Recently I attended a one day workshop on business strategy.
Led by Harvard Business School professor Felix Oberholzer-Gee, he outlined a framework for how companies can achieve more by doing less. set of simple rules, they can select key activities that allow them to successfully differentiate themselves from their competitors.
Oberholzer-Gee presented a framework called value-based strategy as a method of assessing strategic initiatives. He argues that companies that achieve sustainable financial success must create value for their customers, employees and suppliers.
Creating value for customers
Customers are more willing to pay (WTP) where companies innovate or improve existing products. A service that delivers ice cream to your home increases the WTP compared to, say, a 10-minute drive to an ice cream parlor serving the same flavors. Luxury car brands such as Rolls Royce increase the WTP thanks to their exclusivity and quality.
WTP is the highest amount a customer would be willing to pay for a product or service. If Rolls Royce charged a dollar more, their customer wouldn’t buy, but if they innovate or improve their product, perhaps with a mobile hot tub, they could increase the WTP.
WTP should not be confused with price. WTP is the value a customer assigns to a product. Price is for how much the product is sold for. The gap between WTP and price is the level of customer satisfaction associated with the product.
Value-based companies focus on increasing a customer’s WTP. They work out how to turn their customers into avid fans of their business, find ways to generate customer trust and loyalty, and create customer benefits that introduce like-minded customers to the brand.
This is in contrast to a growth-oriented focus that revolves around increasing transaction volume.
Amazon increased a customer’s WTP in the competitive e-reader market in the 2000s.
Sony was the first major consumer electronics company to offer an electronic ink e-reader and capture significant market share. Amazon, the world’s largest seller of physical books, was eager to enter the market and won because of a major innovation: wireless access.
While Sony’s customers had to download books to their computers and transfer them to the e-reader, Amazon’s Kindle had Internet access built in, allowing customers to buy books directly. The Kindle sold out and became the leading e-reader.
Tesla increased a customer’s WTP by creating an additional product, the Superchargers.
While many Tesla drivers charge their vehicles at home, they can take advantage of the company’s charging network, especially when traveling far from home. This has increased the WTP, specifically for Tesla, as other electric vehicles cannot take advantage of their charging network.
Network securities building companies can increase WTP by connecting users through their platform. eBay’s success is due to the number of buyers and sellers on its platform. As more buyers were attracted to their platform, sellers took advantage of it.
Likewise, as more sellers were attracted to their platform, buyers took advantage. While marketplace companies are notorious for their capital consumption, once embedded, they can be very difficult to replace.
Creating value for employees
Companies that make work stimulating, challenging and flexible can attract great talent, even if they don’t offer the highest pay.
While it is important to pay employees the right way, companies can create value by offering better jobs, reducing the minimum compensation needed to attract employees, also known as the willingness to sell (WTS) of an employee, is reduced.
Companies that offer a job under a potential employee’s WTS will be rejected. Like the relationship between WTP and price, WTS should not be confused with reward.
Value-based companies focus on the needs of their employees to drive WTS. Job satisfaction can be improved by implementing technology or policies to make it easier for staff to do their jobs, by creating training and career development opportunities so that employees can enhance their skills and benefit from a greater degree of variety in work, and more levels of autonomy where teams organize themselves and come up with solutions to achieve clear goals.
The growth of the gig economy illustrates how WTS has changed. Uber offers its drivers a high degree of flexibility in start and end times. Unlike a normal taxi service where drivers work eight or twelve hour shifts, Uber drivers can choose the days and hours they work.
If an Uber driver has a quiet evening at home, they can decide to get in the car, drive and make money.
Studies have shown that in certain markets, Ubers drivers are willing to earn less per hour than taxi drivers because of flexibility!
Creating value for suppliers
Suppliers are like employees in expecting minimal compensation. Companies create value for their suppliers by increasing their productivity. As a supplier’s costs fall, so does the lowest price they are willing to accept (WTS).
For example, if a company were to purchase ten widgets from a vendor, the cost per widget could be $100. If the company bought 10,000 widgets, the cost per widget could be $40! This is economies of scale at work.
Value-based companies get to know their suppliers. They understand the supplier’s pain points, opportunities and delivery costs.
Value-based companies consider all their movements from the perspective of value creation. Does the change create value for customers, employees or suppliers? Unless the WTP or WTS changes, it should not move. A chart, called a value stick, provides a way to identify the two most important elements involved in value creation and improved financial success: a customer’s willingness to pay and the employee’s (or supplier’s) willingness to sell their services (or products). ) to the company.
- Benjamin Chong is a partner at venture capital firm Right click on capital letterinvestors in bold and visionary tech founders.