Business Strategy and Leadership Concepts

Business Strategy
Professor Deepak Somaya

Overview

Hello and welcome to this module on Leading Strategically.

[Lesson 1, Slide 2]

In it, we will cover three main topics. First, we will discuss a company’s mission, vision and
values, and the role they play in strategic management. Second, you will learn about business
models, and work through a new framework – the VARS framework – to analyze and develop
business models. Finally, you will be introduced to a well-‐known basic strategic management
tool called the SWOT framework, through which you will also learn about two key concepts –
coherence and fit – that are central to understanding the role of strategy in companies.

Each of these topics are introduced and described in separate Key Concept lectures in this
module. In addition, two of these lectures are accompanied by my interviews with our
executive experts, which will help you see how these concepts are actually used by business
leaders in their companies. In the third lecture – on coherence and fit – you will visit the soccer
field with me, and we will use the metaphor of a team sport like soccer to understand these
concepts.

This module has a number of small exercises and practice quiz questions built into it. Take
advantage of these learning opportunities, which will deepen your knowledge and also prepare
you for the formal module quiz and case analysis. The case analysis for this module is on Uber,
which is at the forefront of transforming the taxi and limousine car industry world-‐wide. I think
you will have a lot of fun with Uber, and applying what you learned in this module to this
company.
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Key Concept: Mission, Vision & Values
The concepts of Mission, Vision and Values are critical for setting the stage for strategic
management inside companies.

[Lesson 1, Slide 3]

A company’s mission is a brief statement about what the company’s ultimate goals and
objectives are; in short, what is its purpose in the world? Here’s Google’s stated mission: “to
organize the world’s information and make it universally accessible and useful.” Wow! That is a
pretty ambitious mission if you ask me … to organize ALL of the world’s information, and to
make it accessible and useful to EVERYONE! And what is truly amazing is that Google’s founders
– Larry Page and Sergey Brin – had already identified this mission as well as a set of core values
or beliefs very early in the company’s history. This is not unusual, as most company missions
are often defined by or at least strongly influenced by the company’s founders and early
managers.

[Lesson 1, Slide 4]

So why do companies have a mission? In fact, not all companies have a mission, and there are
also some companies that do not have a formal mission statement but may implicitly
understand what their mission is and act accordingly.

When companies do have a mission … it achieves at least three main purposes. First, it makes it
completely transparent to all stakeholders – customers, investors, employees, or business
partners – why the company exists and what it is trying to achieve. This common understanding
can play an important role in coordinating action … if all stakeholders understand what Google
is about – that it is committed to organizing the world’s information, and to making it
universally accessible and useful – they can more easily work together to achieve those goals.

Second, because there is this common understanding, it becomes easier to resolve disputes
about the future direction of the company. In Google’s case, it was clear even when it acquired
the phone handset company Motorola Mobility that the handset business was not core to
Google’s mission. So, it was expected that Google would eventually sell this business, which it
did in 2014. Even if there were managers inside Google who wanted to get into handsets in a
big way, it would have been easy to say to them: “look, that’s not who we are as a company; we
should focus on businesses that have a closer fit with our mission.”
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Last but not least, a good mission can be a great inspiration for employees and managers to
give their best work. Most of us would like to feel that we are a part of something bigger,
something that is having a positive impact on the world. It would give us a sense of purpose and
motivate us. And a good corporate mission can do exactly that.

[Lesson 1, Slide 5]

Not all mission statements are created alike. There are good ones and bad ones. So, what
makes for a good corporate mission? First, good missions emphasize the creation of some type
of customer or social value – improving health, or learning, or quality of life, etc. – instead of
focusing only on being the best at something or on simply making money. Second, good
missions do not lose sight of the customer needs or problems that the company was built to
address. Unfortunately, some missions focus too narrowly on the company’s product or service,
and as a result companies become product-‐focused and get surprised when new technologies
or trends make the product obsolete.

[Lesson 1, Slide 6]

Third, a mission is only worthwhile if it is actually lived and practiced by the company. A good
test is to see if a company’s regular employees actually know its mission and use it to guide
their daily work. In Google’s case, I understand that this is indeed the case, which is quite
remarkable considering how many employees the company now has.

