A better, simpler way of thinking about strategy for SMEs

Better strategy

Three key takeaways from Felix Oberholzer-Gee’s exceptional new book, Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance, to help every business streamline their strategic initiatives. 

As a self-professed business geek, I’ve read a lot of business books – about one every few weeks for the last 20 years. And while there have been some great books published in that time, the cumulative effect of all that business literature has probably added to the sense of strategic overload that many business owners are feeling.

But Swiss academic Felix Oberholzer-Gee’s latest book, Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance, is one of the best I’ve ever read on business strategy, because it boils things down to the essentials, and simplifies the seemingly mystical process of deciding which strategic initiatives a business should undertake. 

While hard work and sophisticated strategy leads to enduring financial success for some firms, others are left behind – a quarter of the firms in the S&P 500, for instance, earn long-term returns below their cost of capital. 

At least part of this disparity is due to the fact that strategy has simply become too complicated –  if you work for a sizable organisation, your company is likely to have a marketing strategy, a corporate strategy, a global strategy, an innovation strategy, a digital strategy and a social strategy. 

While there are talented and highly engaged employees working on all of these strategies, Felix argues that their efforts would be better directed if their companies chose fewer initiatives with greater impact. 

This streamlined value-based strategy operates on the principle that a strategic initiative is only worthwhile if it does one or more of the following things: 

  • It creates value for customers by raising their willingness to pay. 
  • It creates value for employees by making work more attractive. 
  • It creates value for suppliers by reducing their operating costs. 

It’s the companies that are consistently able to do these three things that are able to achieve enduring financial success. 

Here’s how it works. 

Focus on value, not sales 

By creating value for customers, instead of focusing on sales and top-line growth, businesses can raise customers’ willingness to pay (WTP). 

WTP is the most a customer would ever be willing to pay for a product. It’s their walking-away point – charge one cent more than someone’s WTP, and that person will simply not buy. Apple and Gucci are examples of companies that have successfully raised their customers’ WTP – Apple, by designing beautiful products that are easy to use, and Gucci, by creating products that confer social status. 

Whereas a sales-centric manager will ask, “What will help me sell more?”, a value-focused manager will search for ways to make customers clap and cheer. A value-focused company will seek to increase WTP at every stage of the customer’s journey by earning their trust and loyalty, and using every interaction to convince them that the company has their best interests at heart. 

Essentially, it’s about focusing on long-term customer retention and acquisition instead of short-term gain. A value-focused manager isn’t overly concerned with the short-term financial consequences of their decisions, because they’re confident that superior value creation will result in improved financial performance over time. 

On the other hand, companies that are obsessed with short-term returns will often undermine value creation. Consider Excite, one of the original internet portals, who turned down the chance to purchase the search technology that ultimately became Google for just $1.6 million in 1997. 

Their reasoning was that the technology was too good – their business model depended on advertising, which required users to spend time on their site, so if they quickly sent users elsewhere by providing highly relevant search results, they’d be losing money. By that logic, it was better to have a search engine that was about 80 per cent as good as other engines. 

If Excite’s executives had been guided by creating long-term value for customers, rather than adding to their revenue in the short term, they would have made a different – and far more profitable – decision.

Value-based organisations are also good at spotting complements – products and services that enhance the value of their core offering for their customers. South Africa’s Discovery insurance company, for instance, creates value by offering an exclusive suite of health-improving services, including access to fitness clubs, health wearables, and incentives to buy healthy foods in supermarkets. 

Not only do these extra health benefits add value for customers, but it means there are more health-conscious people signing up for Discovery’s health insurance – in other words, more customers that are less likely to make health insurance claims.  

Closer to home, Australian coffee pioneer Phil Di Bella is a great example of value-focused management in action. When he was running Di Bella Coffee, he realised that his job wasn’t just to roast and sell coffee beans to cafés – it was to help those cafés run better businesses, making it easier for them to buy more beans. 

He offered free training for their staff, helping them to become more efficient baristas, which in turn resulted in their cafés selling more coffee. Not only did that mean they needed to buy more beans, but Di Bella could charge a premium for them, because he had raised their WTP by providing a value-focused service. 

Make work more appealing 

The second guiding principle for a business’ strategic initiatives is to create value for employees by making work more interesting, motivating and flexible. By doing this, businesses can raise an employee’s willingness to sell (WTS), making it possible for them to attract top talent even if they don’t offer industry-leading salaries. 

An employee’s WTS is, in practice, the absolute lowest wage they will accept to work for your business – offer even a cent less, and they’ll turn you down flat. But value-focused businesses that think holistically about the needs of their employees are able to make their workplaces more appealing without having to offer more money. 

For example, US department store The Gap bserved that one of the biggest pain points for retail workers was a lack of predictable and personalised schedules. To address this, they experimented with standardising the start and end times of work shifts, and scheduled the same employees for the same shifts each week, giving them a sense of certainty and the ability to plan ahead. They also introduced an innovative app called Shift Manager, which enabled workers to trade shifts freely if they needed to. 

