Business Model vs Business Strategy: 5 Key Differences

When starting a new business idea, among the first things to think about are your business strategy and business model. Maybe you heard both terms and still unsure what is what and how to use them to get to product-market fit? In this article, we will explain the key difference between the model and the strategy and how both of them can help you achieve your long-term goals.

What is a Business Model?

A business model defines how your company creates, delivers, and captures customer value. The model is defined by a combination of factors such as:

• target audience
• value proposition
• revenue streams

It is a comprehensive overview of all relevant business processes and outlines how the business will engage with other players in the market. It is also one of the key factors in moving from an idea to a product-market fit.

What is a Business Strategy?

A business strategy is a holistic plan or set of actions an organization implements to achieve its long-term objectives, outperform the competition, and, in many cases, sustain profitability.

The strategy may outline how a company will allocate resources, respond to market demands, and differentiate itself from competitors.

Business strategies typically involve decisions on:

• product offerings
• market positioning
• pricing
• internal operations,
• other key areas that drive the organization's success in its industry.

As most business strategies are guided by the company's mission and core values., they may undergo regular adjustments. By doing this, businesses can quickly respond to changes in the external and internal environment.

Which comes first - model or strategy?

Successful purpose-driven companies start with their mission and vision—that is, what are their reasons to exist? Without a vital purpose, entrepreneurs often fall victim to the turbulence of startups' early days.

The mission and vision are the starting point for building a business strategy. The strategy is the blueprint for achieving the company's mission.

Once a business strategy exists, the team can create one or multiple business models to experiment with. It’s not uncommon for companies to pivot to different business models based on feedback from customers or competitors.

How do they work together?

1. Alignment

A business strategy and a business model work together by aligning the company’s long-term vision with its daily operations. The strategy sets the overall direction, defining goals, competitive positioning, and resource allocation. At the same time, the business model translates these strategic plans into actionable steps that drive revenue and deliver value to customers. A good alignment between the two ensures that the company’s objectives will be achieved in the end.

Example: Netflix

Netflix’s alignment between strategy and model is evident in its investment in original content. Netflix’s strategy for differentiation is based on having unique, high-quality content. The subscription-based model supports that initiative by ensuring a constant revenue stream to fund expensive productions. Unique content, in turn, reinforces customer loyalty and supports subscription retention.

2. Decision making

The business strategy outlines the company's high–level direction, based on which day-to-day operational decisions are made as part of executing the business model. Without a sound strategy and business model, teams tend to make sporadic and chaotic decisions, relying on gut feelings and luck.

Example: Google

Google is renowned for empowering product teams to decide independently based on data. This is enabled through a strong company strategy within which boundaries the teams can work and have to align. Without such overarching priorities, every team can easily take the slippery slope of optimizing for their own objectives, leading to:

• product cannibalization,
• lack of focus,
• missed opportunities from working in collaboration.

3. Resource allocation

The business strategy identifies the key areas where the company needs to focus its resources, such as:

• entering new markets,
• developing innovative products,
• enhancing customer service.

It sets priorities based on the company’s long-term objectives and competitive advantage.

The effective business model, on the other hand, determines how these resources will be utilized in day-to-day operations to generate value and revenue. It outlines the processes, activities, and investments required to deliver the product or service, such as:

• technology development,
• marketing efforts,
• supply chain management.

Example: Apple

Apple’s strategy is centered around innovation, customer experience, and strong branding. To support that, the company creates a business model with its own stores that have unique aesthetics and reinforce the brand identity. In addition, a significant part of the company’s resources are invested in R&D to create the environment needed for product innovation and develop products like the iPhone, iPad, etc.

4. Risk management

The business strategy provides a high-level overview of the risks, focusing on external threats like competition, economic shifts, government regulations, or technology disruptions. It also outlines the approach to mitigating such risks. The business model converts this high-level direction into an actionable plan. Together, the strategy and the business model create a comprehensive approach to risk management.

Example: Amazon

Amazon’s retail strategy has always focused on customer satisfaction, low prices, and various products. However, this strategy exposes the company to a high risk of market volatility, specifically maintaining profitability with low-margin sales that depend on multiple external factors like vendors.

Several elements in the Amazon’s business model mitigate this risk:

• Diversified revenue streams that complement the retail business line like AWS, Amazon Prime, etc.
• Economies of scale and sophisticated supply chain management create an unfair advantage that competitors cannot copy.

How does a business model differ from a business strategy?

1. Purpose

The primary purpose of the business model is to inform the sales, marketing, and product efforts. It is vital in the process of building a product and customer experience that resonates with the target audience.

In contrast, the main aim of a business strategy is to provide a plan for how the organization will achieve its goals, mission, and vision. It informs:

• how the business plan should work,
• how resources should be allocated,
• what is the high-level positioning in the market

2. Timeline

The business model typically operates on short to medium timelines, focusing on how the company generates revenue now and in the near future. The main objective is to ensure the company operates efficiently, generates revenue, and maintains profitability.

On the other hand, the business strategy concerns the long-term direction of the company. It outlines the steps the company needs to take to achieve its mission and vision. The strategy relates to future market trends, the competitive environment, and strategic positioning.

3. Scope/ Components

The business model has a narrower focus, mainly on the operational aspects of how a company creates and delivers value. In contrast, the business strategy has a broader scope as it defines a company's overall direction and long-term goals. It discusses market competition, market positioning, growth, and innovation plans.

4. Flexibility

Although both the business model and the business strategy need to be relatively stable, the business model offers more flexibility.

A business model can evolve based on market feedback, changes in customer needs, or operational challenges. A company might experiment with different business models (even simultaneously) to find the one that works best.

A business strategy is less flexible. It serves as a north star for the organization when making decisions and provides guardrails for how far the company can deviate from the original plan.

5. Relationship

The business model and the business strategy are closely linked. The strategy informs what business model would work best, and the business model (or multiple business models) is one of the components of a business strategy.