And finally, good missions are memorable, inspiring, brief statements that any employee or
manager can remember and use at all times. Google’s mission is a good example of this.

[Lesson 1, Slide 7,8]

In addition to missions, some companies also articulate a vision – a short aspirational statement
about the future direction and impact of the company. Google’s initial vision was “to provide
access to the world’s information in one click.” The venture capital firm Sequoia Capital
supposedly invested in Google because it was so impressed by the company’s vision. Sequoia
then asked all other startups who came seeking an investment to provide their own vision
statements, like Google. As you can see, a good vision statement can be very powerful. Unlike a
mission, however, companies may eventually achieve and/or abandon their initial vision, and
move on to a new one. You might even say that Google has achieved its original vision, and has
now moved on from it.
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[Lesson 1, Slide 9]

Strategic thinkers Gary Hamel and C.K. Prahalad coined the term “strategic intent” to describe a
special kind of stretch vision accompanied by a strategic plan. They cited Japanese photo-‐
electronics company Canon’s plan to “beat Xerox” as a good example of strategic intent. A
strategic intent goes beyond just a vision statement … it galvanizes and inspires employees, and
makes the company expand its capabilities to achieve that vision.

[Lesson 1, Slide 10]

Some companies also have a set of values that they declare they hold and will stick to. These
values can be seen as a “code of conduct” for the company and its employees. A company’s
declared values essentially says to everyone – this is how we will behave as a company, and if
you are an employee it is also how we expect you to behave.


For example, Google has a list of 10 core beliefs, which its founders wrote down very soon after
they founded the company. #6 on this list is “You can make money without doing evil” … often
shortened to “don’t be evil.” These values have a real impact on how Google operates. For
example, Google does not accept pop-‐up advertising and clearly identifies advertised links as
“sponsored links” because of this value.


You might be wondering whether company values or visions or mission statements have any
real impacts on companies, or if they are simply for show. It turns out that company leaders can
play a very important role in this. It is very easy to have formal statements that are not followed
in practice, and leaders have a key responsibility to communicate the company’s mission vision
and values, to set an example by their own behavior, and to encourage and urge others to
follow them.


For example, do you know which company these four core values come from – on
communication, respect, integrity and excellence? They look and sound very good.

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But those four values are from the energy company Enron, included in its 2000 annual report.
In 2001, the company went bankrupt. Despite what the company’s formal values stated, the
company’s executives behaved very differently. Instead of integrity, respect, and open
communication, there was too much risk taking and highly unethical behavior. The company
developed a culture of unlimited greed and cut-‐throat competition between employees.
Enron’s failure to uphold its own values resulted in the failure of the company itself, which was
ultimately a failure of its leadership.


So I hope you have learned a little about what a company’s mission, vision and values are, and
that these can matter for a company’s success if they are … designed well … lived and practiced
within the company … communicated and reinforced by the leadership … and of course they
also have to be a true reflection of the company itself.

Key Concept: Business Model and Business Model Innovation
In this segment you will learn about business models and business model innovation, a truly
exciting topic that is of great relevance to strategic leaders today, but at the same time one that
is often confusing and misunderstood.

[Lesson 2, Slide 2]

To begin with, let us ask why should we care about business models or business model
innovation? You may have your own thoughtful answer to this question, but let me give you
one based on my own personal experience.

As you might know the University of Illinois is based in the twin College towns of Champaign
and Urbana. When I first arrived here in 2008 our town had a number of major stores that
simply don’t exist today. So, let’s take a quick tour around town and I’ll show you where some
of these stores used to be.

[Lesson 2, Slide 3]

We are now to the South of town in front of a Goodwill store, which you may know sells
affordably priced used clothes and home goods. But, many years ago, what we had here was a
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very nice locally-‐owned bookstore here called “Pages for All Ages” which had operated in this
location for years, and was very popular … but unfortunately it was forced to close and has now
been replaced by this Goodwill store.

Now moving to the north of our town, we had a Border’s chain bookstore here in this shopping
center, which is now replaced by the liquor chain store Binny’s.

We also had the electronics store Circuit City, which operated here inside this storefront, but
that closed down, too. It has been replaced by an outdoor clothing and equipment store.
In addition, we had several video rental stores around town – we had the national chain store
Blockbuster operating in this location in the west of Champaign, which is now closed, and
replaced by a pizza shop.

