Better, Simpler Strategy

Synopsis

Ever wondered what strategies make Apple, Amazon, and other juggernauts so successful? We read the book Better, Simpler Strategy by Felix Oberholzer-Gee and will share the top insights he uncovered that explain how top companies succeed.

You'll learn the value stick framework to raise a customer's willingness to pay and lower an employee's willingness to sell, how customers and employees contribute to value incentives, how to build value maps to compare against your competitors, and how companies like Amazon, Apple, Ford and Nike prioritize the right value drivers to grow their business.

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Could you elaborate on the concept of value maps as explained in Better, Simpler Strategy?

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Value maps, as explained in the book 'Better, Simpler Strategy', are tools used by businesses to compare their value incentives against their competitors. They are built using the value stick framework, which aims to increase a customer's willingness to pay and decrease an employee's willingness to sell. Companies like Amazon, Apple, Ford, and Nike use value maps to prioritize the right value drivers to grow their business. These maps help them understand where they stand in the market and how they can improve.

What are some of the most innovative ideas presented in the book 'Better, Simpler Strategy'?

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The book 'Better, Simpler Strategy' presents several innovative ideas. One of the key concepts is the 'value stick' framework, which aims to increase a customer's willingness to pay and decrease an employee's willingness to sell. This framework emphasizes the importance of value incentives for both customers and employees. Another innovative idea is the use of value maps to compare against competitors. The book also provides insights into how successful companies like Amazon, Apple, Ford, and Nike prioritize the right value drivers to grow their business.

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Top 20 insights

1. A higher willingness to pay (WTP) is not a guarantee for success. What matters is customer delight, the difference between WTP and price. JetBlue may have better customer WTP than American Airlines. But still, customers will prefer American Airlines if the difference between American's WTP and ticket cost is more than the difference between JetBlue's WTP and ticket cost. This is because they prefer American's brand.
2. A focus on WTP throughout the customer journey beyond the purchase decision gives you new ways to increase customer delight. Sony dominated the e-reader market with a great product and first-mover advantage. But Amazon won because it offered free 3G access to buy books instantly, which Sony could not match. Amazon's insight came from its focus on value creation across the customer journey.
3. Prioritize value creation over your current business model. When Larry Page and Sergey Brin tried to sell their search algorithm for just $1.6 million to search engine company Excite, their CEO refused because a better algorithm would reduce the time spent on the home page and lower revenue from advertising. Excite is dead, and Google is now valued at over $1 trillion.
4. Focus on your near-customers, those whose WTP is just below your price. Upstart Taobao took 84% market share from eBay in China within four years because it focussed on near-customers who wanted to shop online but were scared. Taobao's Alipay ensured that payments were only made after sellers shipped, allowed customers to bargain with sellers and deployed a brick-and-mortar look to create familiarity.
5. Complementary services are a powerful way to increase WTP and create customer delight, and are particularly powerful if they raise the WTP for only your specific product. FaceTime raises the WTP for iPhones but not Android devices. Tesla's Superchargers charge only Tesla cars — at least initially. If your organization gains more from overall category growth, non-proprietary, industry-level complements are ideal.
6. Treat your partners as a frenemy, not a friend. Partners collaborate to create value but quarrel on how to split that value. Compliments always seek to gain more value from their partner. Intel wants Windows to be inexpensive while Windows seeks to lower Intel's hardware costs.
7. Negotiations between partners have more significant stakes than negotiations between companies and suppliers. As complement prices fall, your product becomes more valuable. When you negotiate a 10% discount with a supplier, your benefit is 10%. However, if you manage to lower the price of a complement, you not only receive a discount but also see an additional increase in your product's WTP, which provides price flexibility.
8. When the competition heats up, companies that make their own complements can drop prices in competitive areas and raise WTP in better-protected areas to shelter overall profits. When Apple faced increased competition from Android phones, it shifted its profits from hardware to software. Between 2009 and 2018, Apple's iPhone margins fell from 62% to 38%, while its average profit from apps rose nearly four times.
9. Winner-takes-all outcomes of Network Effects like Facebook are rare. Network effects are usually limited by geography and culture. Uber has 3 million drivers globally, but it has to start from scratch every time it enters a new market. Once DiDi pulled ahead in China, the market tipped, and Uber had no chance. But Uber's defeat in China had little impact on its dominance in other markets.
10. There are three strategies by which smaller companies can successfully compete with the network effects of large platforms. First, develop features to boost willingness to pay that are independent of scale. Second, dominant platforms are either buyer-oriented or seller-focussed. Create meaningful differentiation with a focus on the WTP of the group neglected by your competitor. Third, focus on a niche group of customers and create deeper connections between them.
11. To lower employee willingness to sell (WTS), choose ways to improve employee satisfaction over a simple pay raise. A pay raise reduces margins and merely redistributes current value without new value creation. But measures to improve work conditions create new value, and companies can capture part of this value in many ways. Companies can offer below-market compensation, enjoy greater loyalty and engagement and get larger applicant pools.
12. Gap improved WTS for part-time employees because it offered predictable shifts in an industry where 80% of part-timers report huge schedule variations. Gap standardized shift timings, scheduled employees for the same shift, provided a minimum of 20 work hours per week for core staff and created an app for workers to trade work hours. Productivity increased by 6.8%, and job satisfaction rose without a pay hike.
13. The measures you choose to reduce WTS can be powerful ways to attract the right employees to your organization. BayCare, an organization that runs hospitals in Florida, is nationally recognized for its training programs. The programs made BayCare particularly attractive for healthcare professionals who value continued training and education. Choose your measures to reduce WTS based on the type of talent you wish to apply.
14. Companies pay suppliers less to improve margins while suppliers push to enlarge their surplus. These zero-sum games create no value. Think of ways to lower the WTS for your suppliers and create more value so that both parties can be better off. Nike enabled its suppliers to adopt lean manufacturing, and the resultant productivity advances both lowered Nike's WTS and increased supplier productivity simultaneously.
15. Do not underestimate the productivity gains that come from established management techniques. Conventional management wisdom says that best practices are easily replicable. However, research shows that, across industries and countries, companies fail to adopt essential tools such as goal setting, performance tracking and frequent feedback. Good management practices are hard to achieve, diffuse slowly and can serve as the basis of long-term competitive advantage.
16. Organizational learning can lead to robust productivity gains. Indian hospital group Narayana Health exploits organizational learning to offer complex surgeries at remarkably low prices. A surgeon at Narayana health performs 200 open-heart surgeries annually, twice as many as a doctor at Cleveland Clinic. High volumes improve productivity (and lower WTS), reduce cost and improve quality, which raises WTP. Narayana Health's success rates rival the very best hospitals in the West.
17. However, excessive emphasis on organizational learning can stifle innovation. When an organization runs a process multiple times to create process improvements, product and process become closely intertwined. Innovation becomes difficult as significant product changes require an extensive process overhaul. Ford's obsession with process improvements for Model T made it costly to introduce new models.
18. A focus on WTP does not mean you build every possible feature. Excellence always requires resources that are in short supply: time, capital and managerial attention. To be great at a few critical features, companies have to be comfortable with deemphasizing others. Slack succeeded because it focussed on just three critical features - search, synchronization across devices and file sharing and neglected others.
19. Value maps help you translate strategic ideas into specific activities and initiatives. List value drivers, the criteria your customers care about most and rank them from most to least significant. For each value driver, rank your company's competence on a scale of 1 to 10. A poor score next to a highly-ranked value driver is a clear opportunity for progress. You can also use value Maps to manage talent.
20. It is possible to raise WTP and lower WTS at the same time. To build this dual advantage, focus on the natural connections between WTP and WTS value drivers. Apple gets a steep discount from malls (lower WTS) as the company brings 15% more foot traffic (higher WTP) for the mall. Zara's fast fashion model reduces inventory (lower WTS) and provides customers with the latest trends in clothing (higher WTP).

