Harvard Business School Professor Felix Oberholzer-Gee joins host Chris Linnane to provide a unique insight into how companies can gain and sustain competitive advantage with business strategy.
Felix Oberholzer-Gee, the Andreas Andresen Professor of Business Administration at Harvard Business School.
HBS Online's Business Strategy course (https://hbs.me/yckhjunp)
Oberholzer-Gee’s latest book, Better, Simpler Strategy (https://hbs.me/yc7c6v4p)
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Editor's Note: The following was prepared by a machine algorithm and may not perfectly reflect the interview's audio file.
Chris Linnane:
The Parlor Room is an official podcast of Harvard Business School Online.
Felix Oberholzer-Gee:
If you're looking at what do customers really want, that's not different every day. And so you focus your strategy on these long run demands, what the customer really wants, or if you do it inside your organization, what is it that people look for in work that doesn't change every week? Doesn't change every month, of course, how you can do it, given the technology, all of a sudden, guess what, we can work from home and that wasn't so easily possible before the way you do it. I think that gets adjusted in the end. The main moments of value creation, those stay quite stable.
Chris Linnane:
Welcome to another episode of the The Parlor Room. I'm Chris Linnane, creative director at Harvard Business School Online. Today, we have a thought-provoking discussion on the topic of business strategy. I'm delighted to be joined by HBS Professor Felix Oberholzer-Gee. As an expert in strategic management, professor Oberholzer-Gee provides a unique insight into how companies can gain and sustain competitive advantage. His HBS Online course, Business Strategy, was one of my favorite courses to help create. As you'll hear in a moment, he's an incredibly engaging teacher. In this episode, we'll discuss factors like disruptive innovation, changing industry dynamics, and the need for strategic flexibility. I know you'll find his insights illuminating, so let's get right into it. What are the key frameworks and concepts people need to understand to develop a business strategy?
Felix Oberholzer-Gee:
It's interesting about strategy. When marketers meet, they don't need to talk about what is marketing. If accountants meet, there's issues to talk about, but they have a common understanding what accounting is all about and what it's trying to do, much less clear. So for some reason in strategy, and so part of what I'm trying to do in my teaching and in the course is have everyone walk out with a really crisp sense of what strategy is all about, why we do it, the consequences. And in a nutshell, it's a plan to create value for someone else where someone else might be a customer, might be someone who works in your business, might be a supplier of to the business.
Chris Linnane:
And some of the key frameworks would be things like value stick or things like that. What are the tools that you use most often?
Felix Oberholzer-Gee:
Yeah, so it starts with this notion of value creation. And then of course, since we live in a data-driven world, everybody's asking, oh, but how are we going to measure it? And the answer is, you measure value for customers by looking at their willingness to pay. You measure value for employees and suppliers by looking at their willingness to sell. And then you can combine these two willingness to pay at the top, willingness to sell at the bottom, and the difference is total value created. That's what is called a value stick.
Chris Linnane:
I feel like I understand willingness to pay because we made lots of animations. We filmed lots of videos for your course.
Felix Oberholzer-Gee:
Yes.
Chris Linnane:
But willingness to pay is just as it sounds--just the top dollar you're willing to spend on a product.
Felix Oberholzer-Gee:
Yes, it's the maximum you would ever spend. So think of a company: you raised the price, you raised the price, you raise the price. At some point in time, the customer's going to say, oh, now too much. I love the product, but it's just too expensive. That's the customer's willingness to pay. Think of it as a separation point between a customer and the company.
Chris Linnane:
Okay. And that area in between is the value.
Felix Oberholzer-Gee:
The value is the difference between willingness to pay and price. So how much did you get in the course? We talk about Apple as one example. So you spend a little bit of time outside an Apple store and you look at people's faces when they come out. They just bought an overpriced product and they couldn't be happier because their willingness to pay is still so much higher than the price that Apple charges.
Chris Linnane:
So willingness to sell, maybe not as intuitive?
