CURT NICKISCH: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Curt Nickisch.
You can’t blame organizations for trying. They’re faced with so many challenges and competitive pressures at such a rapid pace, it’s only natural. They respond with lots of strategic planning and initiatives. Carrying those out are teams of talented employees who get increasingly overwhelmed. You would think that all that Herculean effort would pay off. What’s surprising is how often it does not. One out of every four firms in the S&P 500 earns long-term returns on invested capital below the cost of that capital. Why do they have so little to show for so much sophisticated strategy and all those talented employees?
Well, today’s guest has some ideas that largely start with paring back and simplifying. In his thinking, an initiative is only worthwhile if it creates value for customers or employees or suppliers. If not, it should fall by the wayside. Felix Oberholzer-Gee is a professor at Harvard business school. He’s also the author of the new book, Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance. Felix, thanks for coming on the show to talk about this.
FELIX OBERHOLZER-GEE: My pleasure to be here.
CURT NICKISCH: Why are business leaders facing such strategic overload? What does that concept mean to you?
FELIX OBERHOLZER-GEE: There are so many pressures on businesses today. Just think about everything that is going on. The digital transition, the pandemic, global supply chains that don’t quite work the way they’re supposed to, changing consumer tastes, changes in technology, changes in preferences. You have global competition, you have supply chain disruptions, you have climate change. It’s really never ending. And so the question really in the end is how do you bundle all of these activities? How do you make sure that in this sea of activity, that actually, we’re roughly pulling in the same direction? Because that’s the other really interesting thing that you see in the data. If you ask there’s the super successful companies, how many of their activities, how many of their products, how many of their services really create that kind of success, the number’s often surprisingly small.
CURT NICKISCH: Just saying that strategy is not a complicated thing probably perked a lot of ears up as people are listening to this, because complexity has been such a bit of a post word. And so managing complexity, understanding complexity is kind of what a lot of people think they’re supposed do to become senior leaders or act as senior leaders. And you’re saying it’s less about managing the complexity and actually just simplifying the complexity, and you can scale back rather than just figuring out how to handle it all.
FELIX OBERHOLZER-GEE: I like to think of it in three phases. The first one is conceptually, how do we think about the strategy of an organization? And at that level, I find it’s not complicated. You don’t need gray hair, lots of wrinkles in your face. Actually, everyone in the organization can be a strategic thinker. Because you’re just asking these two very simple questions. Does it change willingness to pay? Does it change willingness to sell? The challenging part, I think, then comes in a second phase where it’s all about creativity. Because in the end, as we all know, competitive advantage comes from differences across companies. So not only do I need to find ways to increase my customer’s willingness to pay, I need to do it in a manner that is differentiated from the competition. And so really, at the heart of strategy is this idea that we got to be creative in seeking of novel ways of doing it.
Sometimes when I speak to executive teams, I would ask them, what’s the mood in your strategy meetings? And they would say, focused, analytic, somber. When I asked them, how often do you laugh in strategy meetings? Basically, the answer is, no one ever laughs in a strategy meeting. And then I ask them to describe, what’s the right environment in which you feel like you can be really creative? And it couldn’t be more different. Someone is like, Oh, we’re laughing. We’re thinking of crazy ideas. We feel inspired by what other people have to say. That, I think, is one of the disconnects. Strategy at its core is a creative enterprise.
And then the third phase is in fact, when we go from having these ideas to implementation, and I think there, in every large organization, as we know, there is a degree of complexity. How do you get divisions to collaborate? How do you make sure the right people get the right kind of benefit from particular events? So there is complexity at the implementation part, for sure. But even there, as I show in the book, if everything is tied back to a couple of really simple principles, even implementation actually ends up being very simple.
CURT NICKISCH: You brought up two terms that I think we should go into a little bit more. One is willingness to pay, which I believe a lot of people are very familiar with, making products, experiences more compelling for customers so that they are willing to pay more. But for a lot of people, they think about the other side of that is lowering costs. And you use this term willingness to sell. Explain that.
FELIX OBERHOLZER-GEE: Yes. So you’re exactly right. On the willingness to pay side, there’s nothing I can tell you that you don’t already know. And it’s really important to keep willingness to pay and price separate from one another. Willingness to pay is the most a customer would ever be willing to pay. But very often, if I go out, I need coffee in the morning, my willingness to pay for that first cup, seven, $8 probably. I go to Dunkin’ Donuts, I don’t need to pay $7. So willingness to pay and price are different. And the same idea is at the other end of what I call a value stick. Willingness to sell from the employee’s perspective is the lowest amount of compensation that it would take to move someone from some other firms to your company.
