What is Strategy? It’s a Lot Simpler Than You Think

to many people strategy is a little bit of a mystery often we have a sense in order to know what strategy is you have to be super senior you feel a lot of job experience it seems very complicated nonsense strategy simple is a plan to create value the way a company plans to create that value that's the strategy of the company [Music] of course it's natural to look at financials what are your margins what's profitability what's the return on investor capital and that of course shows the result of strategy it's an endpoint it's a consequence it's not actually where we start strategy is about looking forward seeing the future planning for the future we want to start with a sense of how much value do we create in the first place value for customers value for employees and value for suppliers value is the difference between willingness to pay and willingness to sell there's a really straightforward and simple way to show this in a figure the figure is called a value stick and literally imagine at the top we have willingness to pay at the bottom we have willingness to sell and the difference between the two is the value that the company creates if i'm more successful if i create more value i can only do this in two ways either by increasing willingness to pay or by decreasing willingness to sell now you're gonna ask okay so but what is willingness to pay what is willingness to sell willingness to pay describes customers it's the most a customer would ever pay for a product or a service charge me one cent more and i'm better off not buying now the company is not going to give away its products of course and so for charging a particular price the price has to be below willingness to pay otherwise people will not buy the success for customers is just a difference between willingness to pay in price i don't know about you i have a hard time waking up in the morning my willingness to pay for that first cup of coffee seven eight dollars easily i go to dunkin donuts every day they sell me coffee for two dollars big difference between my willingness to pay in the price there's a lot of value created for customers customer delight the difference between willingness to pay and price is significant willingness to sell is a little less intuitive than willingness to pay willingness to sell is the least amount of compensation that an employee would accept and still work for this particular company so think of a person trying to sell i could sell my work to company a i could sell my work to company b how do i choose between the two how fabulous is the job how interesting is it will i like my colleagues value for employees is the difference between compensation and my willingness to sell it's a measure of the quality between what the person is looking for in work and what the company can offer [Music] so total value created is the difference between willingness to pay and willingness to sell and then it gets split three ways some of it goes to customers that's the difference between willingness to pay in price some of it goes to employees that's the difference between willingness to sell and compensation and the middle wedge that's the margin of the company that's financial success in the end how profitable an organization is reflects the amount of overall value creation so one natural question is what are the ways i can raise willingness to pay and there are really three buckets the first one is the quality of your product or your service where quality can mean very different things to different people but the higher the quality more appealing the product the more appealing the service the higher his willingness to pay and then there are two different ways to also increase willingness to pay that are a little less obvious the first one is with the help of compliments a compliment is a product or a service that supports willingness to pay off something else think razor razor blade think printer and cartridges think espresso nespresso machines and espresso capsules and the third is network effects for some products in some situations the more popular the product is the more widespread its adoption the greater my willingness to pay social media is a great example if all my friends are on instagram oh it's so much better to also be on instagram my willingness to pay will increase as the adoption of instagram increases are really two ways to be more attractive in the market for talent the first one is i just pay you more money the moment i pay you more money of course i'm going to be more competitive in the marketplace for talent the second option that seems similar is i make the job a better job i create more attractive working conditions maybe i have a better training plan maybe i have more generous promotion rules maybe you can work three days from home whenever i make the job a better job willingness to sell is going to go down and so at the beginning you might think these things are really the same if i pay more money i create more value for my employees and if i make a job a better job i lower willingness to sell and that's that does the same thing it creates more value but there's a big difference if i pay more that just shifts value from the company to the staff to the employees there's no value created value is just redistributed between the company and the people who work for the company if i make work more attractive if the job is a better job willingness to sell goes down and that actually creates value let's talk about a specific example you might know best spy the electronics retailer in the united states and if you go back say 10 years or so everybody including myself everybody was convinced that best buy was going to go out of business why many other electronics retailers had gone out of business and with roughly a thousand stores it just seemed impossible to compete against amazon at one point in time best buy lost a billion dollars in a single quarter and then a new ceo comes in iberjoli and remember strategy is not complicated it's all about either increasing willingness to pay or decreasing willingness to sell and that's exactly what he does instead of building big distribution centers big warehouses from which you ship online he starts thinking about every store as a warehouse and they start shipping from each individual store typically from a store that is just down the road from where you are we increase willingness to pay by having better shipping times and then a second idea has to do with the retail store environment he goes to microsoft he goes to samsung he goes to lenovo and he says well you know you can go down the apple route and you can build really beautiful freestanding stores at millions and millions of dollars or you can have a store in a store inside best buy where people are shopping for electronics products in the first place at a fraction of the cost lowering willingness to sell for the vendors to best buy now what does it mean for employees instead of selling innumerable products now i'm dedicated to the store in a store that's the microsoft store or the store in the store that is the sony store i know so much more about the products i have i can do a much better job helping customers figure out which products are exactly right for them my job is easier i feel more successful willingness to sell drops and if you look at employee engagement surveys at best buy they are at an all-time high after these big changes so what did best buy do it increase customers willingness to pay and we have fewer pricing pressures next they lowered willingness to sell and costs fall for best buy the middle portion of the value stick we have less pricing pressure we have lower cost not surprisingly the company is more profitable they go from losing a billion dollars in a quarter to having a return on investor capital that exceeds 20 amazing why because we started with ideas about how to create value before we thought about how to capture a fraction of the value that we created [Music]

Channel: Harvard Business Review

Views: 38,227

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Id: o7Ik1OB4TaE

Length: 9min 32sec (572 seconds)

Published: Wed Feb 23 2022