What is Strategy? How Best Buy Proved Strategy is All About Creating Value
The Value Stick: A Simple Yet Powerful Approach to Business Strategy You Can’t Ignore
Strategy often sounds intimidating, something that only senior executives or experienced leaders can grasp. It’s usually shrouded in complex terminologies, financial analyses, and long boardroom discussions. But what if I told you that strategy is simpler than you think? In fact, it boils down to one basic concept — creating value.
The Real Meaning of Strategy: Creating Value
At its core, strategy is a plan to create value. It’s not about looking at financial outcomes like profits or margins — those are just results of a good strategy. Instead, it’s about understanding how a company can increase value for its customers, employees, and suppliers. And that’s where the idea of the value stick comes into play.
The Value Stick: A Simple Tool for Understanding Value Creation
Picture a stick. At the top of this stick is the willingness to pay — the maximum amount a customer would ever pay for a product or service. At the bottom is the willingness to sell — the minimum amount an employee or supplier would accept to work for the company or provide goods. The gap between these two points is where value is created.
The goal for any company is simple: increase willingness to pay or decrease willingness to sell. The wider the gap, the more value the company generates, and the more successful it becomes.
Let’s Break It Down: Willingness to Pay
Think about the last time you bought something. How much were you willing to pay for it? For example, I personally can’t get through my day without a strong cup of coffee. My willingness to pay for that first cup of coffee in the morning could easily be $7 or $8. Yet, at Dunkin’ Donuts, I only pay about $2.
The gap between my willingness to pay and the price I actually pay is the customer value created. The larger this gap, the more delight a customer feels. It’s a simple yet powerful idea — customers feel they’re getting more than they’re paying for, which is why they keep coming back.
Willingness to Sell: Creating Value for Employees
While willingness to pay is fairly intuitive, willingness to sell requires a bit more explanation. It’s the least amount of compensation an employee would accept to work for a company.
Imagine you’re an employee trying to choose between two companies. You might think about the salary, sure, but there’s more to it — working conditions, the culture, and your colleagues all play a part. Willingness to sell is influenced by these factors. The more appealing the job is, the lower the willingness to sell, meaning the employee feels they’re getting more value.
By making jobs better — whether it’s through flexible work hours, a great team, or opportunities for growth — a company lowers the willingness to sell. Employees become more engaged and loyal, and that drives success.
Best Buy: A Real-World Example of Value Creation
To see how this concept works in practice, let’s look at Best Buy, the electronics retailer. A decade ago, most people believed Best Buy was on its way out. With competition from Amazon and other online retailers, it seemed impossible for them to survive with their 1,000 brick-and-mortar stores.
At one point, Best Buy lost a staggering $1 billion in a single quarter. But then, a new CEO came in with a strategy grounded in value creation. Instead of following the typical approach of building massive distribution centers, Best Buy started using its stores as local warehouses, reducing shipping times and increasing willingness to pay for customers.
Then, the company introduced the store-in-a-store concept. Instead of making electronics companies like Microsoft, Samsung, and Lenovo open costly standalone stores, they offered space within Best Buy at a fraction of the cost, effectively lowering the willingness to sell for suppliers. This move also made employees more knowledgeable and specialized in the products they sold, increasing their job satisfaction and reducing their willingness to sell.
The result? Employee engagement skyrocketed, and customer satisfaction improved as well. Best Buy went from losing $1 billion in a quarter to achieving over 20% return on invested capital. All of this was achieved by focusing on creating value first — for customers, employees, and suppliers — before worrying about capturing value.
How to Increase Value: Three Simple Strategies
1. Improve Quality: The easiest way to raise willingness to pay is by improving the quality of your product or service. This could mean enhancing the user experience, adding new features, or making your offering more reliable.
2. Leverage Complements: Products or services that work together can boost willingness to pay. Think of a razor and razorblades or espresso machines and coffee pods. The complement makes the primary product more valuable.
3. Use Network Effects: In certain industries, like social media, the more people who use a product, the more valuable it becomes. As platforms like Instagram grow, people’s willingness to pay increases because they gain more value from being part of a larger network.
Lessons Learned: Focus on Value Creation
What makes this approach so effective is its simplicity. Instead of getting bogged down in complex financial models or convoluted business strategies, the focus stays on value creation. By concentrating on increasing willingness to pay or decreasing willingness to sell, a company can ensure long-term success.
The beauty of this strategy is that it applies to any business — whether you’re running a small startup or a global corporation. As long as you’re consistently creating value for your customers, employees, and suppliers, success will follow.
Conclusion: Strategy is Simpler Than You Think
In the end, strategy isn’t some mysterious art form. It’s about creating value — for your customers, employees, and the business itself. As Best Buy’s turnaround story shows, focusing on these key aspects can not only save a company but make it thrive in a competitive market.
So the next time you think about strategy, remember: it’s simpler than you think. It’s all about understanding and improving the value stick. After all, businesses that create value are the ones that win in the long run.