Most strategic planning has nothing to do with strategy. For a long, long time, people would plan out the activities they’re going to engage in. More recently, there has been a discipline called strategy. People have put those two things together to call something strategic planning. Unfortunately, those things are not the same: strategy and planning. So just putting them together and calling it strategic planning doesn’t help.
What most strategic planning is in the world of business has nothing to do with strategy. It’s a set of activities that the company says it’s going to do. We’re going to improve customer experience. We’re going to open this new plant. We’re going to start a new talent development program. A whole list of them, and they all sound good, but the results of all of those are not going to make the company happy because they didn’t have a strategy.
So what is a strategy? A strategy is an integrative set of choices that positions you on a playing field of your choice in a way that you win. So there’s a theory. Strategy has a theory. Here’s why we should be on this playing field, not this other one, and here’s how, on that playing field, we’re going to be better than anybody else at serving the customers on that playing field. That theory has to be coherent. It has to be doable. You have to be able to translate that into actions for it to be a great strategy.
Planning does not have to have any such coherence, and it typically is what people in manufacturing want. The few things they want, are to build a new plant, the marketing people want to launch a new brand, and the talent people want to hire more people. That tends to be a list that has no internal coherence to it and no specification of a way that that is going to accomplish collectively some goal for the company.
Why do leaders so often focus on planning? See, planning is quite comforting. Plans typically have to do with the resources you’re going to spend. So we’re going to build a plan. We’re going to hire some people. We’re going to launch a new product. Those are all things that are on the cost side of businesses. Who controls your costs? Who’s the customer of your costs? The answer is, you are. You decide how many square feet to lease, how many raw materials to buy, and how many people to hire. Those are more comfortable because you control them.
A strategy, on the other hand, specifies an outcome, a competitive outcome that you wish to achieve, which involves customers wanting your product or service enough that they will buy enough of it to make the profitability that you’d like to make. The tricky thing about that is that you don’t control them. You might wish you could, but you can’t. They decide, not you. That’s a harder trick. So that means putting yourself out and saying, here’s what we believe will happen. We can’t prove it in advance, and we can’t guarantee it, but this is what we want to have to happen and that we believe will happen.
It’s much easier to say, “I’ll ramp up my ad spend, I will hire more people, etc.,” than “I will have customers end up liking our offering more than those of competitors.” The tricky thing about planning is that while you’re planning, chances are at least one competitor is figuring out how to win.
If you’re trying to escape this planning trap, this comfort trap of doing something that’s comfortable but not good for you, how do you start?
The most important thing to recognize is that strategy will have angst associated with it. It’ll make you feel somewhat nervous because as a manager, chances are you’ve been taught you should do things that you can prove in advance. You can’t prove in advance that your strategy will succeed. You can look at a plan and say, well, all of these things are doable. Let’s just do those because they’re within our control. But they won’t add up to much. In strategy, you have to say, if our theory is right about what we can do and how the market will react, this will position us in an excellent way. Just accept the fact that you can’t be perfect on that, and you can’t know for sure. And that is not being a bad manager. That is being a great leader because you’re giving your organization the chance to do something great.
The second thing is to lay out the logic of your strategy clearly. What would have to be true about ourselves, about the industry, about competition, and about customers for this strategy to work? Why do you do that? It’s because you can then watch the world unfold. And if something that you say is in the logic that would have to be true for this to work is not working out quite the way you hoped, it’ll allow you to tweak your strategy. And strategy is a journey, what you want to have as a mechanism for tweaking it, honing it, and refining it so it gets better and better as you go along.
Another thing that helps with strategy is not letting it get overcomplicated. It’s great if you can write your strategy on a single page. Here’s where we’re choosing to play. Here’s how we’re choosing to win. Here are the capabilities we need to have in place. Here are the management systems. And that’s why it’s going to achieve this goal, this aspiration that we have. Then you lay out the logic, what must be true for that all to work out the way we hope. Go do it, and watch and tweak as you go along.
That may feel somewhat more worry-making, and angst-making than planning, but I would tell you that if you plan, that’s a way to guarantee to lose. If you do strategy, it gives you the best possible chance of winning.
Strategy: It’s Much Simpler Than You Imagine
Strategy is simple—it is a plan devised to generate value. The company’s strategy revolves around how it intends to create and deliver that value.
Contrary to popular belief, strategy does not begin with a sole focus on profit. While financial aspects are important, such as profit margins, profitability, and return on invested capital, they are outcomes and consequences of the strategy rather than its starting point. Strategy is about looking ahead, envisioning the future, and planning accordingly.
The primary objective is to determine how much value the company can create in the first place. This value encompasses the benefits for customers, employees, and suppliers. Value, in essence, represents the disparity between the willingness to pay and the willingness to sell. To illustrate this concept, imagine a visual representation called the “value stick.” At the top of the stick lies the willingness to pay, while the bottom represents the willingness to sell. The difference between the two represents the value generated by the company.
To increase value creation, there are two fundamental approaches: raising willingness to pay and lowering willingness to sell. Willingness to pay refers to the maximum amount a customer is willing to spend on a product or service. To ensure customer purchases, the price must be set below their willingness to pay. For instance, despite being willing to pay $6 or $8 for a cup of coffee in the morning, if a coffee chain charges only $2, significant value is created for the customers.
On the other hand, willingness to sell pertains to the minimum compensation an employee would accept to work for a particular company. When an employee evaluates job opportunities, they consider factors such as job desirability, work environment, and potential colleagues. The value for employees is the discrepancy between their compensation and their willingness to sell their labor. By improving working conditions, offering better benefits, or creating a more appealing work environment, companies can decrease employees’ willingness to sell.
The total value created is subsequently divided into three portions. Customers benefit from the disparity between their willingness to pay and the price charged. Employees benefit from the gap between their willingness to sell and their compensation. The remaining portion represents the company’s margin, which reflects its financial success.
To increase willingness to pay, three primary factors can be leveraged: product or service quality, complementary offerings, and network effects. Higher product quality generally leads to a higher willingness to pay. Additionally, complementary products or services that enhance the value of a core offering can influence customers’ willingness to pay. Network effects, observed in platforms such as social media, occur when the popularity and adoption of a product or service increase customers’ willingness to pay.
Lowering willingness to sell, and consequently attracting talent, can be achieved through two methods. Firstly, increasing monetary compensation can make a company more competitive in the talent market. Secondly, improving the overall job experience and work conditions can make a job more attractive, ultimately reducing employees’ willingness to sell their labor. It’s important to note that while paying more money redistributes value between the company and employees, creating a better job experience actually generates new value.
An example that exemplifies these principles is the transformation of Best Buy, a prominent electronics retailer in the United States. Faced with the challenge of competing against online giant Amazon, Best Buy’s new CEO implemented a strategy that increased customers’ willingness to pay and lowered employees’ willingness to sell. Instead of relying solely on large distribution centers, they leveraged each store as a local warehouse, offering faster shipping times. They also partnered with major brands to create in-store experiences, reducing costs for the vendors and providing employees with a more focused and fulfilling work environment. These strategic changes led to increased customer value, reduced costs, and a remarkable turnaround in profitability for Best Buy.
Strategy is fundamentally about creating value. By focusing on increasing willingness to pay and decreasing willingness to sell, companies can devise effective strategies that generate value for customers, employees, and the organization itself.