Questions and answers

Explain how this idea can be applied to product management

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The concept of focusing on the customer's willingness to pay (WTP) and customer delight can be applied to product management in several ways.

Firstly, product managers can focus on creating value throughout the customer journey, not just at the point of purchase. This could involve enhancing the product's features, improving customer service, or offering additional services that complement the product.

Secondly, product managers should prioritize value creation over sticking to a current business model. This might mean pivoting the product or its features based on customer feedback or market trends.

Lastly, the concept of customer delight, which is the difference between WTP and price, can guide pricing strategies. If the perceived value of the product is higher than its price, customers are more likely to be satisfied and become loyal to the brand.

Remember, a higher WTP doesn't guarantee success, but a focus on customer delight throughout their journey can lead to a competitive advantage.

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Summary

Over the past few decades, strategy has become increasingly sophisticated. However, only a few companies manage to translate strategy into enduring financial success. Too often, strategic planning becomes an annual ritual. The Value-Based Strategy approach cuts through complexity and clarifies where to focus and how to deepen competitive advantage.

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How can a startup leverage the Value-Based Strategy approach to deepen its competitive advantage?

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A startup can leverage the Value-Based Strategy approach to deepen its competitive advantage by focusing on creating and delivering exceptional value to its customers. This approach cuts through complexity and helps the startup to focus on what truly matters - the value it provides to its customers. By understanding what customers value and aligning its products or services to meet those needs, a startup can differentiate itself from competitors and create a strong competitive advantage. This could involve innovating new solutions, improving customer service, or offering better pricing. The key is to ensure that the value provided is unique and hard for competitors to replicate.

Are there any examples of companies that have successfully implemented the Value-Based Strategy approach?

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Yes, there are several companies that have successfully implemented the Value-Based Strategy approach. Some notable examples include Apple and Amazon. These companies have managed to translate strategy into enduring financial success by focusing on creating value for their customers and deepening their competitive advantage.

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The value stick

A Value Stick visually represents the Value-Based Strategy approach with four components: Willingness to pay (WTP), Willingness to sell (WTS), Price and Cost.

The value stick is a simple and powerful tool to understand value creation and value capture. The stick provides the customer's maximum willingness to pay on top, followed by product price, cost and finally, the employee's willingness to sell at the bottom.

Willingness to pay

WTP represents the most a customer would pay for your product or service. If companies improve their product, the WTP will increase.

Willingness to sell

WTS is based on employee and supplier perceptions. For employees, WTS is the minimum compensation they require to accept a job offer. If companies make work more attractive, WTS reduces. If a job is dangerous or exceptionally demanding, WTS increases.

