E199 | How to Create Value-Based Strategy with Felix Oberholzer-Gee
Are you struggling to create a simple strategy for your business? Then don’t miss Felix Oberholzer-Gee, faculty member at Harvard Business School in the Strategy Unit, and author of the recent book on strategy: Better, Simpler Strategy, on this week’s episode of The Melting Pot.
In Felix’s new book, he shows readers how to create value-based strategy with their service or product. Not in the sense of making customers or employees happy, but in so much as – creating a product or service that delivers so much value, people are willing to pay more for it.
The simple truth of the matter, says Felix, is that business and financial success boils down to imagination. Finding new ways to serve your customers or employees better will always yield better business results. But it’s amazing how many businesses have forgotten this simple strategy in their quest to be successful.
So, if you’re overthinking your business strategy, or you think you have no place to think strategically, think again.
To find out more, download and listen to this latest episode.
On today’s podcast:
- Strategy is all about value creation
- Applying strategy to staff retention
- You can be high quality and low cost
- The discovery of complements
- Book – Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance
- New course – https://online.hbs.edu/blog/post/business-strategy-course
- Twitter – @fogathbs
- LinkedIn – Felix Oberholzer-Gee
- Website – Felix Oberholzer-Gee
How to create value-based strategy with Felix Oberholzer-Gee
Felix Oberholzer-Gee is the Andreas Andresen Professor of Business Administration at Harvard Business School. An award-winning instructor, his academic work and consulting are focused on competitive strategy and the effects of digital technology on corporate performance.
Felix teaches competitive strategy in the HBS MBA program and in executive education courses such as the Harvard General Management Program.
Teaching strategy at Harvard Business School
So how did a Swiss undergraduate with no strategic intent to end up in academia, wind up teaching strategy at Harvard?
“As part of my teaching responsibilities, I teach in executive education at Harvard Business School. And many of these managers, they’re highly accomplished or mid career professionals, many of them go on to do really great things. And I have two observations that really puzzled me at the beginning. One was, strategy was seen as something very complicated… [and] you have to be really senior with grey hair, lots of experience. Otherwise, you can’t be a strategic thinker.”
And that just isn’t true, says Felix. Strategy is all about imagination, i.e. how do you think about and execute value creation? How do you make it real so that it resonates with customers?
While this requires a certain level of understanding, the basic principles of business strategy couldn’t be simpler.
Strategy is all about value creation
“Value creation is not anything that the customer wants. Value creation is not anything that employees will be happy about. Value creation happens if you raise the willingness to pay with customers.”
Are you increasing the willingness of your customers to pay the maxim they would ever pay for a product or service you provide? If the answer to that is yes, then you’ve created real value.
Tweaking a product to make it good enough is not the solution, argues Felix. Too many companies focus on incremental improvements to their products or service over time, and sure, employees and customers may like the offering a little better, but would they pay more for the extra you’re offering? Probably not. Therefore you’ve not created any extra value.
Applying strategy to staff retention
Nationwide Building Society carried out a survey which looked at how profitability per branch was driven by staff longevity. They discovered a correlation between somebody who had been with the company seven years, generating more profit for the bank, than somebody who’d been there three-five years.
And it made them realise that they need to keep staff for the long term if they want to increase profitability.
They also realised that if they paid staff more, and the staff stuck around, they could recruit less, meaning even though they paid more in wages, they’d save money in the long term from not constantly recruiting.
“The best opportunities for most companies are close to home, don’t think the grass is greener on the other side: if only I was in a different business segment, if only I was in a different country, that’s always nonsense. There’s so much variation where you are. And those are your single best opportunities.”
Don’t try to overcomplicate strategy
Increase customers’ willingness to pay, advises Felix, and decrease minimum compensation for employees and you’ll be off to a flying start.
Yet too many people think they need to create a long list of things they need to improve if they want to build a better business, but that’s not necessary, says Felix. If you’re busy now, writing a list of 17 extra things you need to get done isn’t going to help.
“[Reduce] the number of projects, the number of initiatives, and then really focus on the ones that have the potential to increase willingness to pay and decrease minimum compensation.”
You can be high quality and low cost
There was a rumour that you can’t provide a high quality, low cost service, but that simply isn’t true, says Felix.
There are dozens of examples Felix uncovered while researching his book that show how successful companies have been by being low cost and high quality.
“The mechanism is pretty obvious in services. Did you ever get great service from a disgruntled person? No, of course not. So you make the job a better job, you get greater engagement from your employees. Next thing, you know they serve their customers better. And as a result, [you’re] more profitable.”
Why you can’t pay your way through a lack of strategy
Some organisations believe they can attract better talent by paying more, but be cautious if adopting this approach, says Felix. More compensation doesn’t actually create value, it only redistributes the value from the owners of the organisation to the employees. And if you pay more, you’re likely to attract people who like money, not people who like your job.
Plus, the likelihood of these people sticking with you for the long term, being loyal, is slim. They came for the money and when they discover better money elsewhere, they’re gone.
“I always instruct everyone, if you have a great idea for increasing willingness to pay, think about the ways in which this might also allow you to lower willingness to sell. If you have a great idea to lower willingness to sell or minimum compensation, think about the ways in which demand also increases willingness to pay.”
The discovery of complements
“Willingness to pay is [the] first and foremost thing we think of as the attributes of the products. And then there are two big forces that we often forget. The first one is complements. And the second one is network effects.”
What does that mean?
Well, says Felix, complements are the powerful things that aren’t your product or service; they merely increase the willingness to pay for it. And the trick about complements is that they live often at a distance from your business.
Think of Tesla installing car charging ports around the country, or the movie theatre that offers babysitting services alongside popcorn and ticket sales.
What could you give to your customers as a complementary product or service?
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