Business Strategy

Professor Somaya

Module 1: Leading Strategically

Table of Contents
Module 1: Leading Strategically ...................................................................................... 1
Lesson 0-1: About the Course ..................................................................................................2
Lesson 0-1.1: Course Welcome and Course Welcome and Orientation ................................................... 2
Lesson 0-1.2: About Deepak Somaya ............................................................................................................ 7

Lesson 1-0: Information ............................................................................................................8

Lesson 1-0.1: Overview Lecture ...................................................................................................................... 8
Lesson 1-0.2: Executive Interviews Introduction ........................................................................................... 9

Lesson: 1-1: Mission, Vision & Values .................................................................................. 14

Lesson 1-1.1: Mission, Vision & Values ........................................................................................................ 14
Lesson: 1-1.2 Executive Expert Introductions.............................................................................................. 21
Lesson: 1-1.3 Mission and Values: Role of Leadership ............................................................................. 30

Lesson: 1-2: Business Model and Business Model Innovation ......................................... 39

Lesson: 1-2.1 Introduction to Business Models ........................................................................................... 39
Lesson 1-2.2: The V.A.R.S. Framework, Part 1 .......................................................................................... 47
Lesson 1-2.3: The V.A.R.S. Framework, Part 2 .......................................................................................... 55

Lesson 1-3: Coherence, Fit and SWOT ................................................................................. 61

Lesson 1-3.1: Coherence, Fit and SWOT .................................................................................................... 61
 Business Strategy
Professor Somaya

Lesson 0-1: About the Course

Lesson 0-1.1: Course Welcome and Course Welcome and Orientation

Hello and welcome to this course on strategic management. Thank you so much for
your interest in exploring this course. My name is Deepak Somaya. I am truly delighted
and excited to be your instructor. Let me begin by giving you a little background about
myself. I am originally from India and grew up in the large bustling metropolis of
Bombay or what is called Mumbai today. After getting a degree in Mechanical
Engineering from the Indian Institute of Technology in Bombay and an MBA from the
Indian Institute of Management in Calcutta, I worked for a few years in business,
primarily as a management consultant. I came to the United States to get my Ph.D. in
Business Administration at the University of California at Berkeley, which was just a
phenomenal and eye-opening intellectual experience. I've been at the University of
Illinois since 2008. I'm a professor of Strategy and Entrepreneurship at the College of
Business, and also have an appointment at the College of Law. I want to share with you
that a major part of my job, a part that I truly love and enjoy is to be a researcher and
scholar. My main research program is under strategic management of knowledge
assets. Assets such as technology, talent, and relationships which you might recognize
are absolutely critical for the success of 21st century businesses. As a teacher and an
educator which is my other role, I feel truly blessed. I have this amazing opportunity to
interact with so many eager and inquisitive learners like you, and to share with you my
expertise and insights which are often directly informed by my research. In this
introductory video, I will go over some important preliminaries that will help orient you to
the rest of this foundational course in strategic management.
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Professor Somaya

First, I want to give you an idea what strategic management is all about. Strategic
management is the set of knowledge and skills used by leaders and managers to
achieve the overall long-term goals of their organizations. Making choices and decisions
is an important aspect of strategic management which includes decisions about what an
organization should do as well as things that it should not do. Learning about strategic
management can be very useful and interesting no matter what your current job or
career path is. If you want to understand how and why businesses succeed or fail, you
can learn something from this course. This type of knowledge can be of great value if
you're planning your career and need to get a holistic perspective on your company. Or
if you're an entrepreneur or manager developing a new business venture or even if
you're an investor or strategic partner on the outside, trying to understand the future
prospects of a company that you might be doing business with. Because strategy is
closely tied with the goals and work of leaders in companies, we will be taking the
perspective of a corporate leader, say a CEO or a business manager or general
manager throughout this course. This holistic strategic perspective is very useful even if
you're not currently in a leadership role. Top business leaders are often frustrated with
employees who might be very competent at their functional tasks but cannot
comprehend or connect with the big picture the strategy of the company. In other words,
learning strategic management is about learning the language of corporate leaders. If
you want to have a meaningful conversation with a top manager in a company, you
need to speak strategy. Let me also say that the focus of this course is on business
strategy. That is the strategic management of a single business unit. After completing
this course, you might also want to take the companion course on corporate strategy
which deals with topics related to multi-business firms, and to corporate governance.
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Professor Somaya