For suppliers, WTS is the lowest price at which they will offer products and services. If companies make it easier for suppliers to produce and ship products, WTS will decline. Think of WTP and WTS as walk-away points.

The difference between WTP and WTS is ""Value"" for the customer. The difference between compensation and WTS is ""employee satisfaction."" Finally, the difference between prices and cost is the value captured by the firm. Draw value sticks for specific products and specific customer and employee groups.

Questions and answers

Can you elaborate on the concept of 'value sticks' as explained in the book 'Better, Simpler Strategy'?

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The 'value stick' concept in the book 'Better, Simpler Strategy' is a framework that illustrates the distribution of value among customers, employees, and the firm. It's a visual representation of the value created by a product or service. The top of the stick represents the customer's willingness to pay (WTP), and the bottom represents the firm's willingness to sell (WTS). The difference between WTP and WTS is the value for the customer. The difference between compensation and WTS is employee satisfaction. Finally, the difference between prices and cost is the value captured by the firm. By drawing value sticks for specific products and customer and employee groups, companies can better understand and manage the distribution of value.

In what ways has the book 'Better, Simpler Strategy' influenced corporate strategies or business models?

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The book 'Better, Simpler Strategy' has influenced corporate strategies and business models in several ways. Firstly, it introduced the concept of the 'Value Stick', a framework that helps businesses understand how to create and capture value. This has led many companies to reevaluate their strategies and focus more on creating value for customers and employees. Secondly, the book emphasizes the importance of simplicity in strategy, arguing that the most successful companies often have the simplest strategies. This has encouraged businesses to simplify their own strategies and focus on their core competencies. Finally, the book provides numerous case studies and examples, which have served as a source of inspiration for many businesses.

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Value creation and capture

The total value created by a company is the difference between its WTP and WTS. Strategies that lead to exceptional performance use three levers to produce differentiated value:

• Create customer delight to increase willingness to pay.
• Create improved work conditions to decrease employee Willingness to sell.
• Improve organizational productivity in ways that are difficult to imitate.

There are only two ways to create additional value: increase WTP or lower WTS. Every significant initiative must either enhance customer experience (raise WTP) or make it more attractive for vendors or employees to work with you (lower WTS).

Strategists think in differences.

A company's ability to capture created value depends on its ability to create differentiated value. The higher the similarity between your firm and your competitors, the more customers will focus on price, which will create pressure on the firm's margins.

Many passengers choose which budget airline to fly solely based on ticket prices. Price competition puts pressure on margins and reduces a firm's ability to capture value.

Companies with a sustained competitive advantage raise WTP or lower WTS in ways that competitors find hard to replicate. Apple significantly raises WTP with unique products which are radically different from their competitors.

Create customer delight

WTP is influenced by the product, its associations, the status they confer, the joy they bring and the social considerations they cause. While a product-centric manager focuses on purchasing decisions and ways to sway the customer, WTP attempts to increase customer delight throughout the customer journey. Develop practices to periodically remind the entire team of the firm's focus on WTP.

Questions and answers

Are there examples of companies that have successfully implemented the practices of focusing on WTP as outlined in 'Better, Simpler Strategy'?

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Yes, there are several examples of companies that have successfully implemented the practices of focusing on Willingness to Pay (WTP). Apple is a prime example. They have consistently focused on enhancing customer delight throughout the customer journey, which has significantly increased their customers' WTP. Amazon is another example, where they have implemented practices to increase WTP by offering a vast selection, competitive prices, and excellent customer service.

What potential obstacles might companies face when trying to increase customer delight throughout the customer journey and how can they overcome them?

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Companies might face several obstacles when trying to increase customer delight throughout the customer journey. These include lack of understanding of customer needs, poor communication, lack of personalized experiences, and inability to measure customer satisfaction effectively. To overcome these, companies can invest in customer research to understand their needs better, improve communication channels, personalize customer experiences based on their preferences, and use analytics to measure customer satisfaction and make necessary improvements.

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Improve WTP across the consumer journey

Amazon entered the billion-dollar e-reader market dominated by Sony's Librie. Sony had a great product, a first-mover advantage, dominant market share and a big marketing budget. Despite these advantages, Amazon won a 62% market share within just five years. Amazon won because it offered free 3G internet access, which enabled users to instantly download e-books, while Sony users had to rely on computers. The product-centric Sony focussed only on a great reading experience which it knew would influence the customer's purchase decision. Amazon, in contrast, focussed on WTP and improved convenience across the customer journey.

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Can you analyze the case of Amazon's entry into the e-reader market and its broader implications for businesses entering a market dominated by a single player?

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Amazon's entry into the e-reader market, dominated by Sony's Librie, is a classic example of how a company can successfully penetrate a market dominated by a single player. Despite Sony's first-mover advantage, dominant market share, and big marketing budget, Amazon managed to win a 62% market share within just five years. Amazon's strategy was to focus on the customer's willingness to pay (WTP) and improve convenience across the customer journey. They offered free 3G internet access, enabling users to instantly download e-books, while Sony users had to rely on computers. This case illustrates that businesses entering a market dominated by a single player should focus on understanding customer needs and improving the overall customer experience, rather than just focusing on the product.

What are the key takeaways from Amazon's strategy that are actionable for entrepreneurs or managers in the tech industry?

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The key takeaways from Amazon's strategy that are actionable for entrepreneurs or managers in the tech industry include:

1. Focus on the customer journey: Amazon's success in the e-reader market was largely due to its focus on improving convenience across the customer journey, not just the product itself.

