How to Understand and Create Value with Strategy

Strategy is often seen as a mystery, something that only super senior people can understand. However, it's actually quite simple: strategy is a process to create value. In this article, we'll explore how companies can use strategy to create value for their customers, employees, and suppliers, while discussing the role of innovation, company culture, challenges, and effective communication.

Understanding Value

At the heart of strategy is the concept of value. Value is the difference between willingness to pay and willingness to sell. To understand this concept, imagine a stick with willingness to pay at the top and willingness to sell at the bottom. The difference between the two is the value that the company creates.

Value is created in three ways:

Value for Customers

To create value for customers, brands need to focus on three things: quality, compliments, and network effects. First, the quality of the product or service needs to be high in order to increase the willingness to pay. Second, companies can offer complementary products or services that support the willingness to pay of something else. Third, companies can leverage network effects to increase the willingness to pay. For example, social media platforms become more valuable as more people use them. In addition, companies can also focus on creating an emotional connection with their customers. By understanding the needs and wants of their customers, companies can create products and services that truly add value to their lives.

Value for Employees

To create value for employees, companies need to have a strong brand culture. This can be done by offering better compensation or by creating more attractive working conditions, such as flexible schedules or opportunities for growth and development. By making the job more attractive, companies can lower the willingness to sell and create value for their employees. In addition, companies can also provide training and development opportunities to help their employees grow and reach their full potential. This can lead to greater job satisfaction, increased productivity, and lower turnover rates.

Value for Suppliers

To create value for suppliers, companies need to offer fair compensation and foster long-term relationships. By treating suppliers well, companies can create a more stable supply chain and ensure that they have the materials they need to create value for their customers. In addition, companies can also work closely with their suppliers to improve efficiency and reduce costs, which can lead to greater overall value for everyone involved. This can also help to build trust and collaboration between companies and their suppliers.

The Role of Innovation in Creating Value

Innovation plays a crucial role in creating value. By introducing new ideas and technologies, companies can generate additional benefits for customers, employees, and suppliers. For example, by developing innovative products or services, companies can meet changing customer needs and differentiate themselves from competitors. This, in turn, increases the willingness to pay and creates value for customers. Furthermore, innovation can also help companies streamline their operations, improve efficiency, and reduce costs, which can create value for both employees and suppliers.

Aligning Company Culture and Values with Strategy

To create sustainable value, companies must align their core values and culture with their strategic objectives. This ensures that the organization's actions and decisions are consistent with its long-term goals and helps to create a strong foundation for success. For example, a company that values sustainability and environmental responsibility should incorporate these principles into its strategy, such as by investing in eco-friendly technologies or adopting more sustainable business practices. This alignment not only creates value for the company but also enhances its reputation and strengthens relationships with customers, employees, and suppliers.

Examples of Companies Creating Value Through Strategy

Apple: Apple's strategy has always been about creating high-quality, innovative products that provide a seamless user experience. This is evident in the way they've designed their product ecosystem. For instance, the integration between the iPhone, MacBook, iPad, Apple Watch, and services like iCloud and Apple Music, creates a cohesive experience that increases customer loyalty and willingness to pay. Apple's commitment to innovation is also evident in their product evolution. The introduction of the iPhone revolutionized the smartphone industry, and they continue to innovate with new technologies like Face ID and Augmented Reality. Moreover, Apple's strong brand and focus on customer service have helped them maintain a premium pricing strategy, further enhancing their value proposition.

Netflix: Netflix's strategy has been about revolutionizing the way people consume media. They pioneered the streaming industry by offering a vast library of content that users can access anytime, anywhere. But they didn't stop there. Recognizing the value of original content, Netflix invested heavily in creating their own shows and movies, which not only differentiated them from competitors but also increased the willingness of customers to pay for their service. Furthermore, Netflix's recommendation algorithm enhances user experience by personalizing content suggestions, thereby increasing viewer engagement and perceived value.

Best Buy: Best Buy's turnaround strategy under CEO Hubert Joly is a classic example of value creation. Faced with fierce competition from online retailers like Amazon, Best Buy transformed its business model. They turned their physical stores into an advantage by using them as distribution centers to improve shipping times. They also created a store-within-a-store concept by partnering with tech giants like Microsoft and Samsung, enhancing the in-store experience for customers. On the employee front, Best Buy invested in training programs to boost employee knowledge and service quality. These strategic moves not only improved Best Buy's value proposition but also reestablished the company as a leader in the electronics retail industry.

