What Is Strategy? It’s a Lot Simpler Than You Think
Strategy is a bit of a mystery for many individuals. There is a common misconception that one needs to be a senior executive to comprehend strategy. It appears to be highly complicated if there is a great deal of work experience. Nonsense. Simple is the plan. It is a strategy to generate value. A company’s strategy is the means by which it intends to generate value.
Obviously, it makes sense to examine the financials. What are your margins? What exactly is profit? What is the rate of return on capital? This clearly demonstrates the strategy’s outcome. It is a terminus. It’s a consequence. This is not where we truly begin. The strategy focuses on looking forward, envisioning the future, and planning accordingly. We want to have an understanding of how much value we produce in the beginning. consumers’ value, workers’ value, and suppliers’ value. Value is the difference between a buyer’s and a seller’s willingness to pay.
There is an easy and straightforward method to illustrate this in a diagram. The number is referred to as a “value stick,” and, as you may expect, readiness to pay is at the top. The lowest tier consists of the readiness to sell and the disparity between the two. This is the value produced by the business. If I am more successful and produce more value, I can only do it in one of two ways: by raising the desire to pay or by diminishing the readiness to sell.
Now, I’m going to inquire as to how much you are willing to spend. How willing are you to sell? Customers are defined by their willingness to pay. It is the maximum amount a client will pay for a product or service. I would be better off not purchasing the item if it cost one cent extra. Obviously, the corporation will not give away its items, so overcharging a certain price is inappropriate. If the price exceeds the consumer’s desire to pay, consumers will not purchase.
Customers are successful when there is a discrepancy between their willingness to pay and the price. I have no idea about you. I have difficulty waking in the morning. I am willing to pay $7 for the first cup of coffee. $8 quickly. I frequent Dunkin’ Donuts daily. I purchased coffee for $2. The price is far more than my willingness to pay. There is a great deal of consumer value produced. Significant is the difference between willingness to pay and price, created by customer satisfaction. A bit less intuitive than the readiness to pay is the willingness to sell. The minimum amount of pay that an employee will accept to continue working for this organization is the willingness to sell.
Consider a person who is attempting to sell. My work may be sold to Company A. My work may be sold to Business B. How do I decide between the two options? How fantastic is the position? How fascinating is it? Will I enjoy my coworkers? The difference between remuneration and my readiness to sell is the value to employees. It is a comparison between what the individual is seeking in a job and what the firm can provide. The total value generated is, therefore, the difference between the desire to pay and the readiness to sell, and it is then divided into three parts.
A portion is allocated to consumers. That is the gap between price and willingness to pay. This is the gap between the desire to sell and remuneration; it represents the intermediate wedge. That is the company’s margin. That is monetary success. Ultimately, a company’s profitability indicates the extent of its value production. How can I increase my readiness to pay? It is therefore an obvious question. In reality, there are three pails. The first is the quality of your product or service, where “quality” might have very different meanings for various individuals.
However, the larger the desire to pay, the higher the quality, the more desirable the product and service, and the more tempting the readiness to pay. Then, there are two less obvious strategies for raising the desire to pay. The initial method utilizes complements. A complement is a product or service that increases the propensity to pay for something else. Think razor, razorblade. Think of printers and cartridges, espresso, espresso machines, and espresso capsules. Network effects are the third factor.
For certain items and under certain circumstances, my willingness to pay increases proportionally to the product’s popularity and adoption rate. Social media is a wonderful example. Oh, being on Instagram is so much more advantageous. As Instagram’s popularity grows, my willingness to pay will rise. There are essentially two strategies to increase your marketability in the talent market. The first is that I should increase my payment to you. As soon as I increase your salary, I will inevitably become more competitive in the talent market. The second alternative that appears to be comparable is to make the work better. I will provide more desirable working circumstances.
Perhaps I have a superior training regimen. Perhaps I have more liberal promotion policies. Perhaps you can work from home for three days. My inclination to sell will decrease when I improve the quality of the job. Thus, you could initially believe that these items are identical. If I pay my employees more, I generate more value for them, and if I improve their jobs, I reduce their inclination to sell, which has the same effect. It generates greater value, yet there is a significant distinction. If I pay more, the value is transferred from the corporation to the workers and employees. There is no creation of value. The value is simply divided between the organization and its employees.
If I make labor more appealing, if the job is better, the propensity to sell decreases, which produces value. Let’s examine a specific illustration. You may recognize Best Buy as the largest American electronics retailer. Everyone, including myself, thought Best Buy was going out of business about ten years ago. Why? Numerous other merchants of electronic goods had gone out of business, and with over 1,000 outlets, it appeared difficult to compete with Amazon. At one point, Best Buy lost $1 billion in a single quarter.
A new CEO was eventually appointed, and strategy was not difficult. It is all about raising or diminishing the propensity to pay or sell, and that is precisely what he does. Instead of constructing large distribution centers or warehouses from which to transport online orders, he began to view each shop as a warehouse. And they begin shipping from each individual business, often from a store in close proximity to your location. We boost consumers’ willingness to pay by improving shipment times, and a second notion involves the retail shop environment.
He tells Microsoft, Samsung, and Lenovo, “Well, you can go the Apple route and build really beautiful freestanding stores for millions and millions of dollars, or you can have a store in a store inside Best Buy, where people are shopping for electronics products in the first place for a fraction of the cost, thereby decreasing the vendors’ willingness to sell to Best Buy.” What does this imply for employees? Instead of selling many things, I am now committed to the Microsoft shop or the Sony store within the store.
I am significantly better informed about the possessions I own. I can considerably enhance my capacity to assist customers in selecting the optimal products. My work has become easier, and I feel more accomplished as a result. Following these substantial improvements, the propensity to sell declines, but employee engagement surveys at Best Buy reach an all-time high. What was Best Buy’s response? It increased customers’ willingness to pay, and pricing pressures have subsequently diminished. Then, they reduced their desire to sell, resulting in a decrease in Best Buy’s expenses. In the middle region of the value stick, there is less pricing pressure and expenses are lower. Unsurprisingly, the business is more lucrative. They went from losing $1 billion in a quarter to generating a return on invested capital of more than 20%. Amazing. Why? because we first considered how to generate value before considering how to collect a portion of that value.