2. Leverage technology to enhance customer experience: Amazon offered free 3G internet access, enabling users to instantly download e-books. This was a significant differentiator from competitors.

3. Don't just rely on a great product: Sony had a great product and first-mover advantage, but Amazon won the market share by focusing on what would increase the customer's willingness to pay (WTP).

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Focus on near customers

Companies are familiar with their customers and know about consumers of rival firms. But often, they ignore potential customers who are not currently active in the market but may be interested. Near-customers are the segment whose WTP is slightly below the level required to make a purchase. Understanding this group's value drivers can unlock significant business opportunities. Ask yourself why near customers don't buy your product and how you can tweak your product to boost their WTP and make them buyers.

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What strategies can be used to boost the willingness to pay (WTP) of near-customers and convert them into buyers?

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To convert near-customers into buyers, you can employ several strategies. First, understand their value drivers and needs. This can be done through market research or direct feedback. Second, tweak your product or service to meet these needs. This could involve improving the product's quality, adding new features, or offering better customer service. Third, consider pricing strategies that could make your product more attractive to near-customers. This could involve offering discounts, bundling products, or introducing a lower-cost version of your product. Lastly, communicate these changes effectively to near-customers to persuade them to make a purchase.

How can understanding the value drivers of near-customers unlock significant business opportunities?

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Understanding the value drivers of near-customers can unlock significant business opportunities by helping businesses identify and address the barriers preventing these potential customers from making a purchase. By understanding what these near-customers value and why they are not currently buying, businesses can tweak their products or services to better meet these needs and convert them into active customers. This could involve adjusting pricing, improving product features, or enhancing customer service. Ultimately, this understanding can lead to increased market share and revenue.

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Taobao beats eBay

Taobao, a small Chinese startup launched by Jack Ma, took on a dominant eBay, which had an 85% market share with a focus on near-customers who wanted to shop online but were cautious to make a purchase. Taobao provided an escrow service, Alipay, to ensure customers paid only after sellers shipped a product. A second key feature was WangWang, an instant message service that allowed buyers to bargain with sellers. Finally, Taobao's website visually resembled a brick-and-mortar store to create familiarity. Taobao's group of near-customers grew far faster than eBay's customers. Taobao had an 84% market share within four years.

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Win with complements

Without complements, the WTP of many products would be zero. Think of smartphones without any apps. Complements can be particularly powerful if they raise your WTP and not those of your competitors. Tesla Superchargers initially supplied power only to Tesla cars.

Exclusivity is a tricky choice. Ask yourself if you seek to gain the most if you grow your market share or grow the category overall. To grow market share, keep complements exclusive. To benefit from category growth, go for non-proprietary industry-standard complements. To discover complements, ask yourself what customers do before they interact with your business and how you can reduce friction there.

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How can a startup use the concept of discovering complements to grow their business?

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A startup can use the concept of discovering complements to grow their business by identifying what customers do before they interact with their business and finding ways to reduce friction in those areas. This could involve creating or improving products or services that complement their main offering, thereby increasing the overall value proposition for customers. For example, if a startup sells online courses, a complementary service could be offering personalized learning plans or additional resources for students. By providing these complements, the startup can increase its market share and benefit from category growth.

Are there examples of companies that have successfully implemented the strategy of choosing between growing market share and benefiting from category growth?

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Yes, there are several examples of companies that have successfully implemented the strategy of choosing between growing market share and benefiting from category growth. For instance, Apple has been successful in growing its market share by keeping its iOS exclusive. On the other hand, companies like Google have benefited from category growth by making Android an open-source platform, thereby encouraging more device manufacturers to adopt it, which in turn has led to an increase in the use of Google's services.

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Cooperation and conflict

Whenever the price of a complement declines, the WTP for the other product increases. Because apps are cheap, customers are happy to spend more on smartphones. While partners jointly create complimentary value, they often compete on how to share that value. Spotify works hard to promote new songwriters but simultaneously pushes hard to reduce their royalties. There is more at stake in negotiations than a simple supplier negotiation. When you lower the price of a complement, not only do you get a discount, you also see an increase in the WTP of a product.

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Create profit pools

Companies that make their own complimentary services can shift profits from one product to another. Gillette gives away its ""core product,"" the razor, in return for substantial margins on the complementary product blades. Microsoft barely makes money from consoles. When the competition heats up, they can drop product prices and raise WTP of complements to protect overall margins.

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How does the concept of shifting profits from one product to another, as demonstrated by companies like Gillette and Microsoft, challenge traditional business strategies?

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The concept of shifting profits from one product to another, as demonstrated by companies like Gillette and Microsoft, challenges traditional business strategies by focusing on the profitability of the entire product ecosystem rather than individual products. This approach allows companies to strategically adjust prices and margins across their product portfolio based on market conditions and competition. For instance, Gillette practically gives away its razors to earn substantial profits from the complementary product - blades. Similarly, Microsoft barely profits from consoles but makes up for it with the sales of games and services. This strategy can protect overall margins even when competition intensifies.

What strategies do companies like Apple and Amazon use to increase customer willingness to pay and decrease employee willingness to sell?