This course is organized as four modules, each with a set of core interrelated topics.
The first module focuses on strategic leadership. In it, you will learn about how leaders
set the stage for strategic management by providing a company with a mission, vision,
and values and by developing or modifying his business model. In Module 2, we will
focus on the analysis of the external environment that businesses operate in. An
important component of external analysis is industry analysis, and you will learn how to
apply an important tool, the five forces framework, for analyzing industries and
predicting if an industry will be more or less profitable. In Module 3, we will turn our
attention from the external environment to looking inside companies to understand how
and why some of them develop a competitive advantage and others do not. A key idea
that you'll learn about is what makes a company's competitive advantage durable or
sustainable in the long run, which is an important goal for most companies. In Module 4,
you will combine what you learned in internal and external analysis to understand how
firms can strategically position themselves in their environments by using what are
known as generic business strategies. We will also learn about some ways in which
companies can respond to adversity and change by strategically renewing or
dynamically re-positioning themselves. In each of these modules, and in this course as
a whole, I have three main learning goals for you.
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First, modern companies can be quite large and complex organizations, and often
operate in difficult and dynamic environments. So what I want you to understand is how
a company strategy is critical for making its different functions and activities fit together
and for also aligning these internal elements with the external environment to create
overall performance. Secondly, I would like you to learn the main strategic management
tools and frameworks that we will cover and appropriately apply them to real world
business contexts. For example, you'd be learning how to analyze business models, the
industry environment, competitive advantage, strategic positioning and so on. Last but
not least, a core skill for any strategic manager is the ability to process diverse business
and industry data separate important information from noise and synthesize it into a
coherent and actionable strategic plan.
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To achieve these learning goals, you will have a variety of resources at your disposal. I
will of course be explaining key concepts for each of the topics using video lectures, and
my lecture slides would be available to you as a reference. Often my lectures are
interspersed with questions or exercises to engage you and enhance your learning. Do
them diligently. I guarantee you they'll help you learn better. In addition, this course
includes a series of video interviews with executive experts, CEOs or leaders of billion-
dollar companies. These videos connect the key concepts you learned through my
video lectures with a real world practical application of these concepts, as seen through
the eyes of incredibly accomplished managers and entrepreneurs. Each module
includes a case study exercise, which in addition to being a key part of the assessment
is also a great way to apply and learn key concepts. Here you get to apply the main
framework or tools you learn to a real-world company or industry which is a fantastic
way for consolidating and deepening your learning. Last but not least, some of your
lessons in strategic management will come directly from the soccer field. Yes, you
heard me right, soccer or football for those of you who are not American. Now, football
can be a confusing term for many people. So just to be clear I will call it soccer
throughout. I think team sports in soccer in particular can provide some very nice
analogies to learn about strategic management. As it turns out, I still play a little soccer
and you can actually see some footage of me and my soccer teammates in this course.
In addition to soccer videos specifically related to course concepts, each module also
includes a timepass segment, nothing productive, just a short clip of video highlights
from my team soccer game. I hope you enjoy it. Now in addition to these main
resources, I have also recommended a free online textbook as supplemental reading.
Some of you might find it useful. Also your learning will be considerably enhanced by
engaging with your peers who are taking this course with you. In particular, I strongly
encourage you to use the discussion forums to discuss topics related to the cases with
your peers. For example, our first case is on Uber, and you may be specifically
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interested in Uber strategy say in China. Create a thread on this topic or join one if it
already exists and certain there'll be others who want to discuss and debate it with you.
Ultimately, strategic management is not a subject where there are clear right and wrong
answers, only better and worse ways of thinking about strategic issues. So the more
you discuss and debate with others on the discussion forums, the better you will
become at strategic management. I hope this video introduction has helped you
understand what to expect from this course in strategic management. I look forward to
seeing you in class.

Lesson 0-1.2: About Deepak Somaya

Hello, my name is Deepak Somaya, and I'm a professor of strategy and

entrepreneurship in the Giese College of Business at the University of Illinois at Urbana-
Champaign. I want to thank you for your interest in my online course and for making an
investment in your own personal and professional development through online
education. I have also found online education to be a phenomenal digital innovation that
has the potential to transform and democratize higher education in a very profound way.
Let me tell you a little bit about myself. I was born and grew up in a little city in India
called Bombay now Mumbai of over 20 million people. I went to a Jesuit school, enjoyed
Math and Science. And before I knew it I was studying mechanical engineering at the
Indian Institute of Technology in Bombay. I had varied interests and considered higher
studies in bioengineering but decided to get an MBA instead. After my MBA, I worked
for a while in management consulting before coming to the US. To the University of
California at Berkeley to get a PhD in Business Administration. I have been on the
faculty at the University of Illinois since 2008. And in addition to my position here at the
College of Business, I also have a courtesy position as professor in the College of Law.
I have a number of areas of research interest including intellectual property and human
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Professor Somaya

capital strategies and more recently, I've been especially interested in business models.
In addition to research and teaching, I'm interested in the practical application of
strategic management. So I write articles for managers and continue to work as a
management consultant in my individual capacity. In my spare time, I like to read
especially history, listen to music and get some exercise. Among other things, I'm a
soccer enthusiast and I try to play a little soccer whenever I can. I look forward to seeing
you in class and sharing our learning journey together.

Lesson 1-0: Information

Lesson 1-0.1: Overview Lecture

Hello and welcome to this module on leading strategically. In it, we will cover three main
topics. First, we'll 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 V-A-R-S framework, to analyze and develop business
models. Finally, you'll 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. These concepts 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, who 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
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Professor Somaya

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. This will help you deepen your knowledge and also prepare you for the
formal module quiz and case analysis at the end of this module. The case analysis for
this module is on Uber, which is at the forefront of transforming the taxi and limousine
industry worldwide. I think you will have a lot of fun with this Uber case, applying what
you learn in this module to this company.

Lesson 1-0.2: Executive Interviews Introduction

To highlight the real-world relevance of what we will be learning about in business

strategy, I interviewed three experienced executives who you will encounter repeatedly
throughout this course. Kurt Bock is the CEO of Country Financial, 100-year-old Fortune
1000 mutual insurance company.
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Sean Chou is the founder and CEO of Catalytic, growing startup providing Intelligent
process automation for a wide range of corporate functions. Sean Chou was also
previously the CTO of Fieldglass, a company that was solved for over a billion dollars.

