New research argues that business strategy is often too complex and needs to refocus on simplified value creation principles
In Brief: Business strategy can become lost among the myriad of initiatives found at large companies today. New research and analysis argue that focusing strategy development back on the fundamental methods of value creation for customers, employees and partners can best position companies for success.
Analysis: So much is written about business strategy that it’s hard to create truly original ideas that are not some variations on previously articulated concepts. Sometimes, however, a good re-articulation can be a valuable reminder of fundamental business concepts that can get lost in the complex literature about strategy. A new article by Felix Oberholzer-Gee is an excellent example of this approach.
The author begins by making a sound point: the development of corporate strategies has become a sophisticated and multi-disciplinary problem. Most big companies have a marketing strategy, a talent strategy, a digital strategy, and so on. The problem, notes the author, is that despite, or perhaps because of, these multiple strategies, many big companies fail to reach their goals, despite the extensive talents and efforts of their leaders. As the article notes:
A quarter of the firms in the S&P 500 earn long-term returns below their cost of capital. How can it be that so many companies, their ranks filled with talented and highly engaged employees, have so little to show for so much effort? Why do hard work and sophisticated strategy lead to enduring financial success for some companies but not for others?
Oberholzer-Gee argues that strategy has become over-complicated in many cases, and companies need to simplify their strategic thinking dramatically. In his view, “by selecting fewer initiatives with greater impact—we can make it more powerful.” In his simplified strategy model, companies should consider two issues as paramount:
Willingness to Pay (“WTP” ): What a customer is willing to pay for a product or service
Willingness to Sell (“WTS” ): What an employee is willing to accept as salary or a supplier is willing to accept as cost
For the author, these two terms create “an easy-to-use framework called value-based strategy, which gives executives a common language for evaluating strategic initiatives and developing a holistic view of the many activities taking place within their organizations.”
Value Driver 1: Increase WTP
The author argues that companies should consistently focus on increasing what a customer is willing to pay for products and services. He cites the example of Apple, which, faced with a commoditized hardware market, shifted its focus to software and content, where it could dramatically increase WTP. Apple’s move into software is an over-used case study in management, but that does not make it invalid. A rarer example might be Porsche, which has consistently increased WTP by creating differentiated products that customers see as unique in the marketplace. The same could be said for P&G and 3M, both of which have a long history of creating products that command a premium in what are, for their competitors, commoditized product categories.
Of course, any executive might reply that there is nothing new about wanting to get as a high a price as possible for one’s products. That’s a fair critique. But I do think there is a difference between maximizing pricing power and WTP. It’s a subtle difference but a difference nonetheless.
Value Driver 2: Increase WTS
Perhaps the most interesting part of the article is the suggestion that employers use the concept of WTS in thinking about employee compensation. He argues that creating exciting and meaningful work lowers the WTS for workers, which increases margins. As the author explains:
...offering better jobs not only creates value, it also lowers the minimum compensation that you have to offer to attract talent to your business, or what we call an employee’s willingness-to-sell (WTS) wage. Offer a prospective employee even a little less than her WTS, and she will reject your job offer; she is better off staying with her current firm. As is the case with prices and WTP, value-focused organizations never confuse compensation and WTS.
Again, the idea of employee time as a tradable good is not new. However, the concept of minimizing WTS is not front and center in most discussions on human resources. It is novel for the author to give it such prominence in his value-creation framework. Moreover, an example he provides illustrates his point well:
When the Gap learned that one of retail workers’ biggest problems was the lack of predictable and personalized schedules, it experimented with standardizing the start and end times of work shifts and scheduled employees for the same shift every day. In addition, Shift Messenger, an innovative app created specifically for the multistore experiment, allowed workers to trade shifts freely. During a 10-month test period, labor productivity went up 6.8% and sales rose nearly $3 million in participating stores. By creating value for its workers, the Gap increased employee well-being—workers even reported better sleep quality—and the company’s financial performance improved.
WTS finds another application — this one more mainstream — in dealing with suppliers. The author notes that suppliers also have a minimum level of compensation for their products. He argues that an initiative that creates value for suppliers, by increasing their skill sets or productivity, for example, will lower their WTS. “As suppliers’ costs go down,” he notes, “the lowest price they would be willing to accept for their goods — what we call their willingness-to-sell (WTS) price — falls.” When Nike, for example, “created a training center in Sri Lanka to teach its Asian suppliers lean manufacturing, the improved production techniques helped suppliers reap better profits, which they then shared with Nike.”
