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

Summary

In this insightful script, Felix Oberholzer-Gee demystifies the concept of strategy as a straightforward plan to create value. He introduces the 'value stick' to illustrate the difference between customers' willingness to pay and the minimum they're willing to accept, emphasizing the importance of increasing value for customers and employees. Best Buy's turnaround serves as a case study, showcasing how enhancing customer experience and improving employee satisfaction can lead to increased willingness to pay and decreased willingness to sell, ultimately boosting profitability and value creation.

Takeaways

• 😀 Strategy is a simple concept, defined as a plan to create value for a company.
• 🔍 Financial metrics like margins, profitability, and return on invested capital are results of strategy, not the starting point.
• 👀 Strategy involves looking forward and planning for the future, focusing on value creation for customers, employees, and suppliers.
• 📈 The value stick is a visual representation of the value a company creates, which is the difference between willingness to pay and willingness to sell.
• 💰 Willingness to pay is the maximum amount a customer would pay for a product or service, and it's crucial for determining the price point.
• 🤔 Willingness to sell is the minimum compensation an employee would accept to work for a specific company, reflecting job satisfaction and conditions.
• 💼 Value for employees is the difference between their compensation and their willingness to sell, indicating job quality and company offerings.
• 📦 To increase willingness to pay, a company can improve product or service quality, use complements, or leverage network effects.
• 💼 Attracting talent can be achieved by either increasing pay or making the job more attractive, which can lower the willingness to sell.
• 🏢 Best Buy's turnaround strategy involved increasing willingness to pay through better shipping and improving the retail environment by creating 'store within a store' concepts.
• 📊 By focusing on value creation before capturing value, Best Buy was able to increase profitability and return on invested capital significantly.

Q & A

What is the definition of strategy according to the speaker?

Strategy is defined as a plan to create value, outlining how a company plans to generate that value.

Why is the focus on financials considered an endpoint rather than a starting point in strategy?

Financials such as margins, profitability, and return on invested capital are the results or consequences of strategy, not the starting point. Strategy should begin with forward-looking planning and value creation.

What is the concept of 'value stick' and how is it represented?

The 'value stick' is a figure that illustrates the difference between willingness to pay and willingness to sell. It is represented with willingness to pay at the top and willingness to sell at the bottom, with the value created by the company being the difference between the two.

How can a company increase its willingness to pay?

A company can increase willingness to pay by improving the quality of its product or service, leveraging complements, and exploiting network effects.

What is the significance of complements in increasing willingness to pay?

Complements are products or services that support the willingness to pay for another product or service. Examples include razors and razorblades, printers and cartridges, or espresso machines and capsules.

What are network effects and how do they influence willingness to pay?

Network effects occur when the popularity or widespread adoption of a product increases its value and, consequently, the willingness to pay for it. Social media platforms like Instagram are a prime example of this effect.

How can a company make itself more attractive in the market for talent?

A company can be more attractive in the market for talent by either paying more money to attract employees or by improving job quality, such as offering better working conditions, training, promotion opportunities, or flexible work arrangements.

What is the difference between paying more to employees and making the job more attractive in terms of value creation?

Paying more shifts value from the company to the employees without creating new value. Making the job more attractive, however, lowers the willingness to sell, which actually creates new value.

Can you provide an example of a company that successfully implemented strategy changes as described in the script?

Best Buy is an example of a company that successfully changed its strategy by treating each store as a warehouse for online shipping and creating 'store within a store' concepts with major vendors, which increased customer willingness to pay and lowered willingness to sell.

How did Best Buy's strategy changes impact its financial performance?

Best Buy's strategic changes led to increased customer willingness to pay and reduced costs by lowering willingness to sell. This resulted in the company moving from a $1 billion loss in a quarter to achieving a return on invested capital exceeding 20%.

What is the key takeaway from the Best Buy example in terms of creating value?

The key takeaway is that Best Buy started with ideas on how to create value before considering how to capture a fraction of that value, leading to significant profitability improvements.