Al Goldstein is now in his third startup venture, Avant, which uses technology to provide
convenient consumer loans over the Internet. Avant is considered a FinTech unicorn
with evaluation of over a billion dollars. In this introductory video, I asked each of these
executives to describe their own journey in the business world and to share with you the
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major stepping stones that lead them to their current leadership positions. I hope you
will draw inspiration from their personal stories. I started in the consulting world and in
the consulting world, it was a great ecosystem for learning a lot about business in
general.

I started being able to apply a lot of what I knew about the web to the world of business.
As I learned that more and more, this was at the height of the dot-com boom, I
ultimately wanted to participate in something of my own. I wanted to leave the
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Professor Somaya

consulting world eventually and wanted to create a product of my own, I want to have
something that is mine that I can continue using. Whereas in consulting, it's very much
you're creating something for other people, you don't really get to reap the benefits of it.
That eventually led to me meeting up with Jai Shekhawat, who had both an idea and he
had some seed capital for a concept at the time called B2B People, which eventually
became Fieldglass, so it was a indirect route to get to Fieldglass.

I've actually had a lot of fun in what seems like a even longer period of time than about
15 years of my career in leading up to that Russian immigrant, immigrating with my
family from the former Soviet Union at the tender age of eight, growing up in the north
suburbs of Chicago and then joining a lot of my high school classmates at the University
of Illinois studying finance and math. Interned at an investment banking job out of
college, end up getting a full-time offer to go be an investment banker, and thankfully
didn't get pulled in 2001/2002, couple of recessions ago, and learned a lot over a very
short period of time but then very quickly decided that I wanted to pursue other
endeavors. I was able to quit and start a company that now is called the Enova
International. We started the business in 2004, and then Avant. We launched at the end
of 2012. It's been a crazy three years in change. My two co-founders at Avant, like my
prior company, were actually former interns of mine at my first company. University of
Illinois graduates are younger than me, a lot smarter than me. One runs our technology
organization, the other runs our analytics organization. Both were participants in the Y
Combinator start-up incubator program in San Francisco before Avant and their
personal experiences is what led us to start Avant as they were trying to get a loan from
a traditional branch based lender and had a terrible experience. We can see this
business really with the premise being to change the offering to consumers across the
world in providing them a better quality product, better service, when it comes to credit.
That's a long way of saying, but we've had a great run where as I said, a little over three
 Business Strategy
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years old, we have originated nearly three billion dollars of loans on our platform. About
950 employees today operate in the US, UK, and Canada, and currently we have an
unsecured loan products, are currently launching an auto finance product to revitalize
the auto finance vertical and are looking to launch a credit card and have raised over
600 million of equity capital, have raised over three billion dollars to various forms of
debt funding and for overflow commitments to buy loans off of our platform from various
forms of institutions.

I'm very non traditional. I was in 1975 graduate of the US Air Force Academy. I spent 28
years on active duty in the Air Force, which was a great experience, but a lot of
leadership opportunities. My last three years though, were at the University of Illinois, I
was the lucky person that was the Professor of Aerospace Studies at the UFI, which is
commonly known as the ROTC unit. I got a PhD at St. Louis in business administration
finance management science. That comes into play because when I left the Air Force,
the Illinois Farm Bureau has a credit union that was about 150 million of assets. They
were looking for someone to be the CEO that understood asset liability management
and my doctoral work was in risk-based capital so it was easy. It's over there. I spent
two years as a CEO over Credit Union, became the treasure of Country Financial, which
is a affiliate of the Illinois Farm Bureau, went into a private company, an employee on
company in Champagne for three years and then came back to be the Chief Executive
Officer in 2012. A real non-traditional route in insurance for sure but I will tell anyone
that every one of those steps really prepared me for this.
 Business Strategy
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Lesson: 1-1: Mission, Vision & Values

Lesson 1-1.1: Mission, Vision & Values

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 stated mission
statement, Google's mission is to organize the world's information and make it
universally accessible and useful. Wow. That's 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 and 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.
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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, then they can more easily work together to achieve
those goals. Second, because there is this common understanding, it becomes easier
to solve 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 is expected that Google would
eventually sell this business, which it did in 2014, but imagine there were some
managers inside Google who wanted to get into handsets in a big way. Then 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. Handsets is not for us. 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 part of something bigger,
something that's having a positive impact in the world. It would give us a sense of
purpose, and motivate us, and a good coordination can do exactly that.
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Not all mission statements are created alike. There are good ones. There are 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 people's health, or helping
them learn, or improving the quality of life, etc, instead of focusing on being just the best
at something or simply on making money, the focus should be on these types of positive
impacts a business can create in the world. 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.
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Third, a mission is only worthwhile if it's 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 and daily decisions. 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 very good example of this. So here's a little exercise for you, find the
mission statement for a company you really like and submitted in this text box. You may
also post this mission on the discussion board for this course through the link below this
video, and start a discussion about this mission. How would you rate this company's
mission on the four criteria listed earlier? Let's say you use a scale of poor, to okay, to
good. So does the mission statement emphasize creation of customers social value and
not just being the best, or making money? Does it focus on important needs or
problems to address and not just on specific products and services? Does the company
actually live and practice the mission? Is the mission statement short, inspiring, and
memorable for employees and other stakeholders?
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In addition to mission, some companies also articulated a vision, a short aspirational

statement about the future direction of 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. And in fact, Sequoia then went on to ask all the other startups who
came seeking investment from them 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 or abandon their initial
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vision and move on to a new one. You might even say that Google has achieved its
original vision, has now moved on from it. Strategic thinkers, Gary Hamel and CK
Prahalad, coined the term strategic intent to describe a special kind of stretch vision
accompanied by a strategic plan.