One of the other video stores in town was an eclectic video store called “That’s
Rentertainment” located right in campus town with a wide selection of funky, arty and foreign
films. This store too has closed down, although a new renter has not yet moved in.

And my favorite example of all is “Hollywood Videos”; another chain video rental store that
used to operate here in this store … the new owners didn’t even take down the Hollywood sign,
and simply added liquors to it. So it is now another liquor shop – clearly, there’s a bit of a
theme here … liquor sales seem to be doing well in Champaign IL.

[Lesson 2, Slide 4]

It is not hard to guess why all these stores have closed down – the bookstores and electronics
stores have lost business to internet retailers, and the video stores have been losing business to
internet video services like Netflix, and to video rental kiosks like Redbox which have popped up
everywhere in the United States.

And why have these stores been replaced by liquor stores, at least in some instances? It turns
out that liquor stores have less effective internet-‐based competition … at least that has been
true until now. So, it should come as no surprise that liquor stores seem to be doing better than
bookstores and video stores in retail locations.

[Lesson 2, Slide 5]

Now it is not unusual for retail establishments to close down – sometimes they are badly run,
or they run out of cash, or run into labor problems. But there IS something unusual about the
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retail closings we have just seen. First of all, the speed with which these historically successful
businesses have been pushed out is breathtaking – it is a really high level of “churn.” Secondly,
and more importantly, these stores have failed due to a very different type of competition.
Blockbuster was very good at what it did – at operating a chain of video rental stores all over
the U.S. Blockbuster did not close because it stopped running its stores well, or because
another better video rental store came into the market. Instead, Blockbuster disappeared and
Hollywood video became Hollywood Liquors because the likes of Netflix and Redbox figured out
a very different way – a better business model – for meeting the same needs of customers … to
enjoy watching videos.

[Lesson 2, Slide 6]

There’s also some interesting data from an IBM CEO survey that shows that while business
model innovation gets the least focus among CEOs, the companies that do focus on it have had
large increases in profitability over their peers. Now it is important to note that this is merely a
correlation and does not prove causation. That said, what is interesting is the contrast in this
survey that product and process innovation are essentially uncorrelated with profitability, but
business model innovation is.

[Lesson 2, Slide 7]

I hope you now appreciate that business model innovation is important, or at least represents a
new form of competition that business leaders must understand, and if possible use. But, what
is a business model exactly?

I have spent a lot of time reading the academic research and other writings about business
models, and concluded that there is no generally accepted answer to this seemingly simple
question.

[Lesson 2, Slide 8]

What is clear is that the term “business model” became popular as a buzzword during the
internet boom of the 1990s, and has stayed with us since then. In this graph you can see that as
the NASDAQ stock index went up in the 1990s, the usage of “Business Models” in the press
(shown by the light blue line) also quickly went up and then continued to be used in the 2000s.

Early on, there was a lot of confusion about what business models meant, and so it even
acquired something of a bad rap. The author Michael Lewis channeled this negative perception
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when he wrote that the term business model was being routinely invoked during the dotcom
boom to “glorify [as he put it] all manner of half-‐baked plans”.

[Lesson 2, Slide 9]

As I said earlier, the literature shows a lot of confusion about how to define what a business
model is. So, let us take a more practical approach …


… and try to make sense of what comprises a business model. What are its key elements? Here,
the literature does provide some guidance. But, I found no existing framework for analyzing
business models that provides a good practical tool for practicing managers … some
frameworks are too narrow and focus only on one or two specific aspects, and others are so
broad and complex as to overlap with many aspects of strategy and become too unwieldy to
use in practice. So, I have chosen to develop and present a framework of my own that I feel has
just the right balance and utility for managers.


I call this the V-‐A-‐R-‐S (or VARS) framework. It consists of four key elements that together
comprise a business model – V is for the value proposition delivered by the business model, A
for the activities, resources and capabilities (A-‐R-‐Cs) needed to implement the business model,
R for the realization of value or revenue model used, and S for the scope of the enterprise
pursuing the business model. I will now explain each of these elements in more detail. In doing
so, I will use the example of the internet video company Netflix to explain what I mean by each
element. If you are not familiar with Netflix, this would be a good time to pause the video and
read a little about Netflix before returning to this lecture.