Putting Value-Based Strategy to work
In the discussion on applying his ideas, the author explains that his “strategic insight is simple; implementing it requires discipline.” He then notes some patterns discovered in field research that are evident in companies that apply this approach with success.
1: “They focus on value, not profit.”
Perhaps surprisingly, value-focused managers are not overly concerned with the immediate financial consequences of their decisions. They are confident that superior value creation will result in improved financial performance over time.
2: “They attract the employees and customers whom they serve best.”
As companies find ways to move WTP or WTS, they make themselves more appealing to customers and employees who particularly like how they add value. Uber has twice the share of female drivers that taxi companies have because it made the job safer, increasing satisfaction for those drivers in particular….It is an unfair advantage, really. Value-focused companies get to serve the very customers who like their products best, they attract talent that values the organization’s strategy and culture, and they boost corporate performance.
3: “They create value for customers, employees, or suppliers (or some combination) simultaneously.”
Traditional thinking, informed by our early understanding of success in manufacturing, holds that costs for companies will rise if they boost consumers’ willingness to pay—that is, it takes more-costly inputs to create a better product. But value-focused organizations find ways to defy that logic.
Expanding on this last point, the author cites the case of Harkins Theaters, which added childcare to its theaters. This unexpected innovation made it easier for parents to come to the movies without worrying about what to do with young children. Harkins’ example illustrates that value-creating “complements often seem unrelated to the core business” and “identifying them requires you to think creatively about customer journeys.”
4: “They shift profit pools to capture value over time.”
Traditionally strategists have differentiated between value creation (the topic of this article for the most part) and value capture (how to make money from the value you’ve created). Value-focused businesses concentrate on the former, but they tend to be flexible about the latter. Because they take a broad view of customer needs, they frequently offer solutions that go beyond their core products. These product-and-service bundles enhance value capture opportunities because they allow businesses to shift their profit pools from one offering to another as the life cycle of the product—or the market overall—changes.
Besides these four points, the author does fully address how to actually put his ideas to work. (No doubt, his book explains the approach in great detail.). What is presented illustrates a process through which leaders first define the criteria that matter to customers. Next, the leaders determine “how good your company is at meeting customers’ expectations” — a process that is repeated for competitors. Once this customers/company/competitors value map is complete, you “identify the drivers that offer the most potential for future value creation and to think through strategic initiatives that will support them.”
This approach harkens back to the Blue Ocean concept developed at INSEAD by W. Chan Kim and Renee Mauborgne back in 2005. Their strategy model also focused on analyzing and adjusting value-creation criteria vis-a-vis competitors. That was an innovative and effective model, and it’s a general approach that is well worth re-emphasizing in 2021.
Though the implementation process is not elaborated, the author does give a few pieces of advice to leaders who take his suggestions to heart. First of all, invest in a small number of value drivers, and avoid the temptation to take on too many initiatives at one time. Second, resist the temptation to catch up to competitors. “This is a mistake,” he notes, because the “greater the similarity between two companies’ value maps, the greater the pressure to compete on price.” The goal, argues Oberholzer-Gee, “is to increase differentiation, not to close gaps.” Lastly, executives “should insist on making trade-offs.” In other words, no strategy can emphasize everything; thus, company leaders should have a clear sense of what they hope to gain and what they are willing to lose through their decisions.
The author concludes by reminding readers that creating value “for customers, employees, and suppliers sits at the very heart of strategies that result in stellar performance.” In the best companies, “this orientation toward value creation is reflected in every decision made by employees at all levels of the organization.” As I noted at the start, in a world of hyper-complex strategic frameworks and analytical models, there can be great value in stating these maxims yet again, for they are easily overlooked among the day-to-day pressures of running a business. Thus, while this research and model breaks no new ground, its reminders to focus on increasing the value customers get from everything a company creates and the value that employees and partners get from working with us, are valuable lessons presented with clarity and effectiveness.
Felix Oberholzer-Gee. Eliminate Strategic Overload. Harvard Business Review. May–June 2021. https://hbr.org/2021/05/eliminate-strategic-overload