They cited Japanese ohoto electronics company Cannons 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.
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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 as an employee it is also how we expect you to behave.

For example, Google has a set of ten core beliefs, which its founders wrote down very
soon after they founded the company.
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Number six on this list is rather famous. It goes, 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 can now take a minute to
go to Google's website and find its ten beliefs.

Lesson: 1-1.2 Executive Expert Introductions

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Professor Somaya

So I started in the consulting world, and in the consulting world, it was a great kind of
ecosystem for learning a lot about business in general. And I started being able to apply
a lot of what I knew about the web to the world of business. And as I'd learned that,
more and more, this was at the height of the Dot Com boom, I saw, and ultimately
wanted to participate in something of my own. So I wanted to leave the consulting world
eventually and say, I want to create a product of my own, I want to have something that
is mine that I can continue using, whereas in consulting, it's very much you're creating
something for other people, you don't really get to reap the benefits of it. So that
eventually led to me meeting up with Jai Shekhawat who had both an idea and he had
some seed capital for a concept at the time called B2B People, which eventually
became FieldGlass. So it was kind of a indirect route to get to FieldGlass.
 Business Strategy
Professor Somaya

I've actually had a lot of fun in what seems like even a longer period of time than about
15 years in my career and leading up to that, being a Russian immigrant, immigrating
with my family from the former Soviet Union at the tender age of eight. Growing up in
the north suburbs of Chicago and then joining a lot of my high school classmates at the
University of Illinois, studying finance and math. Interned at an investment banking job
out of college, end up getting a full-time offer to go be an investment banker, but
thankfully didn't get pulled in 2001, 2002, couple recessions ago, and learned a lot over
a very short period of time but then very quickly decided that I wanted to pursue other
endeavors. And so I was able to quit and start a company that now is called Enova
International. We started the business in 2004, and then Avant, and Avant we launched
at the end of 2012, it's been a crazy three years and change. My two co-founders at
Avant, like my prior company, were actually former interns of mine at my first company.
University of Illinois graduates, a little bit younger than me, a lot smarter than me. One
runs our technology organization, the other runs our analytics organization. Both were
participants in the Y Combinator start-up incubator program in San Francisco before
Avante and, really, their personal experience is what led us to start Avant, as they were
trying to get a loan from a traditional branch based lender and had a terrible experience.
And so we conceived this business really with a premise being to change the offering to
consumers across the world in providing them a better quality product, better service,
when it comes to credit. That's kind of a long way of saying but we've had a great run.
We're about, as I said, a little over three years old. We have originated nearly $3 billion
of loans on our platform, have about 950 employees to date, operate in the US, UK and
Canada and currently have an unsecured loan product, are currently launching an auto
finance product to really re-vitalize the auto finance vertical, and are looking to a launch
a credit card, and have raised over $600 million of equity capital, have raised over $3
billion of various forms of debt funding and overflow commitments to buy loans off of our
platform from various forms of institutions.
 Business Strategy
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Very non-traditional. I was a 1975 graduate of the US Air Force Academy. I spent 28
years on active duty in the Air Force. Which was a great experience, but a lot of
leadership opportunities. My last three years, though, were at the University of Illinois. I
was the lucky person that was the Professor of Aerospace Studies at the U of I., which
is commonly known as the ROTC unit. So I got a Ph.D at St. Louis U in business
administration, kind of finance, management science, and that comes into play because
when I left the Air Force, the Illinois Farm Bureau has a credit union. It was about $150
million of assets and they were looking for someone to be the CEO that understood
asset liability management and that really was, most of my doctoral work was in risk
based capital so it was pretty easy. And so from there I spent two years as a CEO of a
credit union. Became the Treasurer of Country Financial which is a affiliate of the Illinois
Farm Bureau. Went into a private company, an employee owned company in
Champagne for three years and then came back to be the Chief Executive Officer in
2012. So a real non-traditional route in insurance, for sure, but I will tell anyone that
every one of those steps really prepared me for this.
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Sub-Lesson # 1-1.3 Executive Expertise: Mission and Values

Every company has a mission statement, and it's really largely a matter of whether
everyone's on the same mission statement and whether it's implicit or explicit. I don't
think that implicitness or explicitness is nearly as important as the executive team
making sure that everyone is operating under the same mission statement. That said, I
think that there's a real art to crafting a mission statement. Some people go way too
broad, and their mission statement basically amounts to, we're going to make money,
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which is, yeah, that makes sense if you're in a for profit business. But it's not anything
people can get excited about. It doesn't translate into tactical action. So I think there's a
craft to making sure that your mission statement is big enough that people can get
excited about, but achievable enough that people know roughly what they should be
doing across the organization. So whether you make it formal or whether you make it
informal isn't nearly as important as the executive team just making sure that they do
evangelize, that they spend time with people, they talk about it explicitly. And it's
something that not all organizations do well. A lot of times, people construct a mission
statement, it just becomes something that sits out there, and it's something that then
everyone ignores, as they get caught up in the day to day struggles.

