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

00:09:32
https://www.youtube.com/watch?v=o7Ik1OB4TaE

Resumo

TLDRFelix Oberholzer-Gee demystifies strategy, defining it as a straightforward plan to create value. He introduces the 'value stick' concept, which illustrates the difference between customers' willingness to pay and employees' willingness to sell, emphasizing that value is created through this difference. He discusses methods to increase willingness to pay, such as enhancing product quality, leveraging complements, and utilizing network effects. Additionally, he highlights the importance of improving job conditions to lower willingness to sell, thereby creating value for employees. Using Best Buy as a case study, he demonstrates how strategic changes led to increased profitability by focusing on value creation rather than just financial metrics.

Conclusões

  • 📈 Strategy is a simple plan to create value.
  • 💡 The 'value stick' shows the difference between willingness to pay and sell.
  • 🛠️ Increase willingness to pay by improving product quality.
  • 🔗 Complements can enhance willingness to pay.
  • 🌐 Network effects increase product value with more users.
  • 💰 Willingness to sell is the minimum compensation employees accept.
  • 🏢 Best Buy transformed its strategy to improve profitability.
  • 📉 Increasing pay redistributes value, not creates it.
  • 🌟 Improving job conditions creates additional value for employees.
  • 📊 Focus on value creation leads to better financial outcomes.

Linha do tempo

  • 00:00:00 - 00:09:32

    Felix Oberholzer-Gee explains that strategy is often misunderstood as something complex reserved for senior executives, but it is fundamentally a plan to create value. He emphasizes that financial metrics are outcomes of strategy, not starting points. The focus should be on understanding how much value is created for customers, employees, and suppliers, illustrated by the concept of a 'value stick' which shows the difference between willingness to pay and willingness to sell. He defines willingness to pay as the maximum price a customer is willing to pay for a product, while willingness to sell is the minimum compensation an employee would accept to work for a company. The total value created is divided among customers, employees, and the company's profit margin.

Mapa mental

Vídeo de perguntas e respostas

  • What is the main idea of the video?

    The main idea is that strategy is a simple plan to create value, focusing on increasing willingness to pay and decreasing willingness to sell.

  • What is the 'value stick'?

    The 'value stick' represents the difference between customers' willingness to pay and employees' willingness to sell, showing how value is created.

  • How can a company increase willingness to pay?

    A company can increase willingness to pay by improving product quality, offering complementary products, and leveraging network effects.

  • What does willingness to sell mean?

    Willingness to sell is the minimum compensation an employee would accept to work for a company.

  • How did Best Buy improve its strategy?

    Best Buy improved its strategy by treating stores as warehouses for better shipping and creating in-store experiences with brands, enhancing customer and employee value.

  • What is the difference between increasing pay and improving job conditions?

    Increasing pay redistributes value without creating new value, while improving job conditions lowers willingness to sell and creates additional value.

  • What was the outcome of Best Buy's strategic changes?

    Best Buy went from losing $1 billion in a quarter to achieving over 20% return on invested capital.

  • What role do complements play in strategy?

    Complements enhance the willingness to pay for a primary product or service.

  • What are network effects?

    Network effects occur when the value of a product increases as more people use it.

  • Why is strategy important for companies?

    Strategy is important because it guides how a company creates and captures value, impacting overall profitability.

