architect working on a drafting table
PHOTO: Daniel McCullough

Back when I taught marketing, I would start the first class by asking students a simple question: What did you learn about the purpose of business in your finance class? Invariably they'd say the purpose of a business is to make money. I'd then ask, "How does a business make money?" Most students would stumble with this one. The smartest response is, "It depends on the kind of business you're in."

With the stage set, I'd introduce students to Theodore Levitt’s “Marketing Imagination.” Levitt said the purpose of a business is to create and keep a customer and this, of course, is how businesses make money. But how do you create and keep a customer? A new book provides the answer.

Harvard Business School professor Felix Oberholzer-Gee's new book, "Better, Simpler Strategy," hits the bookshelves on April 20. And important for digital and technology leaders — it answers where they should put their time and energy in digital transformation. It provides, in my opinion, a theory for where the cannons of digital transformation should be pointed to generate the greatest business value.

Engineering a Business Strategy, the Troops Can Follow

Oberholzer-Gee believes, as he writes in the first line of the book, that strategy is simple. It is all about careful reasoning. Strategy, he claims, is simple when it is focused upon creating value. It is important to note that instead of focusing upon accelerating market change and corporate obsolescence, Oberholzer-Gee digs into the variability in business profitability. His research finds that one-quarter of the "firms included in the Standards and Poor’s 500 fail to earn long-term returns in excess of their cost of capital. In China that fraction is even higher, closer to one-third.” More importantly, the very best companies in a market segment dramatically outperform competitors when evaluated by return on invested capital. According to Oberholzer-Gee, “a US company at the 90th percentile in productivity creates twice as much output as a company at the 10th percentile.”

With this background, Oberholzer-Gee argues for simplifying strategy and presents an easy-to-grasp framework tied to financial success. He suggests that “smart strategic moves create differences between companies. Investment in operational effectiveness reinforces similarities.” However, he does suggest that “good management practices and operational effectiveness help create meaningful differentiation between companies.” To get there, he claims we need a common language to evaluate a firm's activities and any projects CIOs manage. Like them, he believes projects need to be linked explicitly to a firm’s business strategy.

Related Article: A Definition for Strategy You Can Actually Use

Market Winners Focus on Stakeholder Value Generation

Oberholzer-Gee claims that companies that outperform peers increase the willingness of customers to pay (WTP) and decrease the willingness to sell (WTS) for their employees and suppliers in ways that are difficult to imitate. Put simply, companies that achieve enduring financial success create substantial value for all business stakeholders — customers, employees and suppliers. To make this easy to conceptualize, Oberholzer-Gee suggests the notion of a value stick. Here, winners maximize value creation by increasing customers' willingness to pay at the same time as they decrease the willingness to sell of employees and suppliers.

A key idea here is that if companies make work more attractive, the willingness to sell declines. In essence, this provides CIOs with the business case for reimagining an effective digital workplace. Oberholzer-Gee believes that companies that excel at creating value focus on the above stakeholders WTP or WTS. Significant initiatives here are designed to either enhance customer experience or to make it more attractive for vendors or employees to work with the company.

Related Article: Want to Differentiate Your Customer Experience? Create Value for All Stakeholders

Winning the Best Talent and Suppliers Is About Creating Value

When competing for talent, firms typically pursue two approaches to gain leverage: 1) offer more generous compensation or 2) make work more attractive. Oberholzer-Gee's research shows that the latter creates more sustaining value and suggests that increasing pay creates no value other than redistribution. Smart companies continuously find new ways to create value for their workforce and to share that enterprise value with employees. With suppliers, smart companies find ways to reduce a suppliers’ cost or working with the company.

Related Article: Want to Attract and Retain Talent? Consider Offering These Benefits

Think Value, Not Profit

Value thinking allows enterprises to increase customers' willingness to pay. Willingness to pay depends on many things, including product attributes, quality and the prestige a product might confer. Clearly, “without a meaningful difference, your company has little chance of earning returns in excess of your cost of capital.”  Geoffrey Moore found the exact same thing in his book “Dealing with Darwin.” In fact, he suggested that competing on cost advantage no longer exists in the developed world.

Clearly, exceptional product quality and outstanding working conditions do not confer a lasting advantage if rival firms easily match them. However, thinking about if business advantage is short-term or long-term suggests that business leaders should focus upon WTP versus products. The reason is that a product-centric manager — a role that I have personally held — asks how they can sell more while a person concerned with WTP wants to see customers clap and cheer. Something that Theodore Levitt would have called the augmented or potential product. To create products that make customers clap and cheer, organizations must commit to improving the customers experience even after they have committed to a purchase. For this reason, these leaders consider the entire customer journey and search for opportunities to create value at every step along the way.