Number one, everybody needs to know why they come to work in the morning, all right?
And so what are we here to do? And there are 5,000 employees, people that form
Country Financial. They need to know why they come to work in the morning. We have
a vision, to be the best provider of financial security in America. But we have to
operationalize it, and I really go classical on its vision, mission, values, and then
strategy. And so I'll tell you, you can have a vision statement up on the wall or mission
statement up on the wall, but if you don't connect it obviously to your values and if you
don't connect it to your strategy, then really, it becomes a nice thing to show people,
kind of the company motto that nobody really pays much attention to. We actually use it
to drive all the way down into strategy yearly objectives that then roll all the way down
into the company. So everyone can find how their own objectives roll all the way up all
the way through the strategy of the company all the way to achieving the mission and
the vision of helping people achieve financial security. I know it sounds like a kind of a
PR thing. It's not. But it's something that we had that over the last four years, where
we've gotten better and better at. So, I'll tell you, great value in it. Everyone needs to
know how they help the company achieve what they do every year. So I'm fully invested
in that.
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In my view, sincerity and transparency win over all else, and I think that's true in work
and in life and in family. And so, I believe you have to have a mission and a calling,
because you have to be motivated and passionate about what you do, and people are
motivated for different reasons. At Avant, we have a very simple mission. Lower the
cost and barriers of borrowing for consumers. It's simple, we understand it, and
everything we do has to correlate with that mission. And the key is to be sincere.
Because I think a lot of times, people know that they need to have a mission and then
they go through a strategic exercise about how to come up with that mission and then
come up with values that sound great. But you ask any person in the company, and
they won't know what it is.
 Business Strategy
Professor Somaya

I guess what's wrong with sort of a mission statement is it simply says that you're here
to make money. Well, I mean, we need to make money. Okay, so, part of this is,
obviously, the financial strength of the company is one of our most important objectives
every year. But also, there's something about why you're really here. Yes, to make
money, but also, to serve a greater good. We feel like insurance is a noble profession.
Financial services is a noble profession, and on top of that, helping people achieve
financial security, and obviously, we want to achieve and grow, etc. But part of this is
ensuring that everyone understands your reason to come to work, not just to make
money, but to serve a greater good, so believe that.
 Business Strategy
Professor Somaya

Now I also think that hand in hand with the mission statement should be a, again,
implicit or explicit set of principles. So what are the ways by which it's acceptable for our
company and for our employees to act to be able to accomplish the mission statement?
Because the mission statement minus any sort of principles becomes sometimes, it's
just too chaotic how people will achieve it and some of the behaviors will become
quickly unacceptable. So you're also defining not just what you're trying to accomplish
as a company, but you're also defining the rules, the acceptable rules of engagement
for how you accomplish that mission. You might also think about that as the values of
the company, so they would. Right, values, right. I think a lot of people would call
mission and values. But I do think both are really important.
 Business Strategy
Professor Somaya

So, I would go all the way back to vision, obviously, is directional, okay. Mission is what
you do everyday, in my estimation. We don't downplay values at all, in fact, we up play
our values, in terms of earning trust, focusing on customer, delivering on promises, and
then driving change. We have a clear value statement that this is what we're going to
do. So we go all the way back to our vision, our mission, to really break all ties. Is it
going to advance financial security for households? That's the country mantra because
we, by being an insurance company, we also have property, casualty, life. We have an
investment in a private wealth management business. But when it comes down to it, the
investments we make in all those, in those yearly objectives, all end up being prioritized
based on will it help us achieve our mission and our vision?

Lesson: 1-1.3 Mission and Values: Role of Leadership

 Business Strategy
Professor Somaya

You might be wondering whether company values, or visions, or mission statements

have any real impact on companies, or if they're 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 and to set an example by their
own behavior and encourage others to follow them.

For example, do you know which company these four core values come from? It says
some very nice things about communication, respect, integrity and excellence.
 Business Strategy
Professor Somaya

But these 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 cutthroat competition between
employees. Enron's failure to uphold its own values resulted in the failure of the
company itself, which is ultimately a failure of its leadership.
 Business Strategy
Professor Somaya

So I hope you've 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 in
practice within the company, communicated and reinforced by the leadership. And of
course, they also have to be a true reflection of the company itself, a reflection of its
ethos. I asked each of our executive experts why companies should have a mission
statement and what was added by having a vision and values? I thought their
responses were really instructive. Note in particular how strongly they emphasize that
the mission statement should be meaningful and inspiring, that it be real and actually
lived by the company through the actions and communications of its leaders.
 Business Strategy
Professor Somaya

Every company has a mission statement, and it's really largely a matter of whether
everyone's on the same mission statement and whether it's implicit or explicit. I don't
think that implicitness or explicitness is nearly as important as the executive team
making sure that everyone is operating under the same mission statement. That said, I
think that there's a real art to crafting a mission statement. Some people go way too
broad and their mission statement basically amounts to, we're going to make money.
Which is, yeah, that makes sense, if you're in a for-profit business, but it's not anything
people can get excited about, it doesn't translate into tactical action. So I think there's a
 Business Strategy
Professor Somaya

craft to making sure that your mission statement is big enough that people can get
excited about, but achievable enough that people know roughly what they should be
doing across the organization. So whether you make it formal or whether you make it
informal isn't nearly as important as the executive team just making sure that they do
evangelize, that they spend time with people, they talk about it explicitly and it's
something that not all organizations do well. A lot of times people construct a mission
statement, it just becomes something that's out there and it's something that then
everyone ignores as they get caught up in the day-to-day struggles.

