Better, Simpler Strategy

1. Value creation is the foundation of exceptional business performance

Think value, not profit, and profit will follow.

Value stick framework. The value stick is a simple yet powerful tool for understanding business performance. It consists of four elements: willingness-to-pay (WTP) at the top, price, cost, and willingness-to-sell (WTS) at the bottom. The difference between WTP and WTS represents the total value created by a company. Exceptional performance stems from creating substantial value for customers, employees, or suppliers.

Focus on value creation. Companies that outperform their peers increase WTP or lower WTS in ways that are difficult to imitate. This approach opens up room for creativity and broad engagement within the organization. By concentrating on value creation rather than profit, businesses can identify unique opportunities and build lasting competitive advantages.

• Key elements of the value stick:
  • Willingness-to-pay (WTP)
  • Price
  • Cost
  • Willingness-to-sell (WTS)

2. Raising customer willingness-to-pay (WTP) is crucial for success

Companies that excel at creating value focus squarely on WTP and WTS.

Customer-centric approach. Increasing WTP involves more than just improving product quality. It requires a deep understanding of the entire customer journey and experience. Companies that focus on WTP often outperform those that are solely sales-driven, as they identify more opportunities for value creation and build stronger customer relationships.

Multiple paths to higher WTP. There are numerous ways to raise WTP, including:

• Enhancing product functionality and quality
• Building a strong brand identity
• Leveraging network effects
• Offering complementary products or services
• Improving customer experience throughout the journey

Companies like Amazon and Apple have successfully increased WTP by focusing on these aspects, leading to their market dominance and customer loyalty.

3. Lowering employee and supplier willingness-to-sell (WTS) creates value

Supply chains are people, too!

Employee satisfaction. Reducing WTS for employees involves creating more attractive working conditions, beyond just offering higher compensation. This approach not only increases employee satisfaction but also creates powerful selection effects, attracting individuals who particularly value the company's work environment.

Supplier relationships. Lowering supplier WTS involves making it easier and more cost-effective for them to work with your organization. This can be achieved through:

• Knowledge sharing and training
• Collaborative problem-solving
• Long-term partnerships
• Streamlined processes and communication

By focusing on these aspects, companies can create mutually beneficial relationships that lead to increased efficiency, innovation, and overall value creation.

4. Network effects can lead to market dominance, but are not guaranteed

The number of users, a common proxy for the strength of network effects, has always been a flawed metric.

Types of network effects. There are three main types of network effects:

1. Direct: User value increases with more users (e.g., social networks)
2. Indirect: Value increases through complementary products or services (e.g., operating systems and apps)
3. Platform: Value increases for one group as another group grows (e.g., buyers and sellers on marketplaces)

Limitations of network effects. While network effects can provide significant advantages, they are not always a guarantee of success. Factors that can limit their impact include:

• Geographic constraints
• Niche markets with strong user preferences
• Competition from focused, smaller players
• Technological changes that reduce switching costs

Companies must understand the specific mechanisms driving their network effects and continuously innovate to maintain their competitive edge.

5. Operational effectiveness and strategy are intertwined for success

There is no doubt that improving the quality of management can create substantial value. Keep in mind, however, that better execution is no substitute for sound strategy.

Balancing act. While operational effectiveness and strategy are often viewed as separate concepts, successful companies recognize their interconnectedness. Operational improvements can serve as a springboard for strategic renewal, leading to new opportunities and competitive advantages.

Continuous improvement. Companies should focus on:

• Adopting best practices in management and operations
• Fostering a culture of innovation and learning
• Regularly reassessing and adjusting strategies based on operational insights

Examples like Intel demonstrate how operational excellence can lead to strategic advantages, such as the ability to pursue single-sourcing in microprocessors.

6. Trade-offs are necessary for achieving excellence in business

True excellence is built on trade-offs. No company can be good at everything.

Focus on key value drivers. To achieve excellence, companies must identify the most critical value drivers for their customers and allocate resources accordingly. This often means deliberately underperforming in less important areas.

Overcoming the "be good at everything" trap. Many executives struggle with making trade-offs, wanting to improve all aspects of their business. However, this approach often leads to mediocrity. Instead, companies should:

• Identify their core strengths and competitive advantages
• Align resources with the most impactful value drivers
• Be willing to make difficult decisions about where not to invest
• Communicate trade-offs clearly throughout the organization

By making strategic trade-offs, companies can differentiate themselves and achieve superior performance in areas that matter most to their customers.

7. Value maps guide strategic decision-making and implementation

Value maps are a powerful tool that facilitates the transition from strategy formulation to strategy implementation.

Creating value maps. Value maps visually represent the importance of various value drivers to customers and the company's performance on each driver. To create a value map:

1. Identify key value drivers for customers
2. Rank drivers by importance
3. Assess company performance on each driver
4. Compare performance to competitors

Using value maps for strategy. Value maps help companies:

• Identify areas of competitive advantage and weakness
• Guide resource allocation and investment decisions
• Align activities with strategic priorities
• Track progress and adjust strategies over time

By regularly updating and analyzing value maps, companies can ensure their strategies remain focused on creating and capturing value in the most effective ways.

8. Stakeholder capitalism requires balancing interests beyond shareholders

Financial success, as we have seen time and again, will follow true value creation.

Shift in perspective. Stakeholder capitalism emphasizes delivering value to all stakeholders: customers, employees, suppliers, communities, and shareholders. This approach recognizes that long-term business success depends on creating value for all these groups.

Implementing stakeholder capitalism. To truly embrace stakeholder capitalism, companies should:

• Focus on increasing WTP and lowering WTS for all stakeholders
• Share value created more generously than competitive concerns would dictate
• Account for the true cost of economic activity, including externalities
• Support policies that correct market distortions (e.g., carbon pricing)
• Refrain from using political influence to soften competition

By adopting these practices, companies can contribute to a more sustainable and equitable economic system while still achieving financial success through value creation.

Last updated: September 22, 2024