to compete. The allocation of activities and the boundaries of the fi rm are chosen to deliver the value proposition as well as to provide the intended competitive advantage to the fi rm and assure that it captures the intended share of the value.

The allocation of activities between the fi rm and others in the network should be done to effectively deliver the value proposition. But

satisfi ed customers are not suffi cient for suc-cessful strategy. The fi rm will need to consider its activities and its position in the value network with value capture in mind. Various revenue sources and the economics of alterna-tive models can be compared to fi nd better ways to both deliver value to customers and capture it for the fi rm. Value for the customers versus value for the fi rm is not a zero-sum game. A better business model could increase value for both the customers and the fi rm. But there will be tradeoffs to be made to ensure value capture for the fi rm.

The economic model of the fi rm is a concept generally used in the

entrepreneurship literature. It refers to the

revenues, costs, and expenses that go into the profi t equation. It also includes the timing of

exchanges

The allocation of activities between the fi rm and others in the network

should be done to effectively deliver the

value proposition. But satisfi ed customers are not

suffi cient for successful strategy

The value network should be able to produce the low costs or differentiation intended in the fi rm’s strategy. But competitive advantage to the fi rm must be based on activities using resources that are VRIO. The design of the fi rm (the allocation of activities) should give it some measure of control, if not ownership of these resources and capabilities. For example, outsourcing an activity central to a fi rm’s com-petitive advantage may be appropriate if the key resources can be controlled. If they cannot, then keeping the activity in-house may be the best course, even if the costs are greater. Again, there will be tradeoffs to be made to ensure competitive advantage for the fi rm.

A well-designed business model creates an overall picture of the fi rm and its operations with a consistent logical structure for execut-ing the strategy. It helps the strategist to orga-nize the fi rm and think about the details of its activities with both the value proposition and



value capture in mind. It helps the strategist to choose among alternative designs with competitive advantage in mind.

Application of the business model framework

A description of Walmart’s business model using the framework will illustrate how the framework provides an overall picture of the fi rm that shows how the basic strategy is executed.

Walmart

Walmart’s value proposition is to provide a wide variety of brand name or recognized quality merchandise at a lower price than competitors. Additional features of their value proposition are consistently having items in stock and providing a satisfactory level of cus-tomer service. Though they targeted small towns and rural customers in their early years, they are now very broadly positioned in sub-urban and urban markets as well. Their basic strategy is to maintain the lowest costs in the discount retailing industry in order to offer the lowest prices and be comparatively profi table.

Walmart’s value creation and delivery system has been widely studied and emu-lated. For this illustration, we discuss only a few of the activities in their value chain. As a retailer, Walmart is positioned at the end of the value network selling goods produced by other fi rms to the fi nal customer. Walmart’s value chain is straightforward — they pur-chase and bring in goods from suppliers and offer them for sale at their stores. Though most of the goods are purchased from suppli-ers with brand names, Walmart does have some store brands, primarily in soft goods that are produced for Walmart by contract manu-facturers. Effi ciency and low cost of course drive the design and management of their store network and distribution system, but maintaining stock is of paramount importance. Walmart has developed their 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 com-pelled 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 devised turned out to be better than manufacturers could have pro-vided, and Walmart continues to use it even though they have tremendous purchasing power today. Though it evolved out of neces-sity, the design of the inbound logistics activities and the choice about which activities Walmart would do versus suppliers have served to deliver their value proposi-tion as well as confer competitive advantage on the fi rm. In other areas, human resource management activities have kept costs low but also motivated employees to maintain sat-isfactory service levels. Marketing activities are also minimized and designed to keep costs low — e.g., simple message, everyday low prices.

A thorough treatment of Walmart’s value creation and delivery system would include discussion of their entire value chain, perhaps an activity system map, and possibly some key process descriptions, like stock replenish-ment. Resources and capabilities that are VRIO would be identifi ed for each activity or process.

Value capture seems to offer little room for design in discount retailing. But Walmart has done better than competitors here as well. The revenue model is straightforward — they receive payment for goods purchased by cus-tomers at their stores. The economic model is also straightforward — keeping costs low is key to realizing margins at discount prices, and Walmart works hard to keep costs of oper-ations low. They also focus on another key cost driver — volume. Volume reduces the impact of fi xed costs and gives them purchas-ing power with suppliers. In addition to low prices, Walmart uses market saturation, good locations, adequate sizing of stores, and excel-lent 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.

But Walmart has done better than competitors

here as well. The revenue model is straightforward — they receive payment for goods purchased by

customers at their stores. The economic model is also straightforward — 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

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 fi rm. And we can see how they work to capture value for the fi rm. The business model helps to clarify how the myriad details of how 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 fi rm work to execute the strategy. The busi-ness model provides an intermediate logical structure between the fi rm’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 fi rm (Porter, 1996), then the business model framework helps to create a consistent logical picture of how all of the fi rm’s activities form a strategy.

The business model framework also pro-vides a simple logical structure for the student of strategy to see how strategy formulation and implementation are linked. Presently, stra-tegic management textbooks typically fl ow from a conceptually well-developed presenta-tion of strategy formulation to a more fragmented and idiosyncratic discussion of implementation. The business model frame-work could help to organize the discussion of implementation and link it back to strategy formulation. In principle, designing the imple-mentation 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 fi rm’s activities should be organized and con-ducted. 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 fi rm (vertical integration, out-sourcing, partnering, etc.); part of business strategy, as they should be (Barney, 2002). This is in contrast to many textbooks that treat such decisions separately from business strategy and as part of corporate strategy.

The business model framework might be useful in strategy research. For example, it could facilitate study of how alternative busi-ness models affect performance. Two fi rms 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 fi rms?

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 fi rm. This is an area for future work — to incorpo-rate additional theories about the organization and conduct of activities that will help guide the strategist in designing better business models.

Biographical note

Jim Richardson is Associate Professor of Man-agement at the Shidler College of Business of the University of Hawaii at Manoa, where he teaches entrepreneurship and strategy. His current research interests include entrepre-neurship and economic development in Asia, venture capital in Asia, and business models. He is an entrepreneur with a new interna-tional venture in the surfi ng industry.

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