Harvard business professor Felix Oberholzer-Gee offers a timeless reminder of age-old business wisdom told through the stories of those who listened – and those who didn’t.
Gleaned from his popular strategy course – and widely considered one of the most important works of strategy in 2021 – Harvard business professor Felix Oberholzer-Gee offers a must-read for making better strategic decisions.
His key insight rests in emphasizing strategic simplicity. Most firms muddle along. Great firms differentiate by maximizing customers’ willingness-to-pay (WTP) for products and services, while minimizing the price at which suppliers and employees will be willing to sell their services (WTS). In between lies value, including margin and profits. No strategy, says Oberholzer-Gee, should permit efforts that don’t increase WTP or decrease WTS.
Increase WTP, Decrease WTS
Oberholzer-Gee advocates for simpler strategies focused on buying low and selling high (WTP and WTS). To create value, he says, simply increase what your customers will pay and/or minimize what suppliers and employees will sell for. Do this by improving the attractiveness of what you sell; by creating a better place to work; and/or by making it easier for suppliers to sell to you. Ideally, says Oberholzer-Gee, do all three.
There are only two ways to create additional value: Increase WTP or lower WTS.Felix Oberholzer-Gee
He cites Best Buy, which faced near-certain bankruptcy in 2012 before its new CEO adopted a simple strategy. Best Buy increased customer WTP by embracing what many considered its weakness: brick-and-mortar stores. It further increased WTP and decreased WTS by inviting competitors to set up mini-shops in its locations. Apple, Amazon and other firms took up the offer, collectively investing hundreds of millions in improving Best Buy’s stores and contributing to workforce costs. In these ways, Best Buy came back from the brink.
Oberholzer-Gee uses Apple as an example of a firm mainly focused on WTP. Apple creates beautiful, quality products that make its brand prestigious and aspirational. By increasing customer WTP, Apple extends its product value, capturing greater margins. Oberholzer-Gee points out that mall owners give Apple cheap space because its stores attract customers, allowing those owners to charge other retailers more.
Unless an initiative promises to increase WTP or decrease WTS, it is not worth pursuing.Felix Oberholzer-Gee
To capture some of Apple’s magic, he suggests that you identify things that improve WTP by attracting customers, then differentiate by improving and enhancing those things. He explains that if airlines offer the same service at the same price between two cities, customers may as well toss a coin to decide. But if one adds free TV and more legroom, it can charge more and gain customers. If the large players compete on price, consider selection. If DoorDash delivers meals, maybe your service should also walk dogs or return web merchandise.
Oberholzer-Gee relates a telling but mostly unknown case involving Amazon’s failed attack on Etsy. With a buyer platform more than 10 times as large, many predicted a swift takeover of the online craft market by Amazon. Yet Etsy tripled its sales and has increased its value 10 times since. Oberholzer-Gee explains that while Amazon focuses on buyers, Etsy concentrates on sellers. Instead of WTP, Etsy emphasizes WTS. Etsy countered Amazon’s threat by offering great services to craftspeople – its suppliers.
Focus on Stakeholders
Oberholzer-Gee suggests you shift from “How do I sell more of this?” to “How do I make my customers cheer?” He turns once again to Amazon, which wanted to break into the e-reader market in the 2000s but faced Sony’s superior products and massive lead. He chalks Amazon’s success in winning a 67% market share to its focus on customer value. By adding wireless capabilities to Kindle, Amazon turned the tables on Sony. He points out that it didn’t create a better reader overall – it simply delighted customers in one significant way.
By simplifying strategy, we can make it more powerful.Felix Oberholzer-Gee
You can further improve WTP by improving work conditions. When you engage employees, invest in their learning and make their jobs easier, Oberholzer-Gee argues, employees produce more, improve customer service and increase revenues. He advises you to learn what delights employees and other suppliers. When you appeal to the passions of employees or gig workers, you’ll find people willing to lower their WTS.
In a fascinating take from business history, Oberholzer-Gee cites the Michelin brothers who, when they sought to sell more tires, pursued a seemingly obtuse strategy – they created maps and road guides, including reviews of the best restaurants in France. This complement to tires encouraged more car travel, more car sales and, thus, more tire sales. Oberholzer-Gee’s insight? Roads, gas stations, parking spots and auto repair shops complement one another, as razors and razor blades do. This can drive higher sales.
Products and services that raise the WTP for another product are called complements.Felix Oberholzer-Gee
He advises you to find your complements and consider whether to focus on those that increase industry sales overall or those that raise your WTP specifically. Tesla’s electric superchargers, for example, only charge Tesla cars. The more supercharger stations, the higher Tesla’s WTP. But Tesla’s exclusivity does little to drive overall sales of electronic vehicles, thus limiting competitor market share. Determine which avenue serves your firm, and choose accordingly. Having complements, argues Oberholzer-Gee, increases WTP and can buffer your business from price shocks.
Ask yourself whether a complement behaves more like a substitute. If you have a restaurant, for example, DoorDash may seem like a complement, but not if your tables go empty as takeouts increase. This assessment can prove difficult, Oberholzer-Gee warns. Computers, for example, should have reduced paper sales. Instead, they vastly increased paper use for many years after their introduction. Likewise, ATMs didn’t end the need for bank tellers. At first blush, he says, something that looks threatening – a substitute – might complement your products or services.
Timeless and Straightforward
Oberholzer-Gee’s ideas are not new and may lack enough detail for execution – and you can only simplify strategy to a point before it loses value. His critics dismiss this work as one that boils down to buy low, sell high. Admittedly, this timeless and simple advice is well-trodden, but – to the detriment of many firms – it is often forgotten. Without a doubt, Oberholzer-Gee offers a timely reminder using compelling case studies.
Other significant contemporary works on strategy include Winning the Right Game by Ron Adner; and Good Strategy/Bad Strategy and The Crux by Richard Rumelt.