So suppose you work at some other company. I would love to have you join my organization. What’s the absolute minimum that I need to offer you in order to attract you to my company? That’s your willingness to sell. Now typically, we end up paying more for competitive reasons, because there’s lots of interest in your talent. Just like prices are typically lower than willingness to pay, the cost of the company, how much they actually end up paying employees and suppliers, are typically higher than that absolute minimum.
But it’s interesting and helpful to think about the absolute minimum because it helps you think about how can I make work more attractive? So if the job that I have for you is your dream job, what you always wanted to do, of course my offer, financially speaking, doesn’t have to be quite as enticing because it’s your dream job. And this is in fact what we see for the very best companies. They often hire talent, and it’s a bit of an unfair advantage that they don’t have to pay quite as much as other organizations because the jobs themselves are intrinsically very interesting or intrinsically motivating for people who have these jobs.
CURT NICKISCH: One example of this that jumped out at me in the article was Gap, the clothing retailer, using an app to help its employees trade shifts more easily and cover for each other.
FELIX OBERHOLZER-GEE: Yes. It’s a beautiful example. So they ran this experiment for a little while that targeted one of the main challenges of being a retail worker. Someone in retail typically doesn’t know their schedule very far in advance. So it changes from week to week. Making plans living our life is super difficult because you never really know when do I have to work? When am I off? And of course this comes along with swings in income. If you get more shifts, then your income is a little better. If you get fewer shifts, your income falls. This can be a third, up to a 40% of your income swings from week to week. It’s terrible.
And so Gap did a very interesting, very simple thing. They used an app called Shift Messenger that essentially created a marketplace for these shifts. Today, my daughter has a big concert at school. I probably don’t want to work the shift that Gap has offered me. I trade it with someone else. And interestingly, it also allowed the company to take back shifts that were not needed without hurting anyone’s income, because you’re taking them back from people who tell you, “Actually, I was assigned to the shift, but it’s not the best time for me to work.”
That had amazing consequences. Productivity increased dramatically. Same store sales over the course of the experiment jumped by millions of dollars. And then when researchers at Berkeley looked at the longer-term effects, they saw better health outcomes. For instance, people slept better because there was less stress in their life. And one of the things that I really love about the story and love about thinking about this particular way to create better working conditions is when I speak with executives and say, how could you make this job a better job? We’re very quickly jumping to the intricacies of the job, to the work processes. But work is so much more than the processes in your organization. Work is the commute, work is the stress or joy of getting dressed in the morning. Work is how anxious am I about that evaluation meeting, that performance meeting that we have next day? What will happen if I make a mistake at work? What’s that interaction like? And so-
CURT NICKISCH: Am I proud to wear the logo?
FELIX OBERHOLZER-GEE: Yes, exactly. When we talk about customer intimacy, I think it’s so right, that you really need to have a holistic, broad understanding of your customers in order to know what’s the best way for your company to add value to customers. And the same is true for talent in your organization.
CURT NICKISCH: You’ve given here some of the upsides to pursuing a value-based strategy. What are some of the pitfalls or issues that you need to be aware of before you set out on this journey?
FELIX OBERHOLZER-GEE: It’s a bit of a change in mindset. In particular, if you’re a very short-term oriented sales driven organization, where really, the key question every day is how do we sway more customers to buy the products that we currently have? It’s a change in how you think about the business. One of the things that I noticed when I spoke with the former CEO of Best Buy, virtually, he was fairly relaxed about profitability of the company. Now, you might say, of course. He’s done this amazing turnaround, so you deserve to be a little relaxed. But for him, it’s actually just that’s the attitude that you should have. And I found this to be true across very many organizations that successfully implement value-based thinking. If you know you create value for customers and employees, you know in the end, this will turn into financial success. And so you can be patient.
You can think creatively. Many of them shift profit pools in really interesting ways. I talk a little bit about how competition today is often shaped by shifts in profit pools that make life easier for organizations. But you have this confidence, I think, is a good way of describing it, among these executives that because they’re in the business of creating value and because they know they do it successfully, of course, financial success will follow. And so that reorientation, I think, can take some work, can be just like any reorientation, when you think about how many more organizations are purpose-driven these days. That’s a shift in mindset that also takes some work. But in the end, if you believe that you’re on the right path, if you believe that and your organization exists because you want to create value, I think the fruit that you will earn is amazing. It’s really spectacular what these companies can do.