Let us begin with Value Proposition, the “V” in the VARS framework. What we mean by a value
proposition is how the new business model is creating greater Economic Value Added than
existing ones. Economic value added (or EVA) is a technical term that refers to the difference
between the value or utility that consumers obtain from a product or service and the costs
incurred to provide that same product or service. For example, if a business model uses an
average of 3 dollars to create a product and the average customer values the product at 5
dollars, then the economic value added is 2 dollars per customer. The business may not actually
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charge 5 dollars for the product, and the price charged isn’t necessarily a part of the business
model … what is important is knowing that the business could charge a price in the 3 dollar to 5
dollar range and still make a profit. Generally, the goal of new business models or business
model innovation – as shown in this graph here – is to increase EVA relative to existing
offerings, which it can do by creating more value for customers or reducing the cost of
producing value, or even doing both.

Now let us see how this applies to Netflix. Netflix offers many benefits and conveniences for
customers, but perhaps the two most important ones are the convenience of being able to
watch a large variety of videos from home, and the Netflix recommendation system which
suggests videos to customers based on past viewing patterns and ratings.

At the same time, the Netflix business model also reduces costs by avoiding owning and
operating stores and carrying large in-‐store inventories that were a part of the video stores’
business model. These twin advantages allow Netflix to charge a very reasonable price and still
provide more value to customers than video store companies.


In order to offer a new value proposition … that is, to increase economic value added … a new
business model must introduce something new to the way the business is operated. This can be
a new set of activities or new resources or new capabilities, which can be key for enabling or
creating the value proposition. For example, the Netflix business model was based on internet
ordering, so the company developed a new set of activities around designing and implementing
websites and web applications, including its well-‐known recommendation system. Similarly,
once Netflix started streaming video content, it had to put in place the technological and
organizational capabilities to do that as well. Interestingly, Netflix outsources many of its
internet infrastructure needs, which are often provided by its internet partners, including
Amazon Web Services. This highlights an important point – while a new business model
generally requires new Activities, Resources or Capabilities, it is not necessary that all of these
A-‐R-‐Cs be necessarily owned and operated by the business itself. In fact, as you will see shortly,
one of choices entailed in designing a business model is deciding which things the business
should do internally and which ones should be outsourced.

In recent years, a number of new business models have been created by adding technology-‐
based A-‐R-‐Cs, which have helped to transform many existing businesses. But it is important to
keep in mind that other non-‐technological capabilities may be important even in technology-‐
driven business models – for example, Netflix needed to develop the capability for building and
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managing relationships with movie and television studios, which own most of the video content
that Netflix wants to stream. So, this non-‐technological capability is critical for the success of
Netflix’s business model, even though its business model builds heavily on new technology.


Even if a business model creates a clear value proposition by using new A-‐R-‐Cs, it doesn’t
automatically follow that it will be able to realize revenues from the business. Think about what
happened when newspapers and magazines began using online business models. Being able to
download and read articles through the internet created tremendous convenience and value
for users. And the distribution of content through the internet was also very low cost compared
to printing and distributing on paper.

So, online newspapers and magazines have created a lot of economic value added. But they
have struggled to translate this value proposition into actual revenues. In the end, even if a
business creates a lot of economic value added, it cannot sustain itself if it cannot translate
some of that value into revenues. So, how the business plans to “realize value” has to be an
important element of its business model.

Commonly, such a plan to realize value is also called a business’ “revenue model”. Perhaps the
simplest revenue model for any business would be to charge customers in cash for the product
or service. If customers are not able to afford to pay in cash, they can be given credit or allowed
to pay in installments, which is what we see with a lot of big ticket purchases like cars. Other
types of revenue models include taking a durable product and then selling services from it, or
leasing and subscription models, which involve periodic payments in return for use of the
product or service. Netflix, of course, employs exactly such a subscription model – rather than
charge for each video, the company charges a fixed monthly subscription fee from consumers.


In technology-‐based products and services, in particular, companies have introduced a number
of other more complex revenue models. One of the more common ones is the so-‐called the
razor-‐blade model, where one product – the so-‐called razor – is sold at a low price to encourage
adoption, and revenues are made up by selling the blades, a higher profit-‐margin complement
to the razor. Examples of this model include printers and ink cartridges, and gaming consoles
and video games.