Overcoming Challenges and Effective Communication in Strategy Execution

Companies will inevitably face challenges when implementing their strategies, including changes in the competitive landscape, economic conditions, or unforeseen obstacles. To overcome these challenges, companies must be adaptable and resilient, adjusting their strategies as necessary to stay on course. Clear communication is also vital in overcoming challenges and maintaining alignment with strategic objectives. By effectively communicating their vision and goals, companies can ensure that employees, suppliers, and other stakeholders remain engaged and committed to the overall strategy.

Sustainability and Value Creation

Sustainability is increasingly becoming a central part of business strategy and value creation. It involves conducting business in a way that not only generates economic value but also contributes to environmental conservation and social well-being. Here's how sustainability contributes to value creation:

Customer Attraction and Loyalty: More and more consumers are prioritizing sustainability in their purchasing decisions. Businesses that demonstrate a commitment to sustainability can attract these consumers and build stronger customer loyalty, thereby increasing the value they deliver to customers.
Operational Efficiency: Sustainable practices often lead to greater operational efficiency. For example, energy-efficient equipment and waste reduction strategies can lower operating costs. Similarly, sustainable supply chain practices can reduce risks and ensure a more reliable supply of materials.
Innovation: Sustainability can drive innovation, as businesses develop new products, services, or processes to reduce their environmental impact or contribute to social well-being. These innovations can create additional value for customers and differentiate the business from its competitors.
Employee Engagement: Many employees, particularly younger generations, want to work for companies that share their values. Businesses that prioritize sustainability can attract and retain these employees, leading to higher engagement, productivity, and value creation.
Risk Management: Sustainability can also help businesses manage risks. For example, businesses that proactively address their environmental impact can avoid regulatory fines, reputational damage, and other risks associated with environmental harm.
Long-Term Viability: By preserving natural resources and contributing to social well-being, businesses can ensure their long-term viability. They depend on healthy societies and ecosystems to provide the resources they need and consume their products and services.
Stakeholder Relationships: Sustainability can strengthen relationships with various stakeholders, including investors, regulators, and the community. Many investors are now prioritizing sustainability, and businesses that demonstrate a commitment to sustainability can attract investment and achieve a lower cost of capital.

Sustainability is not just about doing good for the environment or society. It's also about creating value for the business and its stakeholders. Businesses that understand this and integrate sustainability into their strategy are likely to achieve greater success in the long term.

The Role of Leadership in Value Creation

Leadership plays a pivotal role in the creation of value within an organization. Leaders are responsible for setting the strategic direction, fostering a culture that supports value creation, and ensuring that all parts of the organization are aligned towards achieving strategic objectives.

Vision and Strategy: Leaders are the visionaries who set the strategic direction of the company. They identify opportunities for value creation and devise strategies to capitalize on these opportunities. They make crucial decisions about where to invest resources to generate the most value.
Culture and Values: Leaders play a key role in shaping the company's culture and values. A culture that encourages innovation, collaboration, and customer-centricity can significantly enhance value creation. Leaders set the tone for this culture through their actions and behaviors.
Employee Engagement and Development: Leaders have a direct impact on employee engagement and development. They can create value for employees by fostering a supportive and inclusive work environment, providing opportunities for growth and development, and recognizing and rewarding contributions.
Stakeholder Relationships: Leaders also manage relationships with various stakeholders, including customers, suppliers, shareholders, and the community. They ensure that the company's activities align with stakeholder expectations and create value for all parties involved.
Change Management and Adaptability: In a rapidly changing environment, leaders need to be adaptable and proficient in change management. They must be able to adjust their strategies in response to changes in the market, technology, or customer preferences, ensuring that the company continues to create value under changing circumstances.
Performance Measurement: Leaders establish KPI's to measure the value created by the company's activities. They monitor these metrics regularly and use them to make informed decisions about strategy and resource allocation.

Effective leadership is integral to value creation. Leaders who can articulate a clear vision, foster a value-creating culture, engage and develop their employees, manage stakeholder relationships effectively, adapt to change, and measure performance accurately are likely to drive significant value creation in their organizations.