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Legendas
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Rolagem automática:
  • 00:00:00
    FELIX OBERHOLZER-GEE: For many people,
  • 00:00:00
    strategy is a little bit of a mystery.
  • 00:00:02
    Often, we have a sense, in order to know what strategy is,
  • 00:00:06
    you have to be super senior.
  • 00:00:07
    If there are a lot of job experience,
  • 00:00:09
    it seems very complicated.
  • 00:00:11
    Nonsense.
  • 00:00:12
    Strategy's simple.
  • 00:00:13
    It's a plan to create value.
  • 00:00:16
    The way a company plans to create that value, that's
  • 00:00:20
    the strategy of the company.
  • 00:00:21
    [MUSIC PLAYING]
  • 00:00:28
    Of course, it's natural to look at financials.
  • 00:00:30
    What are your margins, what's profitability, what's
  • 00:00:33
    the return on invested capital, and that,
  • 00:00:35
    of course, shows the result of strategy.
  • 00:00:39
    It's an endpoint.
  • 00:00:40
    It's a consequence.
  • 00:00:41
    It's not actually where we start.
  • 00:00:43
    The strategy is about looking forward, seeing the future,
  • 00:00:47
    planning for the future.
  • 00:00:48
    We want to start with a sense of how much value do
  • 00:00:52
    we create in the first place.
  • 00:00:53
    Value for customers, value for employees, and value
  • 00:00:57
    for suppliers.
  • 00:00:59
    Value is the difference between willingness
  • 00:01:02
    to pay and willingness to sell.
  • 00:01:04
    There's a really straightforward and simple way
  • 00:01:07
    to show this in a figure.
  • 00:01:09
    The figure is called a value stick,
  • 00:01:11
    and literally imagine at the top,
  • 00:01:13
    we have willingness to pay.
  • 00:01:15
    At the bottom, we have willingness to sell,
  • 00:01:17
    and the difference between the two
  • 00:01:19
    is the value that the company creates.
  • 00:01:21
    If I'm more successful, if I create more value,
  • 00:01:24
    I can only do this in two ways, either by increasing
  • 00:01:28
    willingness to pay or by decreasing willingness to sell.
  • 00:01:33
    Now, I'm going to ask, OK, so what is willingness to pay?
  • 00:01:35
    What is willingness to sell?
  • 00:01:37
    Willingness to pay describes customers.
  • 00:01:39
    It's the most a customer would ever
  • 00:01:42
    pay for a product or a service.
  • 00:01:44
    Charge me once cent more, and I'm better off not buying.
  • 00:01:48
    Now, the company is not going to give away its products,
  • 00:01:51
    of course, and so over charging a particular price,
  • 00:01:54
    the price has to be below willingness to pay,
  • 00:01:57
    otherwise people will not buy.
  • 00:01:59
    The success for customers is just
  • 00:02:01
    a difference between willingness to pay and price.
  • 00:02:04
    I don't know about you.
  • 00:02:05
    I have a hard time waking up in the morning.
  • 00:02:06
    My willingness to pay for that first cup of coffee, $7,
  • 00:02:10
    $8 easily.
  • 00:02:11
    I go to Dunkin' Donuts every day.
  • 00:02:14
    They sell me coffee for $2.
  • 00:02:17
    Big difference between my willingness to pay
  • 00:02:19
    and the price.
  • 00:02:20
    There is a lot of value created for customers.
  • 00:02:24
    Customer delight, the difference between willingness to pay
  • 00:02:27
    and price, is significant.
  • 00:02:30
    Willingness to sell is a little less intuitive than willingness
  • 00:02:34
    to pay.
  • 00:02:35
    Willingness to sell is the least amount of compensation
  • 00:02:39
    that an employee would accept and still work
  • 00:02:43
    for this particular company.
  • 00:02:44
    So think of a person trying to sell.
  • 00:02:46
    I could sell my work to company A.
  • 00:02:49
    I could sell my work to company B.
  • 00:02:51
    How do I choose between the two?
  • 00:02:54
    How fabulous is the job?
  • 00:02:55
    How interesting is it?
  • 00:02:57
    Will I like my colleagues?
  • 00:02:58
    Value for employees is the difference between compensation
  • 00:03:03
    and my willingness to sell.
  • 00:03:05
    It's a measure of the quality between what
  • 00:03:08
    the person is looking for in work
  • 00:03:10
    and what the company can offer.
  • 00:03:12
    [MUSIC PLAYING]
  • 00:03:15
    So total value created is the difference between willingness
  • 00:03:19
    to pay and willingness to sell, and then it
  • 00:03:21
    gets split three ways.
  • 00:03:23
    Some of it goes to customers.
  • 00:03:25
    That's the difference between willingness to pay in price.
  • 00:03:27
    Some of it goes to employees, that's
  • 00:03:30
    the difference between willingness to sell
  • 00:03:32
    and compensation, and the middle wedge.
  • 00:03:35
    That's the margin of the company.
  • 00:03:37
    That's financial success.
  • 00:03:39
    In the end, how profitable an organization
  • 00:03:43
    reflects the amount of overall value creation.
  • 00:03:48
    So one natural question is, what are the ways
  • 00:03:51
    I can raise willingness to pay?
  • 00:03:53
    And there are really three buckets.
  • 00:03:56
    The first one is the quality of your product or your service,
  • 00:03:59
    where quality can mean very different things
  • 00:04:02
    to different people.
  • 00:04:03
    But the higher the quality, more appealing the product,
  • 00:04:06
    the more appealing to service, the higher
  • 00:04:08
    is willingness to pay.
  • 00:04:09
    And then there are two different ways
  • 00:04:11
    to also increase willingness to pay
  • 00:04:13
    that are a little less obvious.
  • 00:04:15
    The first one is with the help of complements.
  • 00:04:18
    A complement is a product or a service
  • 00:04:21
    that supports willingness to pay of something else.
  • 00:04:24
    Think razor, razorblade.
  • 00:04:27
    Think printer and cartridges, think espresso and espresso