CURT NICKISCH: Is it hard for companies that have invested so much time and energy in their existing strategy infrastructure, for lack of a better word? I just imagine that a lot of managers would hang on to just the muscle memory of strategic planning sessions that they’ve been holding. Is it hard for them? And how can you overcome that?
FELIX OBERHOLZER-GEE: When I help companies implement value-based strategy in their organization, I actually did not find that much love for existing strategic processes. They’re often seen as bureaucratic. They’re often overly determined by budget concerns. It’s really in the end about what my budget is going to look like. And one of the things, of course, that is interesting about creating value, the value that organizations create doesn’t really show up in your financials, or shows up in your financials only in indirect ways. So when I go out, my willingness to pay for coffee is $7, but I get it for $2.50. That difference shows up in my being loyal. It shows up by me going out to buy coffee tomorrow again, but it doesn’t show up in a very direct way in the financials. And so strategic planning processes that are essentially just financial planning processes, they actually miss the boat a little bit.
CURT NICKISCH: One of the first steps that you recommend is to create a value map.
FELIX OBERHOLZER-GEE: Yes. So value maps have been around for a very long time. In fact, in much executive education at HBS, it is one of the very best hands on exercises that… I don’t even know. We must have done it maybe with thousands of companies, certainly with hundreds of companies. And essentially what a value map is, is something very intuitive. So willingness to pay and willingness to sell is how we measure how much value we create. But willingness to pay is still relatively abstract. It consists of many different factors that drive a person’s willingness to pay.
CURT NICKISCH: And everybody thinks they understand.
FELIX OBERHOLZER-GEE: And everybody thinks they understand. In fact, it’s funny that you say this because what we often do is we have teams think about a particular customer segment, and then just make a list of what are the drivers of willingness to pay for that particular customer segment. When you have multiple teams doing that same exercise, invariably, they come back and they don’t quite agree on what the value… These are called value drivers, the components of your willingness to pay. They don’t agree on what the value drivers are. Or if you ask about the relative importance of one driver or another, they very rarely do they see eye to eye. And that’s one of the benefits of using value maps. So you ask, what are the drivers of willingness to pay? These are all of these different value drivers. And then you measure your performance relative to the competition.
So you’re asking, say, think of an airline, and you happen to serve a customer segment that is really being on time is more important than anything else. And so then you would ask, how good are you at that particular value driver and relative to the competition? And the basic intuition could be simpler. It’s about willingness to pay. And we know willingness to pay only matters if I raise it in a way that is differentiated from the competition. And so the value map, in a very simple, intuitive way, shows you both where you are today, where your competitors are today, and then, most exciting, it shows you opportunities how you might change your value proposition going forward.
CURT NICKISCH: When you’ve identified these value drivers then, what do you do?
FELIX OBERHOLZER-GEE: Yes. You have this beautiful map. You stare at the map. And then-
CURT NICKISCH: Does that help with the simplification, just having this beautiful map?
FELIX OBERHOLZER-GEE: Oh, yeah. It helps so much. So there’s two intuitions that you should have. The first is if you change your performance for any of the value drivers, there’s a little financial calculation attached to it. How expensive will it be to change it? What’s the return? How many more customers do we sway? So this is where the connection to financial planning comes in. But it’s strategic in a sense that you want to change the value drivers that are really critical for your customers, and you want to pull ahead as opposed to catch up with the competition.
And that is something that is, in many organizations, sometimes a little counterintuitive, because you think, oh my God, we’ve fallen behind in, say, customer service. Shouldn’t we catch up with the competition? Well, if you catch up with the competition in customer service, two things happen.
Are you a better organization? Yes, absolutely. You made progress. You have better customer service. Are you also more similar to the competition? Yes. And what happens if everybody’s value stick looks exactly the same? How will the customer choose? Well, the customer will choose based on price. So sometimes I meet executives and they tell me, “I happen to be in this industry where there’s so much pricing pressure. My customers are so price sensitive.” And my first thought is always, it’s not the customers. If your value stick looks like everybody else’s value stick, if my willingness to pay for your products is exactly the same as my willingness to pay for every other product, how on Earth am I supposed to choose? Of course, I look at price. And so we’re taking these value drivers and we’re trying to eek out advantages relative to the competition in a way that gets us the most impact for the capital that we can spend.
