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

FELIX OBERHOLZER-GEE: For many people,

strategy

is a mystery. We often have the feeling that, to know

what

strategy

is, you have to be very senior. If there is a lot of work experience, it seems very complicated. Nonsense. The strategy is simple. It is a plan to create value. The way a company plans to create that value, that is the company's strategy. Of course, it's natural to look at the financials. What are your margins,

what

is the profitability, what is the return on invested capital and that, of course, shows the result of the strategy. It's a final point.

It is a consequence. Actually, that's not where we started. Strategy is about looking ahead, seeing the future and planning for the future. We want to start with an idea of ​​how much value 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 is a really direct and simple way to show this in a figure. The figure is called the value bar, and let's literally imagine that at the top we have a willingness to pay. Deep down we have the will to sell, and the difference between the two is the value that the company creates.

If I am more successful, if I create more value, I can only do it in two ways: by increasing the willingness to pay or by decreasing the willingness to sell. Now I'm going to ask: Okay, so what is willingness to pay? What is willingness to sell? Willingness to pay describes customers. It is the most a customer would ever pay for a product or service. Charge me a cent more and I'd better not buy. Now, the company is not going to give away its products, of course, so by charging too much for a given price, the price has to be below the willingness to pay;

Otherwise, people won't buy. Success for customers is just the difference between willingness to pay and 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, $7, $8 easily. I go to Dunkin' Donuts every day. They sell me coffee for $2. Big difference between my willingness to pay and the price. A lot of value is created for customers. Customer satisfaction, the difference between willingness to pay and price, is significant. The willingness to sell is a little less intuitive than the willingness to pay. Willingness to sell is the minimum amount of compensation an employee would accept and continue working for this particular company.

Let's

think

then of a person who tries to sell. I could sell my job to company A. I could sell my job to company B. How do I choose between the two? How fabulous is the job? How interesting is it? Will my colleagues like me? Employee value is the difference between compensation and my willingness to sell. It is a measure of the quality between what the person is looking for in the job and what the company can offer. So the total value created is the difference between willingness to pay and willingness to sell, and then divided into three parts.

Part of it goes to customers. That is the difference between willingness to pay in price. Part of this goes to employees, that's the difference between willingness to sell and compensation, and the wedge in between. That is the company's margin. That is financial success. In the end, an organization's profitability reflects the amount of overall value creation. So a natural question is: what are the ways I can increase willingness to pay? And there are actually three cubes. The first is the quality of your product or service, where quality can mean very different things to different people. But the higher the quality, the more attractive the product, the more attractive the service, the higher the willingness to pay.

And then there are two different ways to also increase willingness to pay that are a little less obvious. The first is with the help of plugins. A complement is a product or service that supports the willingness to pay for something else. Think razor, straight razor. Think printers and cartridges,

think

espresso and espresso machines, and espresso capsules. And the third is network effects. For some products in some situations, the more popular the product, the more widespread its adoption, the higher my willingness to pay. Social networks are a great example. If all my friends are on Instagram, it's much better to be on Instagram too.

My willingness to pay will increase as Instagram adoption increases. There are really two ways to be more attractive in the talent market. The first is that I should pay you more money. The moment I pay them more money, of course, I will be more competitive in the talent market. The second option that seems similar is to make the job better. I create more attractive working conditions. Maybe you have a better training plan. Maybe you have more generous promotion rules. Maybe you can work three days from home. Every time I improve my work, the willingness to sell will decrease.

And at first you might think that 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, less willingness to sell, and that does the same thing. It creates more value, but there is a big difference. If I pay more, that simply transfers value from the company to the staff, to the employees. No value is created. The value is simply redistributed between the company and the people who work for the company. If I make the work more attractive, if the work is better, the willingness to sell decreases and that really creates value.

Let's talk about the specific example. You may know Best Buy, the US electronics retailer. And if you go back, say, 10 years or so, everyone, including me, was convinced that Best Buy was going out of business. Because? Many other electronics retailers had closed, and with approximately 1,000 stores, it seemed impossible to compete against Amazon. At one point, Best Buy lost $1 billion in a single quarter, and then eventually a new CEO comes along, and remember, strategy isn't complicated. It's about increasing the willingness to pay or decreasing the willingness to sell, and that's exactly what it does. Instead of building big distribution centers, big warehouses that you ship from online, you start thinking of each store as a warehouse and start shipping from each individual store, usually from a store that's right down the street. 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 can go the way of Apple and build really beautiful independent stores for millions and millions of dollars or you can have a store in a store inside Best Buy, where the People buy electronics in the first place at a fraction of the cost, which reduces suppliers' willingness to sell to Best Buy. Now, what does it mean for employees?

Instead of selling countless products, I am now dedicated to the store in a store that is the Microsoft store or the store in the store that is the Sony store. I know a lot 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 the employee engagement surveys at Best Buy, they are at an all-time high after these big changes. So what do Best Buy do? Customers' willingness to pay has increased and we have less pressure on prices.

Then they reduced their willingness to sell, and Best Buy's costs fell. In the middle part of the value, we have less pressure on prices, we have lower costs. No wonder the company is more profitable. They go from losing a billion dollars in a quarter to having a return on invested capital that exceeds 20%. Amazing. Because? Because we start with ideas about how to create value before thinking about how to capture a fraction of the value we create.