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Another revenue model is the so-‐called freemium model, where some digital products are
offered for free, but premium add-‐ons are also offered that cost money. The idea is that the
free offer will get users to try the service, which may then entice them to pay for the upgrade.
Think of Linked-‐In, which is free as basic service, but offers a premium account with more
features if you pay a fee. Many leading free email services also offer similar premium upgrades.

Increasingly, in technology products, companies are using revenue models consisting of two-‐
sided markets, where two interested parties are matched in a product and the company
benefits by charging one party. Google, for example, offers free search to users but then
cleverly uses the attention and information it has from users to sell targeted keyword
advertising to advertisers. E-‐Bay helps buyers and sellers to transact and takes a commission
from the sale.

Some companies even operate multi-‐sided platforms and ecosystems, where the goal is to
attract multiple participants to jointly create value, and then charge some of them for access,
transactions or services. Facebook operates this kind of complex ecosystem … consisting of
users, App developers, service providers and advertisers on its platform, which allows the
company to extract revenues in multiple ways.

Ultimately, there is no magic formula for deciding the right revenue model for a business.
Essentially, the revenue model should be aligned with other aspects of the business model and
with the challenges associated with customer adoption of the new product or service.


Another key element of the business model is the scope of the enterprise. This idea of
enterprise scope refers to the “footprint” of what the business does, and can be mainly
envisioned along three key dimensions. One dimension of scope relates to the customer
segments the business wants to serve; some business models are inherently narrow and seek to
serve only a few customer segments, while others are broad and may even seek to serve all
segments of customers. A second dimension of scope is the business’ horizontal scope – how
many different products or services would the company be in? And which ones? Some business
models are very focused and envision only a single product or service, whereas others include
multiple products and services, which may even be sold in very different markets. A third
dimension of scope is the business’ vertical scope along the so-‐called value chain – what things
does the firm itself do and what activities are outsourced to suppliers or downstream partners?
Some business models entail substantial vertical integration, where the business itself
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undertakes many of the activities needed to create value, whereas others may significantly rely
on partners who provide key components or services.


In the case of Netflix, the company’s target customer segments are very broad – the company
makes its video service widely available so long as customers have an adequate internet
connection. In terms of horizontal scope, however, the company has remained narrowly
focused on video streaming services and its older DVD-‐by-‐mail business. For example, Netflix
has avoided the video kiosk business that companies like RedBox have entered into. And, finally
in its vertical scope, we have already seen how Netflix has been outsourcing many of its cloud
based services to other companies. At the same time, Netflix has chosen not to rely fully on
outsourcing for its video content. As you may know, Netflix has been making some of its own
video content, such as the popular political series “House of Cards.”

One of the important implications of enterprise scope is how it interacts with activities,
resources and capabilities in driving value and cost. For example, Netflix’s broad customer base
means that it can spread its technology development costs over more customers and lower its
costs per customer. It can also improve its video recommendation system by using a huge
amount of customer data. Similarly, by outsourcing cloud based services the company can
reduce its costs and access the best in class solutions provided by other firms for these services.


In fact, it is important to think of the entire V-‐A-‐R-‐S framework in this way … that it consists of
interdependent elements. What this means is that each of the elements of the business model
are connected to the others, and must be aligned with each other in order to achieve a
successful business model.

A new business model can come about from any one of the four elements – new A-‐R-‐Cs could
dramatically change a business, or you might start with a compelling value proposition, or
develop a new revenue model, or even deploy a different enterprise scope for the business.
But, what is then needed is that all the other V-‐A-‐R-‐S elements be quickly redesigned to fit with
each other and be mutually consistent.

For example, at the core of Netflix’s business model is the insight that new technologies –
particularly the internet – could be used to fundamentally alter the video rental business. So,
there was this sense that new Activities-‐Resources-‐Capabilities had to be developed. But, to
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truly identify what A-‐R-‐Cs were needed, it was also important to understand what new value
proposition for the business had the greatest potential. In turn, this value proposition and the
A-‐R-‐Cs were also related to critical enterprise scope decisions as discussed earlier. And Netflix’s
revenue model also needed to be well-‐aligned with the A-‐R-‐Cs and the value proposition of its
business model. For example, one advantage of the subscription model which Netflix uses is
that at no additional cost the customer can sample parts of a movie or TV program and then
decide whether or not to watch it. It turns out that this kind of sampling is easily enabled in a
streaming video service and also adds to the value proposition of the business as a whole.