Number one, everybody needs to know why they come to work in the morning, all right?
And so, what are we here to do? And there are 5,000 employees, people, that form
Country Financial, we need to know, they need to know why they come to work in the
morning. We have a vision to be the best provider of financial security in America, but
we have to operationalize it. And I really go classical on its vision, mission, values and
then strategy. And so I will tell you, you can have a vision statement up on the wall or
mission statement up on the wall, but if you don't connect it obviously to your values,
and if you don't connect it to your strategy, then really it becomes just a nice thing to
show people, kind of the company motto that nobody really pays much attention to. We
actually use it to drive all the way down into strategy, yearly objectives that then roll all
the way down into the company. So everyone can find how their own objectives roll all
the way up, all the way through the strategy of the company, all the way to achieving the
mission and the vision of helping people achieve financial security. I know it sounds like
kind of a PR thing, it's not. But it's something that over the last four years we've gotten
better and better at. So I'll tell you, great value in it, everyone needs to know how they
help the company achieve what they do every year. So I'm fully invested in that, so fully
invested in that.
 Business Strategy
Professor Somaya

It might be sincerity and transparency win over all else, and I think that's true in work
and in life and in family. And so, I believe you have to have a mission and a calling,
because you have to be motivated and passionate about what you do. And people are
motivated for different reasons. At Avant we have a really simple mission, lower the cost
and barriers of borrowing for consumers. It's simple, we understand it, and everything
we do has to correlate with that mission. And the key's to be sincere, because I think a
lot of times people know that they need to have a mission, and then they go through a
strategic exercise about how to come up with that mission and then come up with
values that sound great. But you ask any person in the company, and they won't know
what it is.
 Business Strategy
Professor Somaya

I guess what's wrong with sort of a mission statement that simply says that you're here
to make money. Well, I mean, we need to make money, okay. So part of this is is
obviously the financial strength of the company is one of our most important objectives
every year, but also there's something about why you're really here. Yes, it's to make
money, but also to serve a greater good. We feel like insurance is a noble profession,
financial service is a noble profession, and on top of that, helping people achieve
financial security, and obviously want to achieve and grow, etc. But part of this is
ensuring that everyone understands your reason to come to work, not just to make
money, but to serve a greater good, so I believe that.
 Business Strategy
Professor Somaya

And I also think that hand-in-hand with a mission statement should be a, again, implicit
or explicit set of principles. So what are the ways by which it's acceptable for our
company and for our employees to act to be able to accomplish the mission statement?
Because a mission statement minus any sort of principles, it's just too chaotic how
people will achieve it and some of the behaviors will become quickly unacceptable. So
you're also defining not just what you're trying to accomplish as a company, but you're
also defining the rules, the acceptable rules of engagement for how you accomplish that
mission.
 Business Strategy
Professor Somaya

Lesson: 1-2: Business Model and Business Model Innovation

Lesson: 1-2.1 Introduction to Business Models

In this segment, you will learn about business models and business model innovation. A
truly exciting topic that's of great relevance to strategic leaders today, but at the same
time is one that's often confusing and a little misunderstood. To begin with, let us ask
why we should care about business models or business model innovation. You may
have your own powerful answer to this question, but let me give you one based on my
own personal experience. As you might know, the University of Illinois based in-
between 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.
 Business Strategy
Professor Somaya

Well, first we're here in the south of town in front of a Goodwill store. Some of you might
know Goodwill sells used clothing and used household items at an affordable price. But
many years ago, this used to be a bookstore called Pages For All Ages, very popular
with the local population and locally owned and operated. But that store is no more and
instead we have this Goodwill store here now.

Now moving to the north of town where this location were used to have the chain
bookstore borders, now replaced by Binny's which is a liquor store. You'll see a little bit
of a theme with the liquor stores in a minute.
 Business Strategy
Professor Somaya

Here in the north of town, we also had the electronic stores, Circuit City, in this location
which has been replaced now by Gander Mountain, an outdoor equipment and clothing
store. Just a few doors down, we have RadioShack which is still operating but due to
close down soon as part of its bankruptcy.

We also had a number of video stores in town, including the National Chain
Blockbuster, which is right at this location, now replaced by Jet's Pizza.
 Business Strategy
Professor Somaya

One of the other video stores in town was this eclectic video store called That's
Entertainment. It was located right here in campus town with a wide variety of funky arty
and even foreign films. A very typical store in college towns around the country. It has
now closed down and has been replaced by this new store that's just opening up.

Perhaps my favorite example of all is this Hollywood video rental store, it is used to be
until it closed down, and the new owner didn't even take the Hollywood sign down and
simply added liquors to it. So now this is another liquor store. It's clearly a bit of a theme
here. Liquor stores seem to be increasingly popular in Champaign-Urbana and we'll see
 Business Strategy
Professor Somaya

soon why. It is not hard to guess why all these stores are closed down. The bookstores
and electronic stores have lost business to Internet retailers and the video stores had
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. Why have some of
these stores been replaced by liquor stores? It turns out that liquor stores have very
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 much better than
bookstores and video stores in retail locations. Now it is not unusual for retail
establishments to close down.

Sometimes they're badly run or they run out of cash or run into labor problems, but
there is something unusual about the retail closings we've just seen. First of all, the
speed of which these historically successful businesses have been pushed out is
breathtaking. It's really a very high-level of churn. Secondly and more importantly, these
stores have failed you to a very different type of competition. Blockbuster was very good
at what it did. An operating chain of video rental stores all over the US, Blockbuster did
not close because it stopped running it 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.
 Business Strategy
Professor Somaya

When I spoke with our executive experts, they also underscored this transformative
effect of business models and why business models are especially important for
strategic management today. For example, here's Kurt Bock, the CEO of Country
Financial.

