From Strategies to Business Models

By Nicholas G. Carr

It's hard to pinpoint when exactly "business model" supplanted "business strategy" in the managerial lexicon, but it seems clear that the shift began about four or five years ago — when the Internet gold rush was just heating up. Today, everyone has something to say about business models, but not much is heard about strategy.

It's tempting to dismiss the change as mere semantics, the latest round in the game of musical buzzwords played by consultants, academics and journalists. But while it’s true that "business model" is a uniquely squishy phrase, its adoption marks a fundamental change in business thinking. It underscores, in particular, strategy's uncertain role in the new economy.

Strategy’s Rise

The rise of "strategy," as it applies to business today, began in March 1979, when the Harvard Business Review published Michael Porter's article "How Competitive Forces Shape Strategy." Porter argued that profitability in any industry is determined by five forces: the competition among existing players, the threat of new entrants, the power of suppliers, the power of customers and the availability of substitute products. By rigorously analyzing these forces, the astute manager could determine the optimal positioning for his company

In the Porterian universe, industries had clear boundaries and stable structures, and the success of a company was determined not by the quality or innovativeness of its products but by the logic of its strategy.

It's no coincidence that the ascendancy of such a highly codified form of business thinking came at the end of the Industrial Age. By the late 1970s, the industrial economy had been chugging along for almost a century, and its structure was fixed and competition was predictable. The professional manager had long since taken over from the entrepreneur.

The cult of strategy reached its logical, and absurd, conclusion in the 1980s, when managers spent all of their time "restructuring" their companies. Customers, products and employees became unimportant. All that mattered was manipulating assets to earn higher financial returns. Strategy had become an end in itself.

The New Rules

Whenever a system becomes a parody of itself, it is a good bet that it's about to be replaced by a new one. That's exactly what’s happened over the last decade. The industrial era has given way to the information era. Structure and predictability have been replaced by formlessness and uncertainty.

In the early stages of any economic system, the rewards go to those who create the new, not to those who conserve the old. Entrepreneurship, to paraphrase business professor Gary Hamel, becomes more important than stewardship. And since the ultimate form of the new system remains unknowable, strategic planning, in its Porterian sense, has little use. A new way of thinking about business is required.

That brings us to the shift from strategy to models. But what exactly is a business model? Tom Malone, an MIT professor who is developing an online catalog of business models, has a simple definition: It's "what a company does and how it makes money doing it." I think it could be boiled down even further. Whereas a business strategy is a theory - a line of reasoning that ends in a logical conclusion - a business model is a hypothesis. It's a tentative stab at the truth.

If we sell stuff below cost, we'll make money by distributing the eyeballs we attract - that's Buy.com's hypothesis. If we can build a smart network at the edge of the Internet, we can get paid for distributing content and functions - that’s Akamai’s. In the new economy, we aren't yet at the stage where we can prove theories. The best we can do is to test hypotheses

Re-coding Business

The November-December 1999 issue of Harvard Business Review features an article titled "Getting Real About Virtual Commerce" by the management consultants Philip Evans and Thomas Wurster. They argue, compellingly, that the most profitable role on the Internet will be that played by navigators - companies that lead people to information or transactions.

It's an insightful and important article, but I take issue when the authors say that on the Internet the "obvious land has been grabbed," and thus companies need to shift from experimentation to strategy. For anyone with a vested interest in the industrial-era idea of strategy, the temptation to think that the new economy has assumed its final shape is understandably strong.

But we're not there yet. The new economy is essentially a creation of software code, and that code is still being written.