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Companies like Apple and Amazon use a variety of strategies to increase customer willingness to pay and decrease employee willingness to sell. One such strategy is the creation of complementary services or products. By offering a core product at a low price or even for free, these companies can increase the perceived value of complementary products, thus increasing the customer's willingness to pay for them. This strategy also helps to protect overall margins when competition intensifies. Another strategy is the continuous innovation and improvement of products and services, which not only increases customer willingness to pay but also fosters employee loyalty and decreases their willingness to sell.

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Apple kept the price of music and apps low to generate exceptional margins on the sale of iPods, iPads and iPhones. Over time, Apple's gross margins on the iPhone fell from an estimated 62% to 38% between 2009 and 2018 due to intense competition from Android Phones. However, Apple grew its gross profit from an average app by four times in the same period. In a dramatic strategic move, Apple shifted its profit pool away from hardware to software.

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What are the key takeaways from "Better, Simpler Strategy" that can be actionable for entrepreneurs or managers?

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1. Focus on creating value for customers: Companies like Apple and Amazon have been successful because they consistently focus on creating value for their customers. This can be done by offering high-quality products or services, or by providing exceptional customer service.

2. Use the value stick framework: This framework suggests that companies should aim to increase the willingness of customers to pay for their products or services, while also reducing their own costs.

3. Be adaptable: Companies need to be able to adapt to changes in the market. For example, Apple was able to shift its profit pool from hardware to software in response to increased competition.

How can businesses use the insights from "Better, Simpler Strategy" to build value maps against competitors?

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Businesses can use insights from "Better, Simpler Strategy" to build value maps against competitors by understanding the value stick framework. This involves identifying where the company can add unique value that competitors can't match. For example, Apple used a strategy of keeping the price of music and apps low to generate high margins on the sale of iPods, iPads, and iPhones. Over time, they shifted their profit pool from hardware to software, demonstrating a strategic move to stay competitive. Businesses can apply similar strategies by identifying their unique value propositions and adjusting their strategies based on market competition.

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Network effects and tipping points

In markets with strong network effects, customer WTP rises as the adoption of the product increases. Network effects can lead to tipping points, from low adoption to universal acceptance in a short period. In 2010, mobile payments had not taken off in China. Within a decade, three-quarters of the Chinese population prefers mobile payments to cash, and many retailers have stopped cash entirely.

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Types of network effects

There are three types of network effects:

1. Direct Network Effects — WTP rises with each additional customer who uses the product. Think of mobile phones or fax machines.
2. Indirect Network Effects — Companies raise customer WTP through complements. As more customers purchase smartphones, developers will create more apps. Indirect network effects create chicken-and-egg scenarios. More charging stations are needed for more people to buy electric cars. But more cars are needed to make charging stations viable. To break this, companies will have to invest in complements like charging stations to spur network effects.
3. Platform Network Effects — WTP increases for one group as the other group grows more prominent. On Amazon, WTP increases for customers as the number of sellers rises and vice-versa.

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How can a startup use the strategies covered in "Better, Simpler Strategy" to grow their business?

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A startup can use the strategies covered in "Better, Simpler Strategy" to grow their business by focusing on increasing the willingness to pay (WTP) of their customers. This can be achieved through direct network effects, where the value of the product or service increases as more customers use it. They can also leverage indirect network effects by investing in complements that enhance the value of their product or service. For instance, if a startup is in the tech industry, they could encourage developers to create more apps for their platform. Additionally, startups can create platform network effects, where the value increases for one group as the other group grows more prominent. For example, on a marketplace platform, the value increases for customers as the number of sellers rises and vice-versa.

Can you provide an analysis of the case studies used in 'Better, Simpler Strategy' and their broader implications?

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The book 'Better, Simpler Strategy' uses various case studies to illustrate the concept of the 'value stick' framework and network effects. For instance, it discusses the direct network effects seen in the use of mobile phones or fax machines, where the value of the product increases with each additional user. It also talks about indirect network effects, using the example of smartphones and app developers. As more people buy smartphones, more developers are incentivized to create apps, creating a cycle of increasing value. The book also discusses platform network effects, using Amazon as an example, where the value increases for customers as the number of sellers increases, and vice versa. These case studies highlight the importance of understanding and leveraging network effects in business strategy.

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Network Effects can provide formidable advantages, and markets often tip in favor of a few companies. However, many network effects are bound by geography. Uber has 3 million drivers globally but still has to compete in every new market it enters. Regional network effects create powerful first-mover advantages. Once DiDi grew in China, Uber stood no chance even though it was a global behemoth.

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How smaller firms can compete

Small firms can compete effectively in three ways:

1. Create customer delight that does not depend on scale.
2. Create meaningful differentiation with a focus on the WTP of a group of customers neglected by the dominant platform.
3. Serve a small niche of customers.

Value for employees

Employee satisfaction is the difference between their compensation and their willingness to sell. Firms can improve satisfaction with increased compensation or lowered WTS to make work more attractive. However, there are essential differences between both approaches.

Increased compensation lowers margins and merely redistributes value. But more attractive work conditions create more value as they reduce WTS, the minimum compensation for which an employee will work. The firm can share a part of this value with employees and use the rest to increase margins.

Making work more attractive goes beyond process optimization to include everything from food choices to tone of feedback to even commute. Companies that lower WTS can capture a part of the value they create through below-market compensation, greater loyalty and engagement and an increased pool of applicants. To be competitive in the talent market, companies don't necessarily have to match market compensation levels. They have to create as much value for employees, which is the difference between compensation and WTS as their competitors. If the drop in WTS is more significant than the cut in salaries, both company and employees are better off.