I think about the industry that I'm in right now and it's got plenty of innovation, plenty of
disruption, but we have a business model of the typical captive financial representative
or agent who's delivering financial security. So property casualty, life, wealth
management to a community as our channel. To a set of dedicated agents. Dedicated.
 Business Strategy
Professor Somaya

So 2,000 of them in 19 different states. In the industry, people would think that model is
at risk because we've got plenty of competition from Geico, Progressive, online
aggregators, aggregators that can give a prize to anybody for anything. You'd go out of
business because of your business model, and that generally is the one that'll kill you.
Most the time we're pretty good with our income statement and balance sheet, but it's
the business model that kills you. You can take a look around at Blockbuster, and now
you have plenty of great examples of bad business models that littered the landscape.
For us though, we know that for a customer to get value in our model is got to deliver
advice. So it's got to be value-added and delivered by switch is what we really position
ourselves to do. I think it's absolutely vital to understand your business model, what it
does, and what it doesn't do, and recognize that disruption will make it irrelevant if you
don't tend to it or if you don't change it.

The literature shows a lot of confusion about how to define what a business model
is. Let us instead 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 in utility for managers.
 Business Strategy
Professor Somaya

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 needed to implement the business
model. R for the realization of value or the revenue model used. S for the scope of the
enterprise pursuing this 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 bit about Netflix before returning to this
lecture.
 Business Strategy
Professor Somaya

Lesson 1-2.2: The V.A.R.S. Framework, Part 1

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 obtained 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 three dollars to create a product, and the average
customer values the product at five dollars, then the economic value added is two
dollars per customer, 5 minus 3. The businessmen actually charge five dollars for the
product and the price charge isn't necessarily a part of the business model. What is
important is knowing that the business could charge a price in the three dollar to five
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, economic
value added, relative to existing offerings, which you 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
wide 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 store's
business model. These twin advantages allows Netflix to charge a very reasonable
price and still provide more value to customers than video rental store companies could.
Here's a little exercise for you. Think about any new business model that you have
 Business Strategy
Professor Somaya

noticed in your work or living environment. Which business model are you thinking
about? What is the value proposition of this business model? How is it increasing
economic value added? Is it increasing the value perceived by customers, and in what
way? Or is it decreasing the cost of delivering value, and in what part of the operation?

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 that value proposition. For example, the
Netflix business model is based on Internet orderings, so the company developed a 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
ARCs be necessarily owned and operated by the business itself. In fact, as you will see
shortly, one of the choices entailed in designing a business model is deciding which
things the business should do internally, and which one should be outsourced to other
partners. In recent years, a number of new business models have been created by
adding technology based activities, resources, and capabilities, which have helped to
transform many existing businesses, but it is important to keep in mind that other non-
technological capabilities may also be important even in these technology-driven
business models. For example, Netflix needed to develop the capability for building and
 Business Strategy
Professor Somaya

managing relationships with movie and television studios, most of which own the video
content that Netflix wants to stream. This non-technological capability is critical for the
success of Netflix's business model. Even though it's business model builds heavily on
new technology. Think back to the new business model that you typed into the text box
in the previous exercise. What activities, resources, or capabilities were needed to bring
about this business model? How do they help with either increasing value or lowering
cost? In other words, how did they contribute to the value proposition of this new
business model? Which one of these ARCs, activities, resources or capabilities, is most
important for the business model, and why? Even if a business model creates a clear
value proposition by using new activities, resources, and capabilities, 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. 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, into cold hard cash.

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's revenue
model. Perhaps the simplest revenue model for any business would be to charge
customers for cash for the product or service. If customers are not able to afford to pay
in cash, they can also 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
 Business Strategy
Professor Somaya

taking a durable product and then selling services from it, or leasing and subscription
models, which involve periodic payments in return for the use of that product or service.
Netflix, of course, employs precisely such a subscription-based 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 razor-blade model, where one product, the so-called razor, is sold at a low
price to encourage adoption, and then revenues are made by selling the blades, the
higher profit margin complement to the razor. Examples of this model include printers
and ink cartridges, and gaming consoles, and video games and there are many more
that you can think of. 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 LinkedIn, which is free as a basic
service, but offers a premium account with more features if you pay a fee. Many leading
free e-mail 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
that 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 or transactions or services. Facebook operates this complex
 Business Strategy
Professor Somaya

ecosystem, consisting of users, application 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 for 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.
 Business Strategy
Professor Somaya

A second dimension of scope is the business's horizontal scope. How many different
products or services would accompany be in and which ones? Some business models
are very focused and only envision a single product or service whereas others include
multiple products and services, which may even be sold in very different markets.
 Business Strategy
Professor Somaya

A third dimension of scope is the business's vertical scope along the so-called value
chain. What things does the business itself want to do, and what activities are
outsourced to suppliers or downstream partners? Some business models entail
substantial vertical integration, where the business itself undertakes many of the
activities needed to create value.
 Business Strategy
Professor Somaya

Whereas others may significantly rely on partners who provide key components or
services.