Metrics and Measurement in Value Creation

Measuring the value created by a company's strategy is crucial for understanding its effectiveness and making necessary adjustments. There are several KPI's that businesses can use to assess value creation:

Customer Metrics: These include customer satisfaction scores, Net Promoter Score (NPS), customer retention rate, and customer lifetime value (CLV). These metrics can help a company understand how well it is meeting customer needs and creating value for them.
Employee Metrics: Employee engagement scores, turnover rates, and employee satisfaction surveys can provide insights into how well a company is creating value for its employees. High levels of employee engagement and satisfaction often correlate with increased productivity and better company performance.
Supplier Metrics: Supplier performance metrics, such as on-time delivery rate, quality score, and supplier continuity, can indicate how well a company is creating value in its supplier relationships. Strong supplier relationships can lead to a more reliable supply chain and better product quality.
Financial Metrics: Financial performance indicators, such as revenue growth, profit margin, return on investment (ROI), and shareholder value, are critical for assessing the overall value a company is creating. These metrics can show whether a company's strategy is translating into financial success.
Innovation Metrics: Metrics like the number of new products or services launched, revenue from new products, and the percentage of sales from products introduced within the last few years can help measure the value created through innovation.

By regularly tracking these metrics, companies can gain a clearer understanding of how their strategies are performing and where they need to make adjustments to create more value. It's important to remember that these metrics should align with the company's strategic objectives and be relevant to the specific ways in which the company aims to create value.

Digital Transformation and Value Creation

Digital transformation involves the integration of digital technology into all areas of a business, fundamentally changing how the organization operates and delivers value to its customers. Here's how digital transformation contributes to value creation:

Customer Experience: Digital transformation can greatly enhance the customer experience, a key component of value creation. By leveraging technologies like AI, machine learning, and data analytics, businesses can personalize the customer experience, predict customer needs, and respond to issues more quickly, thereby increasing customer satisfaction and loyalty.
Operational Efficiency: Digital technologies can streamline operations, reduce costs, and improve efficiency. For example, automation can handle repetitive tasks, freeing up employees to focus on more complex, value-adding activities. Similarly, advanced analytics can provide insights to optimize operations and decision-making.
Innovation: Digital transformation often leads to innovation, another key driver of value creation. By leveraging technologies like cloud computing, IoT, and AI, businesses can develop new products, services, or business models that deliver greater value to customers.
Data-Driven Decision Making: Digital transformation enables businesses to collect and analyze vast amounts of data. This data-driven approach can lead to more informed decision-making, helping businesses to better understand their market, customers, and operations, and make decisions that create more value.
Employee Engagement: Digital tools can also enhance employee engagement and productivity. For example, collaboration tools can facilitate communication and teamwork, while learning platforms can provide opportunities for employee development.
Risk Management: Digital transformation can also improve risk management, an often overlooked aspect of value creation. For instance, cybersecurity tools can protect valuable data, while data analytics can help identify and mitigate operational risks.

Digital transformation is not just about implementing new technologies. It also involves a cultural shift that requires organizations to continually challenge the status quo, experiment, and accept failure as a part of the process. This cultural aspect is often what makes digital transformation challenging, but also what makes it a powerful driver of value creation when successfully implemented.

Conclusion

Creating value is at the heart of strategy. By focusing on the willingness to pay and willingness to sell, companies can create value for their customers, employees, and suppliers, and achieve long-term success. Innovation, company culture, effective communication, and overcoming challenges all play important roles in developing and executing a successful strategy. By understanding these elements and using them as guides for decision-making, companies can create sustainable growth and profitability, fostering strong and lasting relationships with their customers, employees, and suppliers, and contributing to a more prosperous and sustainable future for all.

Key takeaways :

Strategy is a process to create value for customers, employees, and suppliers.
Value is the difference between willingness to pay and willingness to sell, and it can be created by focusing on quality, compliments, network effects, and emotional connections.
Companies can create value for employees by making jobs more attractive through better compensation, working conditions, and opportunities for growth and development.
Creating value for suppliers involves offering fair compensation, fostering long-term relationships, and collaborating to improve efficiency and reduce costs.
Apple and Netflix serve as examples of companies that have successfully created value through innovation and strong company culture.
Adapting to challenges, being resilient, and maintaining clear communication are crucial for successfully implementing and executing a strategy.
Focusing on value creation, innovation, and effective communication will lead to sustainable growth, profitability, and strong relationships with all stakeholders.