Part of this can involve a platform or ecosystem strategy. Here, you look for or create complementary products. For example, providing childcare during a movie. Oberholzer-Gee believes smart companies explore these relationships carefully and try to measure the benefits created. They also look for network effects that provide positive feedback loops, where more retailers attract a larger number of customers, additional retailers are drawn in. Network effects can cause markets to reach a tipping point — to spring from very low adoption to universal acceptance in no time at all. They increase the WTP by connecting users directly through complements. They also can serve to limit competition.

Create Value for Employees and Suppliers

At the lower end of the value stick, companies improve financial performance by creating value for their employees and suppliers. This is important because willingness to pay is determined by employees and suppliers — in fact,  80% of the US economy is services. Without question, Oberholzer-Gee is correct to suggest the joy and satisfaction workers derive from their jobs is the difference between compensation and willingness to sell. For this reason, if a company pays the bare minimum that is required to keep people in their jobs, compensation matches willingness to sell. People here will leave for a modest raise. However, companies that find ways to lower WTS not only have more satisfied employees but attract workers who particularly value the ways in which the company reduces WTS.

Companies that succeed here make the changes needed to make employees lives better — shifting ownership, recognizing progress and improvement, sharing the value created creatively and magnifying existing benefits. Doing this is clearly easier when an organization is differentiated and has significant value creation — great companies come out of a great margin.

Smart Companies Decrease the Willingness to Sell of Their Suppliers

One interesting suggestion Oberholzer-Gee makes is that a business’s goal should be for their organization and their suppliers to be better off. For this reason, he suggests that companies help suppliers lower their cost by making it easier for them to sell to them. By doing so, you end up helping yourself. He says that reorientation toward value creation makes it easier to share information, align incentives, and even discover attractive opportunities. To attract partners to a shared set of goals, he suggests putting in place bonuses and target incomes from working together.

Implementation

The book spends a fair amount of time discussing prioritization, especially for resource-constrained organizations. Oberholzer-Gee tells an amazing story about the early decisions Slack made that caused the collaboration market to take off. He said its obsession with selective functionality increased customer willingness to pay and willingness to sell. Several years ago, Yahoo! faced a similar decision. Brad Garlinghouse, a Yahoo! senior vice president, wrote the infamous peanut butter manifesto in response. In it, he suggested that Yahoo! had to pick where it could win and focus its investment on differentiating there. Slack's equivalent memo was titled, “We don’t sell saddles here.”

Slack's goal was to make people’s lives simpler, more pleasant and more productive. For this reason, it started by investing limited resources into its communications platform. With this and other selective investments, it aimed to differentiate the platform from others in the market. Slack succeeded where other, similar brands had failed. Oberholzer-Gee put it this way, "similar products existing before Slack, but Yammer, HipChat, and Campfire failed to catch on because clients found it difficult to see how a group message would create value.” 

According to Oberholzer-Gee, "every value prop represents a set of tradeoffs, a mixture of dos and don’ts, a blend of promises and letdowns." I remember this clearly from one my startups, eBalance. With that company, I would sit with my head of development and organize potential features by how compelling their value proposition was and by ease of development. In true SaaS development form, my head of development would always caution the first rev would be a pig with lipstick.

Just like Slack, we tried to be great at one dimension first before moving on to other value propositions. According to Oberholzer-Gee, companies that spread their resources over many product attributes and innumerable services features end up being mediocre throughout. He goes on to state that the focus should be on impacting users. To assist here, he suggests organizations deploy a value map. A value map brings together a group of customers and employees to determine what is most important and least important. This is very similar to the work of Ian Mittroff and Russell Ackoff, who suggested that stakeholder assumptions be surfaced and weighted by importance and certainty.

With a value map in hand, Oberholzer-Gee suggests companies can then evaluate their competitive standing and strategic positioning. Smart firms exceed expectations where it counts. Value map data can in turn be employed to guide more effective buying processes for customers — the customer journey. At this point, Oberholzer-Gee shares an amazing story around Tommy Adaptive, where employees and suppliers together worked to create cost-effective products aimed at customers with disabilities. Clearly, "CEOs work to generate profit and return value to shareholders, but the best run companies do more. They put the customer first and invest in their employees and communities.”

Parting Words

Smart organizations have always understood the importance of driving value for all business customers. However, what Oberholzer-Gee does is expose the financial justification for doing so. Just as important, he provides concrete ways for enterprises to add value. Theodore Levitt suggested that smart managers ask questions. Today’s business leaders, including those in IT, need to ask the right questions and focus projects on things that expand customers’ willingness to pay and reduce employees and supplier’s willingness to sell. We should all want stakeholders that clap and cheer. Clearly, the initiatives and projects that empower this need attention as organizations power out of COVID-19.