Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance – Felix Oberholzer-Gee
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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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.
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.
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.
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.
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.
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.
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.
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.
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.