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

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0:35So when your mind won't switch off, you've got something that can help. Erasing thoughts and restless nights won't stand a chance. Find OLLI's sleep solutions for the whole family at OLLI.com. That's O-L-L-Y dot com. 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 have a lot of job experience. It seems very complicated. Nonsense.

1:02Felix Oberholzer-Gee:Strategy, simple, is a plan to create value. The way a company plans to create that value, that's the strategy of the company.

1:17Of 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.

1:59The figure is called a value stick.

2:02Felix Oberholzer-Gee: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 going to ask, okay, so 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 we're charging a particular price.

2:44The 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 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, 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 and 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.

3:25Willingness 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.

3:39Felix Oberholzer-Gee: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. Chevy is called the heartbeat of America for a reason. With SUVs made to move with your rhythm. The versatile Equinox tackles your entire day. The spacious Traverse fits your crew and your whole weekend. And tracks bring style with value you can count on. all infused with tech that has your back. So your drive always hits the right chord. Chevrolet, together let's drive. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs.

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5:05So 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 and 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.

5:46The 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, the more appealing the product, the more appealing the service, the higher is 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 of something else. Think razor, razor blade. Think printer and cartridges. Think espresso machines and espresso capsules.

6:24And 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. There 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.

7:10I 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.

7:36Felix Oberholzer-Gee:And that does the same thing. It creates more value. But there is a big difference. If I pay more, that just shifts value from the company to the staff, to the employees. This episode is brought to you by State Farm. listening to this podcast instead of doom scrolling smart move another smart move getting help from one of state farm's 19 000 local agents when you choose to bundle home and auto bundling just another way to save with the personal price plan prices are based on rating plans that vary by state coverage options are selected by the customer availability amount of discounts and savings and eligibility vary by state did you know sam's club isn't a store it's actually a club with cool finds and like a whole community.

8:23It's a club. Of course, Jason. It's in the name, Sam's Club. Oh, yeah. Come join us. Sam's Club. 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,

8:41Felix Oberholzer-Gee:if the job is a better job, willingness to sell goes down, and that actually creates value.

8:52Felix Oberholzer-Gee:Let's talk about a specific example. You might know Best Buy, 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, Hubert Jolie. And remember, strategy is not complicated. It's all about either increasing willingness to pay or decreasing willingness to sell.

9:35Felix Oberholzer-Gee: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 then you can build really beautiful freestanding stores at millions and millions of dollars.

10:20Felix Oberholzer-Gee: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 the 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.

11:08Felix Oberholzer-Gee:They are at an all-time high after these big changes. So what did Best Buy do? It increased 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 costs. Not surprisingly, 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. 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.

12:04Thank you.