For the 10-month test period, labour productivity went up 6.8 per cent, and sales rose nearly $3 million in participating stores. By creating value for their workers, The Gap not only increased employee satisfaction – workers even reported better sleep quality as a result of the changes – but they improved the company’s financial performance. 

In Australia, I observed a similar effect to this with a company PieLAB works with that specialises in smoke alarm maintenance. With the help of data scientists, we developed a way to shift the jobs that technicians servicing smoke alarms were assigned to, minimising the distance between where they lived and the properties they serviced. 

So, for example, if they were previously spending a total of 45 minutes travelling to and from their first job of the day and their last job of the day, that commute would come down to about 15 minutes. Effectively, we had bought those employees an extra half hour each day. 

On top of that, because they were being routed around areas close to where they lived, they brought their local knowledge with them – they knew the streets and they knew where to park, so it made their jobs easier and less stressful. Of course, we didn’t suddenly start paying them less, but we had certainly made their work more appealing without having to offer them more money. 

I think the thing to keep in mind here is to focus on initiatives that truly add value to employees. If you’re fitting out a new office, you might think that the way to add value is to go the Google route, with slippery dips and pizza bars and free beer on tap – and if you’re making the sort of money that Google does, that might seem reasonable. 

But are these things really what your staff want? Or would they prefer to know that you’ve got their back and will give them time off when they’re going through a personal crisis, and that you’ll give them opportunities to learn and expand their skill sets? Those things are much cheaper to provide than a ‘zany’ office space, but I think they have a much bigger impact on people’s happiness – which, ultimately, will determine their willingness to sell, and perhaps more importantly, their willingness to stay. 

Create value for suppliers 

Like employees, suppliers expect a minimum level of compensation for their product. But Felix says that a company can create value for its suppliers by helping them to raise their productivity and reduce their operating costs – which, in turn, leads to suppliers lowering their WTS price. 

Nike, for instance, created a training centre in Sri Lanka to teach its Asian suppliers about lean manufacturing. With these improved production techniques, suppliers reaped better profits, which they then shared with Nike. 

To improve their suppliers’ Willingness To Sell (WTS), Toyota leased land right next to their factory to a supplier of car seats, and built a plant for them to operate. Obviously, this significantly reduced the costs for the supplier, which made them more willing to sell their product to Toyota at a lower price. And by interconnecting the two facilities, Toyota saved on shipping costs, and eliminated the need for inventory – the moment they needed a seat, it rolled into the factory from next door. 

I took a similar approach to creating value for suppliers with a property management business I built called Rental Express. Essentially, if you had a job that needed doing – a leaky tap, for instance – we would organise a plumber. That plumber would come to our office to get a set of keys, which they would use to let themselves into the property, and then they would come back to our office, drop off the keys and go home. 

We started working with our suppliers to allocate plumbers for multiple jobs at a time. Instead of three plumbers picking up three sets of keys from our office, one plumber would come to us, pick up all three sets of keys at the same time, and then drop the keys back at the end of the day. Effectively, we had made our supplier more efficient – with less back-and-forth, they could take on more jobs, which lowered the price they were willing to charge us for their services. 

Most SMEs would never think to do this, because their focus is on how they can get more sales – not on how they can collaborate with their supplier to increase their profit. 

The Value Creation Opportunity 

When companies find ways to increase customer delight, employee satisfaction and supplier surplus (the difference between the price of goods and the lowest amount a supplier is willing to accept for them), they expand the value they create – and they position themselves to increase their profit margin, without even having to increase their top-line revenue. 

This concept can be visualised with a graph called a ‘value stick’, with WTP sitting at the top and WTS at the bottom. Whereas the traditional thinking is that it takes more costly inputs to create a better product, so costs have to go up at the same time that value does, the value stick demonstrates how value-focused organisations can defy that logic.  

If you’re running an SME, the key to putting this value-based strategy into action today is to take a good, hard look at the various initiatives you’re putting into place, and ask yourself three questions. 

  • Does this initiative create value for customers? 
  • Does this initiative create value for employees? 
  • Does this initiative create value for suppliers? 

Be honest with yourself, and if the answer to all three of those questions is no, get rid of it. Then, from the initiatives that are left, work out which ones you think will have the greatest impact on a customer’s WTP or an employee or supplier’s WTS, and make those your focus. 

Ultimately, value-focused executives have to evaluate every strategic move, and every idea that comes across their desk, through the lens of value creation. If an initiative doesn’t create value for customers, employers or suppliers – if it doesn’t move the needle on WTP or WTS – it’s simply not worth doing. 

Felix Oberholzer-Gee’s Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance is available now through Harvard Business Review Press. 

Chris Rolls is a serial entrepreneur, investor and self-professed business geek. Chris has built and exited four businesses in four different industries, and three of these businesses (Rental Express, First Class Accounts and Scody Performance Wear) have become some of the largest of their type in Australia. Chris is the Founder and Managing Partner of PieLAB Council Capital, which assists owners of profitable, recurring revenue businesses to grow over the long term with assistance from a panel of experienced CEOs.

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