CURT NICKISCH: Well, the other thing that strikes me about really focusing on certain value drivers is it brings back, revives this notion of trade-offs, making trade-offs, which is fundamental to classic strategy theory. But it just seems like some of the complexity of strategic overload is perhaps the lack of trade-offs.
FELIX OBERHOLZER-GEE: So this is one of the most interesting experiences. When I do the value curve exercise with participants in executive education at HBS, I teach a case on strategic trade-offs. And the case discussion is interesting, but everybody… People just know. Of course you have to make trade-offs. And then we go off and we do the value curves and ask people to come back and tell me, how would you like to evolve your value curve over time? How are you going to be more competitive? And guess what? Everything just improves. This notion of trade-offs is completely gone, even though we spoke about it 10 minutes ago.
Most strategy meetings that I’m part of, we’re making long lists of things to improve. There’s never a question. What will we stop doing? Where will we under-invest? Where can we cut back? Because we’re not making trade offs. It’s then really difficult to bring the good ideas that we have, to bring them to life, because we just don’t have the resources. You get this kind of… My colleague, Francis Frei, has this fabulous phrase, I think, that really catches the mood in so many organizations when she speaks about exhausted mediocrity, where you see the exhaustion because everyone’s trying so hard. And at the same time, you don’t get stellar performance. How can this be? No trade-offs.
CURT NICKISCH: How do we avoid getting back to complicated strategy again? Do you need to take a strategy audit every six months or every year just to keep tabs on everything?
FELIX OBERHOLZER-GEE: Yeah. So once you have these value maps and you indicate how you want to change your value proposition over time, you then can translate these changes into discrete projects, into discrete initiatives. And for each of these projects, for each of these initiatives, you will see how much progress that we made. Did we hit the benchmark? We wanted to raise willingness to pay by 12%. Are we hitting 12%? Is it only 8%? Why is that? So value-based strategy is enormously data-driven. I’ve been working with one of the leading banks in Europe. It’s an organization called Tatra Bank in Slovakia. And they’re amazing at using technology. They’re way ahead of so many other financial services institutions in that sense. But they essentially used value-based strategy to drive their business, and then they have these posters everywhere in the organization where you see the value drivers.
You see how you want to move them over time. You see in color code, which departments are responsible for making that change. And then you have, in usual fashion, the green and red dots. Are we on track? Are we not on track? And what I find so amazing about the company is that these posters are everywhere. Everybody knows. Are we on track? Are we not on track? And the CEO tells me that in surveys that they do about how well do people understand the strategy of the bank, they’re somewhere in the 90s. Imagine that. 90% of the people in your organization, not only know what the strategy is, but they have a sense of how those big lofty goals, how that translates into what they do every day.
CURT NICKISCH: For companies that start down this road of a value-based strategy, how soon might they start seeing results? How quick are the wins?
FELIX OBERHOLZER-GEE: Well, one of the key messages in the article and in the book is that irrespective of the industry that you’re in, you have every reason to be super optimistic about the potential gains that your company could make, if, in fact, you find novel ways to create value for your customers, for employees, or for your suppliers. I do a little thought experiment. Imagine 100 companies, and you rank them from worst to best, and say you’re exactly average. And now you improve, you can’t be Apple or you can’t be MasterCard, but say you could improve from rank 50 to rank 40. How much of a difference is that? That is a 20% increase in your profitability. Imagine that. And it’s not like all of a sudden, you’re an industry leader. That’s maybe not realistic to expect. But even small, modest changes that refocus the organization on value creation can have this really dramatic financial impact. And if I look at that impact around the globe in other countries, the number is even larger than it is in the United States.
So I hope that optimism about… Business leaders today get beaten from every which direction, and that sometimes makes it a little hard to remain optimistic. But always just remember, in the end, you’re in the business of creating value for other people. And if you do that well, both, I think, the recognition of your customers, of your employees, of the people that work for you, but also the recognition in the financial markets is really difficult, is not hard to see.
CURT NICKISCH: Felix, thanks so much for coming on the show and talking about this.
FELIX OBERHOLZER-GEE: It’s such a pleasure to be here, Curt. Thank you.
CURT NICKISCH: That’s Felix Oberholzer-Gee. He’s a professor at Harvard Business School and the author of the new book, Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance. He’s also a co-host of After Hours, the HBR presents podcast. You can find both the book and the podcast at hbr.org.
This episode was produced by Mary Dooe. We get technical help from Rob Eckhardt. Adam Buchholz is our audio product manager. Thanks for listening to the HBR IdeaCast. I’m Curt Nickisch.
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