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We ask why some companies are so much more successful than others. For example, aren’t the home improvement retailers Lowe’s and Home Depot essentially clones? How can it be that one, Home Depot, is far more profitable than the other? The answer, it turns out, has much to do with how companies create value for their customers, their employees, and their suppliers. It is surprising, perhaps, but true nevertheless: the companies that perform best do not think about themselves first and foremost. They dream up ever better ways to create value for others.
Think value, not profit, and profit will follow.
Pillar #1 Value for Customers
Do you tend to root for the underdog? If so, you will love the story about the ways Amazon gained a toehold in the market for consumer electronics in fierce competition with then-dominant Sony. Sony had it all: the best e-reader technology, a stellar brand in consumer electronics, and a marketing budget the size of a small country’s GDP. Amazon’s edge? A better way to think about value for customers.
Sales-driven organizations (like Sony) and companies that focus on willingness to pay, WTP (like Amazon) would show similar performance. But this intuition turned out to be wrong. Companies that train their lens on WTP have a significant long-term competitive advantage.
Some approaches to raising WTP are obvious: increase the quality of your products, enhance their brand image, innovate. But even strategies that are often overlooked can be exceptionally powerful. For instance, it is fascinating to observe how some companies leverage the power of complements: products and services whose presence raises the WTP for other products and services. Think printer and toner, cars and gasoline. Michelin and Alibaba Group rely on complements to supercharge their entry into new industries. Apple uses them defensively to soften the blow from declining prices. Harkins Theatres cleverly offers complements to fill seats in its movie theaters. If you compete on the basis of your products and services alone, if you fail to recognize your complements, there is a good chance your business is already in trouble.
Pillar #2 Value for Talent and Suppliers
Our attention will swing to the bottom of the value stick. We will meet companies that gain a competitive advantage by decreasing the willingness to sell, WTS of their employees and their suppliers. In competition for talent, firms pursue two approaches to gain leverage: offer more generous compensation or make work more attractive. While the two strategies seem similar at first—they both create greater employee engagement and satisfaction—they have vastly different consequences. Increases in pay shift value from the company to its employees; there is no value creation, only redistribution. By contrast, more attractive working conditions create more value.
Strategies that lower WTS also pay off in improved supplier relationships. Even prior to the Covid-19 pandemic and the increasingly frequent disruptions of global supply chains as a result of climate change, experts readily recognized the value of close and adaptable collaborations with suppliers. If you find ways to reduce a supplier’s cost of working with your company, you can capture a part of the value that you helped create. However, what is straightforward in theory is often difficult in practice. Many buyer-supplier relationships do not live up to their potential, not because it is challenging to see how one might create value but because we fear the other party will capture most of the benefits from a successful collaboration.
Pillar #3 Productivity
If you had to guess, how wide do you think the productivity gap is between an industry’s bottom 10 percent of companies and the top 10 percent? It is substantial. In the United States, leading companies are twice as productive as the weakest organizations. In emerging markets, top performers best the least efficient by a factor of five. Imagine—a company that produces five times as many products with exactly the same inputs! Whenever firms increase their productivity, cost and WTS fall at one and the same time.
If you wonder why JPMorgan Chase doubled in size after the Great Recession in 2008, when we were questioning if some financial institutions were “too big to fail,” look to economies of scale as one important reason. A classic in the strategist’s playbook, scale economies remain an influential means of lowering cost and WTS. And so is learning—the idea that costs decline with cumulative output. In fact, in the age of machine learning and advanced analytics, learning has become even more important. Anomaly detection algorithms, for instance, can result in substantial cost reductions because faulty parts are sorted out before they enter production workflows. While steeper learning curves promise considerable efficiency gains, the strategic effects of learning can be surprising. Consider the value of being the first to detect a better way of working. When everyone learns at the speed of light, being early means very little. Your competitors will catch up quickly. Paradoxically, the strategic effects of learning are most valuable if learning reduces cost at an intermediate pace—not too fast and not too slowly.
Scale and learning are on the evergreen list of productivity-enhancing strategies. By contrast, research on the importance of basic management tools is fairly recent. When asked how well their company is managed on a scale from 1 to 10, most managers rate their organization about a 7. Surprisingly, these ratings tell us very little about the chances that a company actually implements modern management techniques that help drive productivity. And across many industries and countries, companies fail to adopt basic tools such as goal setting, performance tracking, and frequent feedback. If you are searching for ways to substantially raise the productivity of your team or your company, chances are these management techniques are among the most promising opportunities to raise your game.
Implementation
Strategies that lead to exceptional performance are built on three ideas: value for customers (raising WTP), value for employees and suppliers (reducing WTS), and increases in productivity (lowering cost and WTS). Building on this insight we will explore how companies move from conceiving a strategy to putting it into practice. Observing brilliant strategists make three critical choices.
First, among many options, they invest in a small number of value drivers to pull ahead of the competition. Value drivers are the criteria that make up WTP and WTS. They are the product and service attributes that are important to your customers. For instance, when choosing a hotel, consumers typically consider value drivers such as location, room size, staff, and friendliness, as well as the hotel brand. Accomplished strategists are comfortable promoting only a few value drivers and withholding resources from many others. How did Paul Buchheit, Gmail’s lead developer, express this idea? “If your product is great, it doesn’t need to be good.”
Second, for each of the critical value drivers, accomplished strategists develop a deep understanding of how they influence WTP or WTS. For example, they know that scale is no panacea. (Comparing size or market share across the firms in the S&P 500, for instance, tells you exactly nothing about their profitability.) But strategists also know that scale can be all-decisive in some situations—for example, in the presence of network effects or scale economies. In each instance, they understand deeply how a value driver increases WTP or lowers WTS.
Third, successful companies often use smart visuals to cascade their strategy throughout the organization. Such value maps illustrate how ideas about value get connected to specific key performance indicators (KPIs) and projects that increase the performance of the organization.
Final Word
Strategy is conceptually simple, because it serves a single purpose: creating value. Companies that do this well end up leading their industries. We will see how Tommy Hilfiger did just that for an often-disadvantaged group of people, persons with disabilities. Imagine what this must be like, showing up at work every day with the single ambition of making life better for a group of customers, the people who work for your organization, the suppliers with whom you collaborate. Value or profit is a false choice. Exceptional financial performance reflects value.
Think value, and profits will follow.
This insight is important for reasons that go beyond the performance of companies. Unless you have been hiding in some faraway castle, you know that business does not enjoy the best of reputations these days. In recent surveys, only about a quarter of participants say they believe that their organization “will always choose to do the right thing over an immediate profit or benefit.”
Value-based strategy is uniquely suited to help us see a way forward. To make progress, value must sit at the very core of every business. Even the most vexing problems can bend when we apply enough creativity and imagination to create more value for customers, employees, and suppliers.