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How does the concept of 'Willingness to Sell' (WTS) contribute to a company's competitive edge in the talent market?

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The concept of 'Willingness to Sell' (WTS) contributes to a company's competitive edge in the talent market by making the company more attractive to potential employees. This can be achieved through various means, such as offering better working conditions, providing more benefits, or creating a more positive work environment. By lowering the WTS, a company can attract more applicants and retain employees for longer periods, even if they do not match the market compensation levels. This is because the value created for the employees, which is the difference between their compensation and WTS, is greater. If the decrease in WTS is more significant than the cut in salaries, both the company and the employees benefit.

How can companies implement the strategies discussed in "Better, Simpler Strategy" to increase employee loyalty and engagement?

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Companies can implement the strategies discussed in "Better, Simpler Strategy" to increase employee loyalty and engagement by making work more attractive. This can be achieved through various means such as improving the work environment, providing better food choices, giving constructive feedback, and considering factors like commute. Companies can also lower the Willingness to Switch (WTS) by creating more value for employees. This doesn't necessarily mean matching market compensation levels, but creating as much value for employees, which is the difference between compensation and WTS as their competitors. If the drop in WTS is more significant than the cut in salaries, both the company and employees are better off.

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Supply chains

Companies want to increase margins and pay suppliers less, and suppliers seek to enlarge their surplus. These bargaining efforts are zero-sum games that create no value. All gain comes at the expense of the other party.

However, if you manage to decrease the WTS of suppliers, more value is created, and both your company and suppliers can be better off. The relationship between the company and supplier determines WTS. If a supplier gains prestige by working with a company, WTS is lower. To lower WTS and create more value, teach your suppliers to be more productive is an effective way to lower WTS and create more. Nike enabled its suppliers to adopt lean manufacturing, and the resultant productivity advances lowered WTS and increased margins simultaneously.

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The world's cheapest car

Sometimes changes in WTS occur from changes in the company's approach to suppliers. Many buyers are overly prescriptive in their demands of suppliers. But over-specification robs suppliers of the opportunity to adopt novel processes and introduce innovative products and services. When Tata Motors set out to design the world's least expensive car, it asked Bosch Automotive to design the engine. However, they gave no rulebooks or specifications. They merely mentioned the design constraints and cost goals and allowed Bosch to find innovative ways to achieve them. Bosch's technical breakthroughs found their way into multiple Tata engines.

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What role did Bosch Automotive's innovative approach play in the design of Tata Motors' least expensive car?

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Bosch Automotive's innovative approach played a significant role in the design of Tata Motors' least expensive car. When Tata Motors set out to design the world's least expensive car, they asked Bosch Automotive to design the engine. However, they did not provide any rulebooks or specifications. They only mentioned the design constraints and cost goals and allowed Bosch to find innovative ways to achieve them. This freedom allowed Bosch to adopt novel processes and introduce innovative products and services. As a result, Bosch's technical breakthroughs found their way into multiple Tata engines.

How does over-specification impact the innovation potential of suppliers in business strategy?

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Over-specification in business strategy can significantly impact the innovation potential of suppliers. When buyers are overly prescriptive in their demands, it can limit the suppliers' ability to adopt novel processes and introduce innovative products and services. This is because the suppliers are bound by the specific requirements and have less freedom to explore and innovate. For instance, when Tata Motors set out to design the world's least expensive car, they did not provide Bosch Automotive with specific rules or specifications. Instead, they only mentioned the design constraints and cost goals, allowing Bosch to find innovative ways to achieve them. This approach led to technical breakthroughs that were incorporated into multiple Tata engines.

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Productivity

Advances in productivity lower cost and willingness to sell at the same time. Companies have considerable opportunities to improve productivity, which lowers both costs and WTS. The productivity gap between the top 10% of companies and the bottom 10% of companies is stunning. A US company in the 90th percentile is twice as productive as a company in the 10th percentile. In China and India, top performers produce five times as many products as the least efficient companies.

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How can the value stick framework be applied to increase a company's productivity?

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The value stick framework can be applied to increase a company's productivity by focusing on improving the company's efficiency and reducing costs. This can be achieved by investing in technology, training employees, and streamlining processes. The framework emphasizes the importance of creating value for customers and capturing value from customers. By increasing productivity, a company can lower its costs and increase its willingness to sell, thereby capturing more value. It's also important to note that there is a significant productivity gap between top-performing companies and less efficient ones, suggesting that there is considerable room for improvement in many companies.

What are some strategies to improve productivity and lower costs in a company?

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Some strategies to improve productivity and lower costs in a company include investing in technology and automation, streamlining processes, training and developing employees, and implementing lean manufacturing or management techniques. It's also important to regularly review and adjust strategies based on performance metrics. Companies can also consider outsourcing non-core activities to reduce costs.

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There are three ways to improve productivity:

1. Scale

In some industries with fixed costs, companies benefit from economies of scale. In such an industry, you must know your Minimum Efficient Scale (MES), the volume required to be cost-competitive. Below MES, you will not be able to compete with larger rivals. Once you achieve MES, continued growth no longer results in a more significant cost advantage.