I hope this new V-‐A-‐R-‐S framework for understanding business models has helped you get a
better sense for what business models are. But we are still left without a definition of what a
business model is. So let me tentatively offer one.


The way I view business models – which some of the research also does – is that in the end they
are “models” … just like we have say climate models. So a business model is a theoretical
abstraction, but it is a pragmatic theory of how a business will create and realize value. In turn,
this means that a business model also has embedded in it a set of hypotheses about how a
business can be created and made to work. When entrepreneurs and managers go about
actually implementing a business model they may find that some of these hypotheses are
proven wrong. So you should be ready to revise your business model when you are faced with
such contrary evidence. Consistent with that idea is also the idea that a business model can be
thought of as something like an experiment – you try out a business model and see if it works,
and if it doesn’t you modify the experiment and try it again, and so on.


I think it is also important to be clear what a business model is not. For one thing, it is not a
detailed description about all kinds of operational and tactical plans. To be useful, a business
model must remain a high-‐level description of core elements of the business.

Secondly, business models shouldn’t attempt to encompass all of strategy … there are many
other strategic factors that affect a company’s long run performance, and in particular its
advantages relative to competitors, who might even adopt the same business model. As you
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learn more about strategic management, you will begin to appreciate these other aspects that
we have left out of our analysis of business models.

And this leads me to a final point … which is that a business model need not be specific to a
particular firm, and in fact it generally is not. So it is perfectly reasonable to say that other firms
are operating in the video rental industry using the same business model as Netflix. In fact, in
an earlier era, Blockbuster and Hollywood Video (and a few other companies) were all using the
same video store business model as each other.

Key Concept: Coherence, Fit and SWOT

In this video lecture we will learn about two core ideas in strategy – coherence and fit. As it
happens, these two ideas are also at the center of a historically important but now old strategy
framework – the SWOT framework – which you will also learn about. To understand these ideas
better we will be traveling to the soccer field, and yes you might actually see me play a little
soccer … c’mon it will be fun.

[Lesson 3, Slide 2]

Hi, we’re here today at a local soccer facility in Urbana called Soccer Planet. It is an indoor
facility, and has artificial turf and artificial light, so one of the nice things about it is that I can
play some soccer here even in the winter. You know, just to get out and have fun, and get some
exercise as well.

Soccer Planet is a private business that runs soccer leagues for all ages, organizes coaching
camps, and even hosts soccer-‐themed birthday parties. I play here once a week in a
recreational co-‐ed league, so the games in this league are less competitive and the teams have
both men and women. If you’re trying to follow along, my team is the black team.

[Lesson 3, Slide 2]

If you think about any team sport, and soccer is no exception, one of the critical things to be
successful is that the team should work well together. Often, different players are assigned to
different roles – in soccer, someone plays as goalkeeper, some players are defenders, some are
midfielders, some play as forwards or strikers. Although the players have different roles, they
must work together with a common understanding and consistency of approach. For example,
some teams may focus on a lot of passing and keeping possession of the ball, others may
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resolute defense and quick counter attacks. If the team is to succeed, all the players need to
understand what the team’s overall approach is and also communicate and coordinate with
each other throughout the game.

[Lesson 3, Slide 3]

It is the same in any large company. People specialize in different roles and are often located in
different functional departments like Marketing or Finance or Operations. But, in order to be
effective, all parts of the company – just like all parts of a soccer team – must work in a
consistent way and integrate with each other. They must have a common understanding of
what the company’s strategy is and what each person’s role is within it. In other words, if is to
succeed, a company’s strategy must be coherent within its organization. This is sometimes
referred to as “the first rule of strategy.”

