Two arrows

Value-based strategy

Creating value for success

7 minute read
Two arrows

Global markets are changing at an unprecedented pace and strategy has become more sophisticated and complicated according to Harvard Business School Professor Felix Oberholzer-Gee.

In his paper, Eliminate Strategic Overload published in the Harvard Business Review 2021, Professor Oberholzer-Gee shows how, by applying a value-based strategic approach, companies can set themselves apart and take a back-to-basics method through “fewer initiatives with greater impact”.

For Professor Oberholzer-Gee, a value-based strategy is only worthwhile if it does one of three things – create value for customers, employees or suppliers.

To understand how to provide this value, Professor Oberholzer-Gee suggests companies create a value map, a visualisation tool, to look for strategic opportunities by understanding what their customers “value most and how well you deliver”.

He cautions, however, against making assumptions about this. “If you’re going to reformulate your strategy on the basis of your value map, you need good data to assist you in building it.”

This article provides a summary of Eliminate Strategic Overload and value-based strategy and includes an interview with global market research expert, Ipsos Perth Director Brad Hyde.

Value for customers and willingness to pay (WTP)

The paper describes willingness to pay as “the most a customer would ever be willing to pay” for a product. Even one cent more and they will believe they are better off not purchasing the product.

If companies find a way to innovate or improve existing products, they can raise a customer’s WTP and the customer will pay a premium for a product if they deem it worthy.

Ipsos Perth Director Brad Hyde said when looking at value within a company, the organisation must first understand the customers’ needs and motivations within their market.

“This understanding can come from many places, but market research is a perfect opportunity for most organisations,” he said.

“To get to customers’ core needs and motivators, organisations like Ipsos spend time with people in real life through ethnography – in their households, on shopping trips, and experiencing different products and services with them.

“We also use qualitative research – such as interviews, focus groups and online discussions – and quantitative research like surveys to get both the ‘why’ and ‘how many’ questions.”

In Professor Oberholzer-Gee’s paper, he notes that companies focused on WTP are consumed with the customer’s journey, and ultimately earn their loyalty and trust.

“A value-focused company convinces its customers in every interaction that it has their best interests at heart.”

Part of this can be pairing core products with other complementary products or services as a source of value creation.

An example was one cinema’s unique idea to attract customers – staffing play centres with trained professionals, so parents could watch a movie while their children were looked after.

Complements can seem unrelated to the core business, so identifying them means looking at a customer’s journey and analysing how you can create new ways to produce customer value.

Value for employees and suppliers and willingness to sell (WTS)

Another way to take a value-based approach is by making work appealing to create value for employees.

With more employees looking to achieve quality work-life balance, they often value their work conditions over the compensation they receive.

As Professor Oberholzer-Gee states, “When companies make work more interesting, motivating and flexible, they are able to attract talent even if they do not offer industry-leading compensation.”

Often companies mistake creating value for employees by offering generous compensation when, in reality, this isn’t always necessary if the work is enjoyable.

“Paying employees more is often the right thing to do, of course. But keep in mind that more generous compensation does not create value in and of itself; it simply shifts resources from the business to the workforce.

“By contrast, offering better jobs not only creates value, it also lowers the minimum compensation that you have to offer to attract talent to your business… an employee’s willingness-to-sell wage.”

Professor Oberholzer-Gee stresses that value-based companies “never confuse compensation and WTS”. They think about the needs of their employees.

Similarly, suppliers expect a minimum level of compensation for their goods, but companies can lower this by raising a supplier’s productivity.

As the costs go down for suppliers, their willingness-to-sell prices also fall.

Implementing a value-based strategy

The paper describes value-focused executives as those who “evaluate every strategic move, every idea that comes across their desk, through the lens of value creation.”

“They focus on value, not profit…and they are confident that superior value creation will result in improved financial performance over time. By contrast, companies obsessed with short-term returns often undermine value creation.”

So how do organisations know how to create value for customers, employees or suppliers?

Mr Hyde said that “Organisations should be engaging with multiple sources of information, including their own customer data, industry reports, social data and commissioned market research to uncover insights that are previously unseen.

“All staff, including senior management, should also be out there talking to customers, suppliers and other stakeholders.”

Mr Hyde recommended organisations seek an understanding of their market and how it is changing at three broad levels, including:

1. Macro forces – the known knowns impacting societies, markets and people, including demographic and planetary drivers like ageing, community migration, technology, wealth, climate change, politics, health and more

2. Societal shifts – the medium-term changes in the public’s opinions, attitudes and values towards categories, brands and issues, which are often recorded in polling and other forms of research

3. Signals – the short-term responses to our world, both localised and individual such as market shares, current purchasing behaviours, new policies, fashions or trends. These signals are picked up through market research, social media monitoring, reading the news or everyday life by staying across current events.

“Accurate and reliable market data that’s properly analysed enables informed decision-making, drives innovation and contributes to organisational success in an increasingly complex and competitive world,” Mr Hyde said.

Value maps

Professor Oberholzer-Gee recognises that, though firmly at the heart of this strategic approach, willingness to pay and willingness to sell are abstract concepts that can be challenging for an organisation to implement.

Harvard Business School helps organisations to visualise the concepts with a value map, which he says is “useful for testing the tenets of value-based strategy against whatever’s happening in your company.”

The steps he describes when creating a value map are:

• Select a group of customers, such as your most profitable segment

• Compile a list of criteria that are important to those customers when purchasing

• Rank these value drivers from the customer’s perspective of most to least important

• Determine how good your company is at each of these and do the same for major competitors.

It is during this process that Professor Oberholzer-Gee insists companies use good data to make informed decisions.

For Mr Hyde, it is important to look at the value an organisation’s category or market delivers to its customers and what the brand or organisation brings that sets it apart from its competitor.

“Organisations want to develop a clear list of how they create value in their category and against their competitors,” he said.

“Through quantitative modelling via surveys, we can calculate the actual importance of each of the value drivers, as opposed to what people say is important.

“At Ipsos, we use a model called Censydiam, which captures the needs and motivations that drive relevance in a specific category – organisations and brands can grow if they succeed in connecting themselves to more emotional and functional needs better than others.

“From our research, we’ve found there are eight fundamental motivations that drive all behaviour: enjoyment, conviviality, belonging, security, control, recognition, power and vitality.”

Value maps in action

When companies undertake rigorous value-map analysis, there are quite often surprises in the data. What also becomes apparent is the former lack of knowledge around how customers view their competitors.

For Professor Oberholzer-Gee, a sound understanding of value drivers based on reliable research has several benefits.

“Value drivers can serve as innovation engines because they live midway between the rather abstract notion of WTP and WTS and the specific attributes that describe your current product or service.

“[Value drivers] are useful for analysing the existing business. It’s a straightforward task to link a given value driver to operating models and key performance indicators and to compare performance with that of competitors.

“Second, they can be helpful in thinking about opportunities, because they don’t specify in any detail how you will meet a particular customer need.”

In Mr Hyde’s view, “Where the strategic opportunities come in is to size the market – look at your capabilities and, importantly, determine what your competitive advantage is going to be.

“Organisations should be thinking about their competitive advantage – investigate where your organisation can create a greater wedge than your competitors in what customers are willing to pay and what it costs you to make the product or service.”

Professor Oberholzer-Gee concludes Eliminate Strategic Overload  by stating that identifying the drivers with the most potential for future value creation and arriving at the strategic initiatives to bring them to fruition requires further guidance.

His book Better, Simpler Strategy offers more information, however, he gives three key principles to keep front of mind:

1. Invest in a smaller number of related value drivers

2. Resist the temptation to play catch-up

3. Insist on making trade-offs.