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2. Learning

As companies increase production volumes, costs decline because employees gain familiarity with products and processes and find new ways to improve productivity. By 1926, the cost of manufacturing a Ford Model T had dropped to $840 — from $1300 in 1909. This price drop was despite a threefold rise in wages for workers. Learning alone had dropped costs by nearly one-third. Learning not only improves productivity but can also improve WTP in some contexts.

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What are the key takeaways from "Better, Simpler Strategy" that can help entrepreneurs increase production volumes and reduce costs?

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The key takeaways from "Better, Simpler Strategy" that can help entrepreneurs increase production volumes and reduce costs are the importance of learning and familiarity with products and processes. As companies increase production volumes, costs decline because employees gain familiarity with products and processes and find new ways to improve productivity. This is evident in the example of Ford Model T, where the cost of manufacturing dropped significantly over time due to learning and improved productivity. Additionally, learning can also improve Willingness To Pay (WTP) in some contexts, thereby increasing the value delivered to customers.

How can small businesses apply the concept of learning to improve productivity as discussed in the book Better, Simpler Strategy?

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Small businesses can apply the concept of learning to improve productivity by continuously refining their processes and products. This can be achieved by encouraging employees to gain familiarity with products and processes, and to find new ways to enhance productivity. As the book 'Better, Simpler Strategy' suggests, learning not only improves productivity but can also increase the willingness to pay in some contexts. This can be seen in the example of Ford Model T, where learning alone dropped costs by nearly one-third. Therefore, small businesses should invest in continuous learning and improvement.

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A surgeon at Indian hospital group Narayana Health performs nearly 200 open-heart surgeries annually, nearly twice as much as a doctor in Cleveland Clinic. The high volumes reduce cost and improve quality. Narayana Health's success rates rival the very best hospitals in the West. AI and machine learning have renewed interest in learning as a source of competitive advantage.

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How can a small business leverage the value stick framework to increase customer willingness to pay and decrease employee willingness to sell?

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A small business can leverage the value stick framework to increase customer willingness to pay and decrease employee willingness to sell by focusing on creating and delivering value. This can be achieved by understanding what customers value and aligning the business's offerings to meet those needs. This increases the perceived value of the product or service, making customers more willing to pay. On the other hand, decreasing employee willingness to sell can be achieved by creating a work environment that values and rewards employees, making them less likely to leave the company.

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However, there is a dark side to learning. An excessive focus on process optimization can lead to a deep intertwining of product and process. Innovation gets stifled as it becomes too costly to make significant changes. Ford's learning effects meant that it had to wait nearly two decades before it could implement important product innovation.

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3. Operational effectiveness

High-quality management practices and operational effectiveness help create meaningful differentiation between companies. Contrary to conventional management wisdom, management best practices are difficult for competitors to imitate and serve as a basis for long-term competitive advantage. Operational effectiveness and strategy are intertwined, and companies must not pay importance to this distinction. Instead, they should consider if they have the potential to raise WTP or lower WTS.

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What are some strategies that companies like Apple and Amazon use to prioritize the right value drivers to grow their business?

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Companies like Apple and Amazon prioritize the right value drivers to grow their business by focusing on high-quality management practices and operational effectiveness. These practices create a meaningful differentiation between them and their competitors. They understand that these best practices are difficult for competitors to imitate, serving as a basis for long-term competitive advantage. They intertwine operational effectiveness and strategy, disregarding the conventional distinction between the two. Instead, they consider if they have the potential to raise Willingness To Pay (WTP) or lower Willingness To Sell (WTS).

How can operational effectiveness and strategy be intertwined to raise a customer's willingness to pay (WTP) or lower an employee's willingness to sell (WTS)?

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Operational effectiveness and strategy can be intertwined to raise a customer's willingness to pay (WTP) or lower an employee's willingness to sell (WTS) by focusing on creating meaningful differentiation between companies. This can be achieved through high-quality management practices and operational effectiveness. These practices are difficult for competitors to imitate and serve as a basis for long-term competitive advantage. By focusing on these areas, companies can increase the perceived value of their products or services, thereby increasing a customer's WTP. Similarly, by improving operational effectiveness, companies can reduce costs and increase efficiency, which can lower an employee's WTS.

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Value maps

A value map is an excellent tool to visualize critical strategic opportunities and tradeoffs. To build a value map, select your target customer group and use data-driven surveys to rank value drivers, the core list of criteria that customers value in the order of importance. Finally, on a scale of one to ten, indicate how good your company is in meeting each value driver. Create this map for your organization and see which value drivers you could use to improve WTP.

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A company's ability to capture value depends entirely on differences in WTP or WTS compared to competitors. Compare your company's value map to your competitors' value propositions to identify critical differences and devise ways to heighten them. Choose a coherent group of value drivers that help customers achieve similar objectives also differentiate your product from the competition.

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Remember, to improve performance on any value driver, organizations must deprioritize another value driver. Resources are scarce and must be allocated to ensure excellence in a few core areas. It's far harder to determine where not to invest and where to underperform. At every strategy meeting, teams must ask themselves, what will we stop doing to ensure that we execute on our key priorities. Once you decide which value drivers to strengthen and which ones to deprioritize, strategic implementation follows naturally.

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How can the lessons from "Better, Simpler Strategy" be applied in today's business environment?

