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

Harvard Business Review
23 Feb 202209:32
EducationalLearning
32 Likes 10 Comments

TLDRThe video script by Felix Oberholzer-Gee demystifies strategy as a simple plan to create value, emphasizing the importance of understanding and balancing customer willingness to pay and employee willingness to sell. It introduces the concept of the value stick to illustrate value creation and discusses ways to increase willingness to pay through product quality, complements, and network effects. The example of Best Buy's turnaround highlights how strategic adjustments can enhance value for customers and employees, leading to the company's financial success.

Takeaways
  • 📈 Strategy is a plan to create value for a company, focusing on the future and value creation rather than just financial results.
  • 💡 Understanding strategy involves recognizing the importance of value for customers, employees, and suppliers, beyond just profitability.
  • 📊 The 'value stick' model illustrates the difference between willingness to pay and willingness to sell, showing how value is created.
  • 🛒 Willingness to pay is the maximum amount a customer is willing to pay for a product or service, which can be influenced by quality and other factors.
  • 💼 Willingness to sell represents the minimum compensation an employee would accept to work for a company, influenced by job quality and conditions.
  • 🔄 Value created is split between customers, employees, and the company, with the company's profitability reflecting the overall value creation.
  • 🎯 To increase willingness to pay, companies can focus on improving product or service quality, leveraging complements, and harnessing network effects.
  • 💰 Attracting talent can be achieved either by offering higher compensation or by improving the job itself, with the latter creating more value for the company.
  • 🏢 Best Buy's turnaround strategy involved improving shipping times and creating in-store brand-specific retail spaces, which increased customer willingness to pay and decreased willingness to sell for vendors.
  • 📈 By focusing on creating and capturing value, Best Buy transformed from significant losses to high profitability and increased employee engagement.
Q & A

  • What is the core concept of strategy as defined in the script?

    -The core concept of strategy is a plan to create value, outlining how a company intends to generate that value.

  • How does the script simplify the understanding of strategy?

    -The script simplifies strategy by explaining it as a straightforward plan to create value, rather than something that requires extensive experience or seniority to comprehend.

  • What are the key financial metrics mentioned in the script that reflect the outcome of a company's strategy?

    -The key financial metrics mentioned are margins, profitability, and return on invested capital.

  • What is the 'value stick' and how is it used to illustrate value creation?

    -The 'value stick' is a figurative representation that shows willingness to pay at the top and willingness to sell at the bottom. The difference between the two is the value created by the company.

  • How can a company increase its value creation according to the script?

    -A company can increase value creation by either increasing willingness to pay or decreasing willingness to sell.

  • What does 'willingness to pay' signify in the context of the script?

    -'Willingness to pay' signifies the maximum amount a customer would be willing to pay for a product or service.

  • What factors contribute to the 'willingness to sell' of an employee?

    -Willingness to sell is determined by the least amount of compensation an employee would accept to work for a particular company, considering factors like job quality, interest, and relationships with colleagues.

  • How does the script describe the distribution of the total value created?

    -The total value created is split three ways: some goes to customers (difference between willingness to pay and price), some to employees (difference between compensation and willingness to sell), and the middle wedge, which is the company's margin or financial success.

  • What are the three main ways to raise willingness to pay as per the script?

    -The three main ways to raise willingness to pay are improving the quality of products or services, utilizing complements, and leveraging network effects.

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

    -A company can be more attractive by either paying more money to employees or by improving the job itself, such as creating better working conditions, offering better training, and more generous promotion rules.

  • What specific example is used in the script to illustrate a successful application of strategy?

    -The script uses the example of Best Buy, which increased customer willingness to pay by improving shipping times and lowered willingness to sell for vendors by offering in-store partnerships, leading to higher profitability.

Outlines
00:00
📈 Understanding Strategy and Value Creation

This paragraph introduces the concept of strategy as a simple plan to create value for a company. It explains that strategy is not just about financials, but also about looking forward and planning for the future. The value stick is introduced as a tool to illustrate the difference between willingness to pay and willingness to sell, which is the value created by a company. The paragraph emphasizes that creating more value can be achieved by either increasing willingness to pay or decreasing willingness to sell. It also discusses the factors that can affect willingness to pay, such as product quality, complements, and network effects.

05:01
💼 Attracting Talent and Best Buy's Turnaround

The second paragraph delves into the strategies companies can employ to attract talent, highlighting the difference between offering higher compensation and improving job quality. It contrasts the two approaches, explaining that while higher pay merely redistributes value, improving the job itself can actually create value. The example of Best Buy's turnaround is provided, illustrating how the company increased customer willingness to pay through better shipping times and lowered willingness to sell for vendors by offering in-store brand-specific sections. The changes also positively impacted employees, making their jobs more focused and satisfying, which in turn reduced their willingness to sell and increased their engagement. The result was a more profitable and successful company.

