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.
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.
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.
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.
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.
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 Nano, 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.
The Willingness to Pay and to Sell
Willingness to pay(WTP)
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)
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.”
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).
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.
The Value-Based Strategy approach
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.
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.
Improve your Productivity
Three ways companies can improve their productivity:
- The first is scaling, which involves finding the minimum efficient scale to be cost-competitive in a given industry.
- The second is learning, which involves employees gaining familiarity with products and processes as production volumes increase, leading to improved productivity and potentially even higher customer willingness to pay.
- The third is operational effectiveness, which involves high-quality management practices and can create meaningful differentiation between companies.
An excessive focus on process optimization can stifle innovation, and emphasizes the importance of considering potential impact on customer willingness to pay or willingness to switch when making strategic decisions.
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).
To create dual advantages, focus on connections that lead from one set of value drivers to others.
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.
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.
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.
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.
There are three types of network effects:
- Direct Network Effects — WTP rises with each additional customer who uses the product. Think of mobile phones or fax machines.
- Indirect Network Effects — Companies raise customer WTP through complements. As more customers purchase smartphones, developers will create more apps.
- 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.
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.
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.
How smaller firms can compete
Small firms can compete effectively in three ways:
- Create customer delight that does not depend on scale.
- Create meaningful differentiation with a focus on the WTP of a group of customers neglected by the dominant platform.
- 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.
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.
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.
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.