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The lessons from "Better, Simpler Strategy" can be applied in today's business environment by focusing on the value stick framework. This involves identifying key value drivers for your business and allocating resources to strengthen these areas. It's equally important to determine which areas to deprioritize or underperform in, as resources are scarce. This strategic approach helps in executing key priorities effectively and achieving excellence in core areas.

How might a company in a traditional sector like manufacturing or retail apply the strategies discussed in Better, Simpler Strategy?

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A company in a traditional sector like manufacturing or retail can apply the strategies discussed in 'Better, Simpler Strategy' by focusing on improving performance on key value drivers while consciously deciding to deprioritize others. This is because resources are scarce and must be allocated to ensure excellence in a few core areas. The company must determine where not to invest and where to underperform. During strategy meetings, teams should ask themselves, what will they stop doing to ensure that they execute on their key priorities. Once these decisions are made, strategic implementation follows naturally.

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Create competitive differentiation

Compare your company's value curve with your competitors' value propositions to identify relevant differences and find ways to heighten them. Organizations should choose a set of related value drivers as a theme that help their customers achieve similar objectives. Your theme must help differentiate your product from competitors.

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What strategies can be used to differentiate a product from its competitors using related value drivers?

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To differentiate a product from its competitors using related value drivers, a company can use the following strategies:

1. Identify the unique value drivers that your product offers and emphasize them in your marketing and branding efforts.

2. Compare your company's value curve with your competitors' value propositions to identify relevant differences and find ways to heighten them.

3. Choose a set of related value drivers as a theme that help your customers achieve similar objectives. This theme should help differentiate your product from competitors.

4. Continuously innovate and improve your product based on customer feedback and market trends to ensure your product's value drivers remain relevant and competitive.

How does the value stick framework contribute to the success of companies like Apple and Amazon?

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The value stick framework contributes to the success of companies like Apple and Amazon by helping them identify and heighten their unique value propositions. This framework allows organizations to compare their value curve with their competitors' and find ways to differentiate their products. By choosing a set of related value drivers as a theme, these companies can help their customers achieve similar objectives, thereby increasing customer satisfaction and loyalty.

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You can also use value maps to understand lower employee WTS. If your company depends on critical suppliers, you can create value maps for those relationships as well.

Improve both WTP and WTS

Organizations can improve WTP and lower WTS simultaneously if both sets of value drivers are naturally connected. Malls give Apple a discount (lower WTS) because it attracts many shoppers (higher WTP). Doctors at Narayana Health perform more surgeries, which improves quality (higher WTP) and raises productivity (lower WTS). In services, employee satisfaction and customer experience are deeply interlinked. To create dual advantages, focus on connections that lead from one set of value drivers to others.

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How does the concept of employee satisfaction and customer experience being deeply interlinked relate to contemporary debates on work culture and customer service?

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The concept of employee satisfaction and customer experience being deeply interlinked is a significant part of contemporary debates on work culture and customer service. It's based on the understanding that satisfied employees are more likely to provide better service, leading to a better customer experience. This is because happy employees are more engaged, motivated, and committed to their work, which reflects in their interactions with customers. This concept encourages businesses to invest in their employees' satisfaction as a strategy to improve customer service. It also shifts the focus of work culture towards employee well-being and satisfaction, recognizing their role in driving customer satisfaction and overall business success.

What are the broader implications of using the value stick framework as demonstrated by Apple and Narayana Health?

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The broader implications of using the value stick framework, as demonstrated by Apple and Narayana Health, are that it can lead to increased customer willingness to pay (WTP) and decreased willingness to sell (WTS). For instance, Apple attracts many shoppers, which increases WTP, and gets discounts from malls, which decreases WTS. Similarly, Narayana Health performs more surgeries, improving quality (increasing WTP) and raising productivity (decreasing WTS). This strategy can be applied to various industries, showing its versatility and effectiveness.

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To get the strategy conversation started in your team, take a piece of paper, draw a value stick and ask three simple questions: What do we do to change WTP? How do we change WTS? What are the connections between our value drivers, prices and costs? The key to organizational growth is a relentless focus on value creation. The value-based approach enables your company's core purpose: create more value for customers, employees, suppliers and shareholders.

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How can the lessons on value creation from "Better, Simpler Strategy" be implemented in today's competitive business environment?

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The lessons on value creation from "Better, Simpler Strategy" can be implemented in today's competitive business environment by focusing on the value stick framework. This involves understanding what changes the Willingness To Pay (WTP) and Willingness To Sell (WTS) and finding the connections between your value drivers, prices, and costs. A relentless focus on value creation is key to organizational growth. This value-based approach enables your company's core purpose: to create more value for customers, employees, suppliers, and shareholders.

What are the potential real-world applications of the strategies used by successful companies like Apple and Amazon as discussed in Better, Simpler Strategy?

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The potential real-world applications of the strategies used by successful companies like Apple and Amazon, as discussed in the book, could be numerous. These strategies are based on the value stick framework which focuses on value creation for customers, employees, suppliers, and shareholders. In real-world applications, businesses can use these strategies to increase their customer's willingness to pay (WTP) and decrease their willingness to sell (WTS). This could be achieved by improving product quality, offering superior customer service, or creating a unique brand experience. Additionally, businesses can also focus on reducing costs and improving operational efficiency. It's important to note that the specific application of these strategies would depend on the nature and context of the business.

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