Mindmap
Keywords
💡Strategy
Strategy refers to a plan designed to create value for a company. It encompasses the methods and actions a business takes to achieve its objectives. In the video, the speaker simplifies the concept of strategy, emphasizing its importance in looking forward and planning for the future, rather than just analyzing financial results.
💡Value Creation
Value creation is the process of generating value for customers, employees, and suppliers. It is central to the video's message, as it is the difference between the willingness to pay and the willingness to sell. The speaker uses the 'value stick' to visually describe this concept, highlighting that a company's success is directly tied to its ability to create value.
💡Willingness to Pay
Willingness to pay is the maximum amount a customer is prepared to pay for a product or service. It is a crucial concept in the video, as it helps determine the value a company can potentially create. The speaker illustrates this with the example of a morning coffee, where the price is significantly lower than the customer's willingness to pay, thus creating value for the customer.
💡Willingness to Sell
Willingness to sell represents the minimum compensation an employee or vendor is willing to accept for their work or products. In the context of the video, it is less intuitive than willingness to pay and is influenced by factors such as job satisfaction and compensation. The speaker explains that understanding and managing willingness to sell is key to creating value for employees and the company.
💡Value Stick
The value stick is a visual tool used in the video to represent the concept of value creation. It has willingness to pay at the top and willingness to sell at the bottom, with the difference indicating the value created by a company. The video uses this concept to explain how a company can create value and how it is distributed among customers, employees, and the company itself.
💡Quality
Quality refers to the standard or grade of a product or service. In the video, it is one of the three buckets to raise willingness to pay. Higher quality products or services are more appealing to customers, which increases their willingness to pay. The speaker emphasizes that quality can mean different things to different people, making it a critical aspect of strategy.
💡Complements
Complements are products or services that enhance the value of another product or service. The video uses examples such as razors and razor blades, printers and cartridges, and espresso machines and capsules to illustrate how complements can increase the willingness to pay for a primary product, thereby creating more value.
💡Network Effects
Network effects occur when the value of a product or service increases as more people use it. The video uses social media platforms like Instagram as an example, where the willingness to pay increases as more friends and acquaintances join and use the platform. This concept is important in understanding how certain products or services can gain value through widespread adoption.
💡Marketplace for Talent
The marketplace for talent refers to the competition among companies to attract and retain skilled employees. In the video, it is discussed in the context of increasing a company's attractiveness by either paying more or improving job quality. The speaker highlights that while higher pay can shift value, making jobs more attractive can actually create value.
💡Best Buy
Best Buy is used as a specific example in the video to demonstrate how a company can turn around its financial situation by focusing on value creation. The company adapted its strategy by changing its shipping model and retail environment, which increased customer willingness to pay and decreased willingness to sell for vendors, leading to significant financial success.
💡Employee Engagement
Employee engagement refers to the level of enthusiasm and commitment employees have towards their work. In the context of the video, it is mentioned in relation to Best Buy's changes, which improved employee engagement by making jobs more specialized and satisfying. This, in turn, lowered the willingness to sell and contributed to the company's overall value creation.
Highlights

Strategy is a simple concept, defined as a plan to create value. (Start Time: 0s)

A company's strategy is about how it plans to create value. (Start Time: 10s)

Financial metrics like margins and return on invested capital are results of strategy, not the starting point. (Start Time: 20s)

Value is created by considering the future and planning for it. (Start Time: 30s)

Value for customers, employees, and suppliers is central to strategy. (Start Time: 40s)

The value stick is a tool to visualize the difference between willingness to pay and willingness to sell. (Start Time: 50s)

Willingness to pay is the maximum amount a customer would pay for a product or service. (Start Time: 1m)

Willingness to sell is the minimum compensation an employee would accept to work for a company. (Start Time: 1m30s)

Total value created is split between customers, employees, and the company's margin. (Start Time: 2m)

Raising willingness to pay can be achieved through product quality, complements, and network effects. (Start Time: 2m30s)

Attracting talent can be done by either increasing compensation or improving job attractiveness. (Start Time: 3m)

Improving job attractiveness can lower willingness to sell and create more value. (Start Time: 3m30s)

Best Buy's turnaround strategy involved increasing customer willingness to pay and lowering willingness to sell for vendors. (Start Time: 4m)

Best Buy's focus on in-store expertise improved employee engagement and willingness to sell. (Start Time: 4m30s)

Best Buy's strategic changes led to a significant increase in profitability and return on invested capital. (Start Time: 5m)

Creating value should precede capturing value for a successful strategy. (Start Time: 5m30s)

Transcripts

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Related Tags
ValueCreationCustomerExperienceEmployeeEngagementMarketStrategyWillingnessToPayWillingnessToSellBestBuyCaseStudyProductQualityComplementsNetworkEffects