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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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).

1 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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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.

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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.

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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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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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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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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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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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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.

2 questions and answers

Can you explain in simple terms and provide more examples of this?

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Direct Network Effects: Consider a social media platform like Facebook. The more people join Facebook, the more valuable it becomes to each user. This is because you have more friends to connect with, more photos to view, and more updates to read. This is a direct network effect.

Indirect Network Effects: Take the example of a gaming console like PlayStation. The more people purchase the console, the more game developers are interested in creating games for it. This makes the console more attractive to potential buyers as they have a wider selection of games to play. This is an indirect network effect.

Platform Network Effects: Think about a marketplace like Etsy. The more sellers there are on Etsy, the more products buyers have to choose from, which attracts more buyers. Conversely, the more buyers there are on Etsy, the more sellers are attracted to the platform because they have a larger customer base to sell to. This is a platform network effect.

Tell me more about indirect network effects please using simple language and examples from business.

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Indirect network effects occur when the value of a product or service increases for its users as more people use complementary products or services. This is different from direct network effects, where the value increases as more people use the same product or service.

For example, consider the case of smartphones and mobile applications. As more people buy and use smartphones, more developers are motivated to create and improve mobile applications. This in turn makes smartphones more valuable to their users, because they now have access to a wider range of applications. This is an indirect network effect.

Another example is the case of video game consoles and video games. The more people own a particular console, the more games are developed for that console, making it more attractive to potential buyers.

In both cases, the value of the product (smartphones, game consoles) increases not because more people are using the same product, but because more people are using products that complement it (apps, games).

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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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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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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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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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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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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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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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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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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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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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