Now let us think about Netflix's business scope. 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's 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
 Business Strategy
Professor Somaya

cloud-based services to other companies and at the same time, Netflix has chosen not
to rely fully on outsourcing 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 the activities,
resources, and capabilities in driving value and cost, in other words, in driving the value
proposition. For example, Netflix's broad customer base means that it can spread its
technology development costs over more customers and lower its cost per customer. It
can also improve its video recommendation system by using a huge amount of
customer data and that creates value for all customers. Similarly, by outsourcing cloud-
based services, the company can reduce its costs and access the best in class
solutions provided by other companies for these services.

Lesson 1-2.3: The V.A.R.S. Framework, Part 2

 Business Strategy
Professor Somaya

That's a great question. The way I was thinking about it, as I talked about, it was very
much how does a company make revenues? Fundamentally, I think it's first and
foremost, a business model talks about how a company makes money and how the
expenses relate to that process of making money. If you're making money and you're
spending all of your money, making that money, that's like the traditional industrial
revolution approach or manufacturing approach. But Google totally changed that up. A
lot of other people are totally changing that up. The ways in which people make money
are very unobvious that to an outsider, a lot of people just don't understand how
companies make money anymore.
 Business Strategy
Professor Somaya

For me, business model is really pretty straightforward. It's what your value proposition
is for your consumers and Avant value proposition is very simple. We want to be the
best provider of credit products and alternatives for middle-class consumers around the
world. We have a definition for what middle-class means. In the US, we would define as
basically everyone under a $100,000 on income which happens to be 50 plus percent of
the US population and everything we try to do is provide them better product
alternatives across all of their credit verticals. Today we have an unsecured personal
loan product, we're launching an auto finance product, so if they want to go and buy a
car or refinance their car loan, Avant can provide that for them and we're launching a
credit card product, if they want to transact in the point of sale, and the idea is to provide
all of those products to that same customer, that when they think about borrowing
money in some form, they actually just think about a bond and we do that in real time.
We use the most advanced technology analytics and we structure our products to be
clean and transparent and I think, that's really our value proposition. Today you have an
environment where in order to borrow money from Avant, you apply online via a mobile
app or a mobile phone. It takes you three to five minutes and in real time you can get an
answer that you're approved and if you go to a bank, that same experience involves you
going into the physical branch, filling out all the information, going home and getting
more information that's required, and then waiting 30 days to get an answer.
 Business Strategy
Professor Somaya

It is important to think of the entire VARS framework, 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 activities, resources, or capabilities could dramatically change your
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 VARS 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 Internet enabled technologies, could be
used to fundamentally alter the video rental business. There was the sense that new
activities, resources, and capabilities had to be developed. But to truly identify what
ARCs 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 ARCs
were also related to critical enterprise scope decisions as discussed earlier. Even
Netflix's revenue model also needed to be well aligned with these other elements of the
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 a TV
program and then decide whether or not to watch it. It turns out that this kind of
sampling is easily enabled in the streaming video service and also adds value to the
value proposition of the business as a whole.
 Business Strategy
Professor Somaya

I hope this new VARS framework for understanding business models has helped you
get a better sense for what a business model is. But we are still left without a definition
for a business model. 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, a climate model'. A business model is a
 Business Strategy
Professor Somaya

theoretical abstraction, a mental representation, but it is a pragmatic theory of how a

business will create and realized value. In turn, this also means that a business model
has embedded in it a set of hypotheses, but 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're 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, try it again, and so on and so forth.

I think it is also important to be clear what a business model is not. 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 abstraction, 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 can 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 learn more about strategic management,
you will begin to appreciate these other aspects that we've left out of an analysis of
business models. 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. 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.
 Business Strategy
Professor Somaya

Lesson 1-3: Coherence, Fit and SWOT

Lesson 1-3.1: 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. Come on, it'll be fun. 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 use 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.
 Business Strategy
Professor Somaya

It is the same in any large company, people specialize in different roles and are often
located in different functional departments, like finance or marketing 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 strategy is and what each person's role is
within it. In other words, if it is to succeed, a company's strategy must be coherent within
the organization. This is sometimes referred to as the first rule of strategy, a company
strategy must be coherent. In soccer, just as it's important to have a coherent approach
within one's team, it's 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
might 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 might 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 team. In outdoor games, we might also consider things like 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
strategy 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 has slow defenders, and we have fast-forwards who
can get past them. Or maybe we can use the deflections of the sideboards effectively to
maybe win this game. We'll see if any of that actually happens today.
 Business Strategy
Professor Somaya

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 good strategic fit between a company's organization, its values, capabilities,
systems, processes, etc., and its external environment is critical to ensuring the
performance and long-run success of the company.

An early strategy framework that incorporates this idea of strategic fit and to a lesser
extent coherence is the SWOT framework. SWOT, S-W-O-T, stands for strengths,
weaknesses, opportunities and threats. And the general idea with this framework is that
 Business Strategy
Professor Somaya

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's also so intuitive and
easy to understand.

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've 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 in non-fossil fuel renewable technologies, like solar, are big ones.
Given ExxonMobil's strengths in fossil fuels and weaknesses in 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.
 Business Strategy
Professor Somaya

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
aspect 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 that threat into an opportunity. And similarly, what is defined as a strength or
a weakness can also be murky. 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 for strategic analysis.
The framework is useful if you want to easily communicate and establish a rapport with
a broad audience, but to develop a deeper strategic insight use other frameworks.
 Business Strategy
Professor Somaya

To summarize, in this module you learned 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 are they and why are they
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.