Prioritise value and profit will follow, says Harvard business professor

Value creation is often an afterthought but is, in fact, the route to profit. Harvard Business School professor Felix Oberholzer-Gee says that what often surprises him about the business propositions his students develop in class is that they focus excessively on monetising ideas to the detriment of figuring out how to deliver value.

“Companies that perform best do not think about themselves first and foremost. They dream up ever better ways to create value for others. If you do this in a way that is differentiated from the competition, profit will follow. Think value – not profit – and profit will follow,” he says.

Value comes in many forms, he explains. It can be for customers in terms of compelling and competitive offerings. It can also be for employees or suppliers, enhancing their attractiveness to work for or do business with you.

In his book Better, Simpler Strategy, Oberholzer-Gee introduces the notion of a value stick as a way to determine competitive advantage. Based on proven economic models, the value stick suggests value can be expressed in terms of willingness to pay or willingness to sell.

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Willingness to pay sits at the top of the value stick and represents the most a customer would ever pay for a product or service. If companies find ways to improve their product, willingness to pay will increase.

Willingness to sell at the bottom end of the value stick refers to employees and suppliers. For employees, willingness to sell is the minimum compensation they require to accept a job offer. When companies make work more attractive, willingness to sell declines.

In the case of suppliers, willingness to sell is the lowest price at which they are willing to sell products and services. If companies make it easier for their suppliers to produce or supply products or services, willingness to sell falls.

Competitive advantage

Oberholzer Gee says competitive advantage is more enduring that most realise.

“Every company is exposed to some erosion of competitive advantage over time, but people are inclined to believe in the hyper-competition fairy-tale. Over a 10-year period, only a third of competitive advantage disappears.

“There are three advantages that erode more slowly – intellectual property, economies of scale and network effects. Financial services provide plenty of examples of economies of scale with huge players dominating markets, while the big platforms are all built with network effects which are very hard to dislodge.”

For everyone else that doesn’t have the above advantages, strategies that are built on trade-offs tend to survive the longest – companies that provide amazing customer value in one area but don’t in another, for example – tend to be more protective, he adds.

Consider the online dating market. With 35 million monthly visitors Match.com is the leading player in the United States. It dwarfs competitors such as eHarmony. Unlike the market leader, the eHarmony site lacks basic services such as a search function and limits the number of potential dates a person can see on a given day. Yet eHarmony thrives.

Why? Because eHarmony keeps competition at bay for a cohort of customers that fear rejection and moreover, are willing to pay a premium for a site that favours those seeking committed relationships.

“Focusing on a limited set of customers may not be the most intuitive advice if you are trying to build a business that will benefit from network effects. It is, nevertheless, good advice. By serving a select group of users who benefit most from being connected to one another, you might be able to compete with a much bigger platform,” he says.

Delight

The distinction between focusing on product and focusing on willingness to pay is a subtle but important one, he notes. While a product-centred manager worries about selling more, a better question is how to delight customers.

Oberholzer-Gee draws on his own experience to illustrate the point. When ordering flowers for a friend’s birthday, a florist asked him whether he wanted next-day delivery. The professor fessed up that he was a few days late already, having forgotten his friend’s birthday. The florist’s response caught him by surprise. “Should we take the blame for the late delivery?”

“The story has a predictable ending. I now receive a reminder several days ahead of my friend’s birthday and I order my flowers, perhaps at inflated prices. But I have never even considered using another flower shop.”

Willingness to sell involves looking at the wider picture for a company’s employees and suppliers. Crucially, the key to cracking this is not to exploit either employees or suppliers by squeezing them unfairly but by creating value which can be shared for all. That could mean a better working environment or a supply-chain architecture that allows a supplier to grow their margins while reducing prices because you’ve helped them lower their operating costs.

The ability to see the bigger picture is one of the reasons why Apple enjoys a preferential rate on rents in US shopping malls. The tech giant typically pays about 2 per cent of its sales per square foot in rent, compared with about 15 per cent for other tenants. Malls have a typically low willingness to sell to Apple because its presence in malls typically pushes footfall up about 10 per cent, benefitting all tenants in the process, unpinning the higher rents that the mall owners can charge others.

There’s a limit on how far this advantage can be leveraged and it is important to know where to draw the line. In 2018, the Huffington Post abandoned its policy of sourcing a large amount of its content for free from citizen journalists and aspiring journalists via its so-called contributor programme. Instead, it shifted its focus to new paid sections populated by professional journalists who would produce “smart, authentic, timely and rigorous op-eds”. Others in the industry followed suit.

Letting the world know you want to do the right thing wins plaudits but Oberholzer-Gee says that 20 years of academic research shows there’s very little evidence that having a stated virtuous purpose has an effect on consumers – with the exception of a handful of outliers such as Patagonia – unless the principle is firmly backed up with the right practice. Equally, words need to be matched with deeds if you want to move the dial with employees.

“True, nobody wants to work for an evil corporation and it’s nice to have great principles in the annual report but don’t think that those beautiful words mean anything if people don’t witness that on an everyday basis in their job. Consider nurses. How much of the purpose of the hospital do they see from day to day as they run from patient to patient when the reality of the job does not live up to the promise?”

Boosting willingness to sell as a HR strategy

Making work more attractive is not rocket science: undertake or consult existing staff engagement surveys. Employees have many ideas to make their work more pleasant. Pursue the ones that also raise productivity.

Look at the wider picture for employees: consider the many ways in which work touches the lives of your employees. A more pleasant commute outside rush hour might be as valuable as improved work processes. Uber’s policy of identifying its customers made it a more attractive platform for hiring female drivers, for example.

Align business practices with employee values: Google, for example, gave up on lucrative work for the US military and the development of a search engine for China after Googlers protested that the projects were inconsistent with the values that had attracted them to the company in the first place.

Multiple benefits: companies that lower willingness to sell can benefit from lower compensation, others enjoy greater loyalty and engagement and most see larger pools of job applicants.

Better Simpler Strategy, a Value-Based Guide to Exceptional Performance by Felix Oberholzer-Gee is published by Harvard Business Review Press.