  • 00:04:31
    machines, and espresso capsules.
  • 00:04:33
    And the third is network effects.
  • 00:04:36
    For some products in some situations, the more popular
  • 00:04:39
    the product is, the more widespread its adoption,
  • 00:04:43
    the greater my willingness to pay.
  • 00:04:46
    Social media is a great example.
  • 00:04:48
    If all my friends are on Instagram,
  • 00:04:50
    oh, it's so much better to also be on Instagram.
  • 00:04:53
    My willingness to pay will increase as the adoption
  • 00:04:57
    of Instagram increases.
  • 00:05:00
    There are really two ways to be more attractive in the market
  • 00:05:04
    for talent.
  • 00:05:05
    The first one is I should pay you more money.
  • 00:05:07
    The moment I pay you more money, of course,
  • 00:05:10
    I'm going to be more competitive in the marketplace for talent.
  • 00:05:14
    The second option that seems similar
  • 00:05:17
    is I make the job a better job.
  • 00:05:19
    I create more attractive working conditions.
  • 00:05:22
    Maybe I have a better training plan.
  • 00:05:24
    Maybe I have more generous promotion rules.
  • 00:05:27
    Maybe you can work three days from home.
  • 00:05:29
    Whenever I make the job a better job, willingness to sell
  • 00:05:33
    is going to go down.
  • 00:05:34
    And so at the beginning you might think,
  • 00:05:36
    these things are really the same.
  • 00:05:38
    If I pay more money, I create more value for my employees,
  • 00:05:42
    and if I make a job a better job,
  • 00:05:44
    I lower willingness to sell, and that does the same thing.
  • 00:05:48
    It creates more value, but there is a big difference.
  • 00:05:51
    If I pay more, that just shifts value
  • 00:05:55
    from the company to the staff, to the employees.
  • 00:05:59
    There's no value created.
  • 00:06:01
    Value is just redistributed between the company
  • 00:06:04
    and the people who work for the company.
  • 00:06:07
    If I make work more attractive, if the job is a better job,
  • 00:06:12
    willingness to sell goes down, and that actually
  • 00:06:15
    creates value.
  • 00:06:16
    [MUSIC PLAYING]
  • 00:06:20
    Let's talk about the specific example.
  • 00:06:22
    You might know Best Buy, the electronics
  • 00:06:25
    retailer in the United States.
  • 00:06:27
    And if you go back say, 10 years or so,
  • 00:06:30
    everybody, including myself, everybody
  • 00:06:33
    was convinced that Best Buy was going to go out of business.
  • 00:06:36
    Why?
  • 00:06:37
    Many other electronics retailers had gone out of business,
  • 00:06:40
    and with roughly 1,000 stores, it just
  • 00:06:44
    seemed impossible to compete against Amazon.
  • 00:06:47
    At one point in time Best Buy lost $1 billion
  • 00:06:50
    in a single quarter, and then a new CEO comes in eventually,
  • 00:06:55
    and remember, strategy is not complicated.
  • 00:06:58
    It's all about either increasing willingness to pay
  • 00:07:01
    or decreasing willingness to sell,
  • 00:07:03
    and that's exactly what he does.
  • 00:07:05
    Instead of building big distribution centers,
  • 00:07:09
    big warehouses from which you ship online,
  • 00:07:12
    he starts thinking about every store as a warehouse
  • 00:07:17
    and they start shipping from each individual store
  • 00:07:20
    typically from a store that is just down the road from where
  • 00:07:23
    you are.
  • 00:07:24
    We increase willingness to pay by having better shipping
  • 00:07:28
    times, and then a second idea has to do with the retail store
  • 00:07:33
    environment.
  • 00:07:34
    He goes to Microsoft, he goes to Samsung, he goes to Lenovo,
  • 00:07:39
    and he says, well, you can go down the Apple route
  • 00:07:42
    and you can build really beautiful freestanding stores
  • 00:07:46
    at millions and millions of dollars
  • 00:07:48
    or you can have a store in a store inside Best Buy,
  • 00:07:52
    where people are shopping for electronics
  • 00:07:54
    products in the first place at a fraction of the cost,
  • 00:07:57
    lowering willingness to sell for the vendors to Best Buy.
  • 00:08:02
    Now, what does it mean for employees?
  • 00:08:04
    Instead of selling innumerable products,
  • 00:08:07
    now, I'm dedicated to the store in a store that's
  • 00:08:11
    the Microsoft store or the store in the store that
  • 00:08:14
    is the Sony store.
  • 00:08:15
    I know so much more about the products I have.
  • 00:08:19
    I can do a much better job helping customers figure out
  • 00:08:23
    which products are exactly right for them.
  • 00:08:25
    My job is easier, I feel more successful.
  • 00:08:29
    Willingness to sell drops, and if you
  • 00:08:33
    look at employee engagement surveys at Best Buy,
  • 00:08:36
    they are at an all time high after these big changes.
  • 00:08:42
    So what they Best Buy do?
  • 00:08:44
    It increased customers' willingness to pay
  • 00:08:47
    and we have fewer pricing pressures.
  • 00:08:51
    Next, they lowered willingness to sell
  • 00:08:54
    and costs fall for Best Buy.
  • 00:08:58
    The middle portion of the value stick,
  • 00:09:00
    we have less pricing pressure, we have lower costs.
  • 00:09:04
    Not surprisingly, the company is more profitable.
  • 00:09:07
    They go from losing $1 billion in a quarter
  • 00:09:10
    to having a return on invested capital that exceeds 20%.
  • 00:09:15
    Amazing.
  • 00:09:16
    Why?
  • 00:09:17
    Because we started with ideas about how to create value
  • 00:09:21
    before we thought about how to capture a fraction of the value
  • 00:09:25
    that we created.
  • 00:09:26
    [MUSIC PLAYING]
Etiquetas
  • strategy
  • value creation
  • willingness to pay
  • willingness to sell
  • value stick
  • Best Buy
  • network effects
  • employee engagement
  • product quality
  • complements