[Lesson 3, Slide 4]

In soccer, just as it is important to have a coherent approach within one’s team, it is also
important to adapt to the external environment in which one is playing. When playing soccer,
there are many external conditions to consider. For example, the size of the field and goals may
be different or the kind of turf and lighting may be different. In our case, we play on a smaller
field with smaller goals, and on artificial turf with artificial lighting. Also, the rules of the game –
set by different institutional authorities – may be different. In this league, we not only allow
balls to bounce back into play from the boards, but there are no off-‐sides and there are also
rules about women members in the teams. In outdoor games, we might also consider things
like the weather and crowd support.

And we shouldn’t forget another very important external factor – the competition. What are
their strengths, weaknesses and behavioral patterns? Our strategies should ideally be adapted
to all of these external conditions, including our competitors. More importantly, we should
attempt to use strategies that align our internal strengths and abilities as a team with the
external environment in the most effective way. Perhaps our rival team has slow defenders and
we have fast forwards who can get past them. Or maybe we can use the deflections off the side
boards effectively to maybe win this game. We’ll see if any of that actually happens today.

[Lesson 3, Slide 5]

This idea of aligning internal aspects of an organization with the external environment is
another core idea in strategy, which is called strategic fit. The central insight is that finding a
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good strategic fit between a company’s organization – its values, capabilities, systems, etc. –
and its external environment is critical to ensuring the performance and long run success of the
company.

[Lesson 3, Slide 6]

An early strategy framework that incorporates this idea of strategic fit, and to a lesser extent
coherence, is the SWOT framework. SWOT stands for strengths, weaknesses, opportunities and
threats, and the general idea with this framework is that managers should examine each of
these four elements and seek to draw strategic conclusions for the company. One thing that
you should notice right away is that strengths and weaknesses relate to internal elements of
the company, and opportunities and threats relate to the external environment. So, the idea of
aligning these two – the idea of strategic fit – is quite central to this framework. You could also
see elements of the idea of coherence in the framework, especially in its strengths and
weaknesses half.

SWOT is still widely used in business, in part because of an older generation of managers who
are very familiar with it, and in part because it is so intuitive and easy to understand.

[Lesson 3, Slide 7]

To understand how SWOT can be used in practice let us apply it to the giant energy company
ExxonMobil. Looking at this chart, you will notice that I have listed some of the company’s main
strengths and weaknesses, as well as some opportunities and threats for the company. You may
pause the video here and take a minute to go through them.

Among the opportunities, I think the possibility of buying up cheap energy assets while prices
are low is particularly attractive for this company. Among the threats, low energy prices and
advances non-‐fossil fuel renewable technologies like solar are big ones. Given ExxonMobil’s
strengths in fossil fuels, and weaknesses in non-‐fossil renewable energy, the last of these
threats might be the most worrisome for the company. When applying the SWOT framework,
the idea is that one identifies these kinds of issues and acts on them. So for example,
ExxonMobil could decide to get more active in renewables – maybe doing more research or
acquiring a renewables company – after conducting such an analysis.

[Lesson 3, Slide 8]

16

Despite its intuitive appeal, the SWOT framework has some important drawbacks. The analysis
is often at a very high abstract level and open ended, with very little guidance on what exactly
should be analyzed. So, the exercise is extremely subjective. Also, what aspects should be put
into each of the four categories is often confusing. For example, people are often confused by
whether a change constitutes an opportunity or a threat. Think about renewables for example –
with a couple of acquisitions, ExxonMobil could easily turn it into an opportunity from a threat.
And similarly what is defined as a strength or a weakness can also be murky.

[Lesson 3, Slide 9]

Moreover, the SWOT framework doesn’t really have a clear connection to specific courses of
action, and especially to eventual company performance, so it is hard to know what to do with
it even after the analysis is complete. So, I recommend that SWOT should only be your starting
point in strategic analysis. The framework is useful if you wish to easily communicate and
establish a rapport with a broad audience. But to develop deeper strategic insights, use other
frameworks.

[Lesson 3, Slide10]

To summarize, in this module you learnt about three main topics. You learned about the role
played by a company’s mission, vision and values and how to get them right. Second you
learned about business models – what they are, and why they are important. You also learned a
useful framework – VARS – for analyzing business models, which you will soon be able to use in
your case exercise. And last but not least, you learned about two key ideas in strategy –
coherence and fit – and also a little bit about the well-‐established SWOT framework.

17

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