Felix Oberholzer-Gee:
Yes, exactly. So I think everybody understands the key concepts at the top of the value stick, willingness to pay. And then even though willingness to sell is the exact same idea, somehow we have less intuition. We don't talk about it as often, but it's literally the same mechanism. So imagine you're an employee in my organization; I cut your pay, I cut your pay, I cut your pay, I cut your pay. At some point in time, you're going to say, oh, now not enough money given the job that I have to do. That is your willingness to sell. So, it's the least amount of compensation that it would take to keep you inside an organization. Now the better the job, the more attractive, the lower the willingness to sell. If the job is really risky, if the job is dangerous, obviously we see that companies tend to pay higher wages. Why? Oh, because you've got to compensate for the risk. So willingness to sell, adjusts for the quality of work, just like willingness to pay, adjusts for the quality of the product.
Chris Linnane:
We're in a very obviously fast-paced time. People always say that. I almost feel like people say that too much. Everything's moving fast.
Felix Oberholzer-Gee:
That's so true.
Chris Linnane:
But things are fast. Yes. How do you balance your strategy and have the flexibility to adjust as things keep changing?
Felix Oberholzer-Gee:
Yes. So, the notion first that things are changing ever faster, not so true in the data. And in fact, you can go back all the way to late 19th century business. People have always had this sense of, oh my god, so much change. Everything is new, everything is different. And so that's probably a longer conversation we could have around why is it that we always think about things are changing dramatically. When I think about the life of my grandfather when he's born, no cars, no indoor plumbing, by the time he passes away, there's the internet. Really like, am I experienced that same kind of change, or do I just have an exaggerated sense of how much is changing? In a really fast world, who knows? Exactly.
Chris Linnane:
Yeah. But it feels like, I think what you're saying is true, that we're self-centered.
Felix Oberholzer-Gee:
Yes, that's what it feels like. That is true change or no change, I think, yeah. In any case. So then the question becomes, as a strategist, do I have to rethink my strategy moment for moment? And the answer is, if you did that, you would actually get nothing implemented. We all know this sense. When we work in a company and there's a new program, there's a new idea. If you know this idea is just a flavor of the day, what does everybody do? Duck? Because you already know. Don't do anything. Don't invest because it's just the flavor of the day. So you want some longevity, some commitment to value creation in your strategy, but how do you balance that with an environment that changes so quickly? One way to think about it is that what the customers really want, what Clayton Christensen might call the job to be done, that actually doesn't change so quickly. So say I'm thinking about my relationship with banks, I want it to be secure. I want it to be really convenient. This is probably the two things I care about the most. Now how banks do convenience, that of course changes dramatically over time, but the strategy of producing convenience, that stays the same over long periods of time. So if you're looking at what do customers really want, that's not different every day, that's not different every week. And so you focus your strategy on these long run demands, what the customer really wants, or if you do it inside the organization, what is it that people look for in work that doesn't change every week, doesn't change every month. Of course, how you can do it, given the technology, all of a sudden, guess what, we can work from home and that wasn't so easily possible before. So the way you do it, I think that gets adjusted in the end, the main moments of value creation, those stay quite stable.
Chris Linnane:
That makes me feel a little bit better because every time I talk to people and they're like, and nowadays how quickly things are changing. That's right. I think, yeah, right. They are changing quickly. But your perspective of your grandfather's lifetime and how dramatic of change happened then that would be hard to top that. I dunno, maybe we're heading there with AI? I'm not sure.
Felix Oberholzer-Gee:
So everybody's favorite shopping app these days is a Chinese company called Temu, and they have incredibly low prices. They go from zero to a hundred million customers in the United States in just a couple of years. What's really interesting is the backstory. So the parent company called duo or PDD, as many people call it, because the Chinese is a little difficult to pronounce, they get started in an environment where you think there is no chance to be successful. Sort of a little like Amazon in e-commerce in the United States. China has long had two leading companies, Alibaba and jd.com, and they were the masters of e-commerce in the country. Together they had almost 80% market share. And so everybody would say, because of network effects, which we'll talk about in the course quite a bit, this idea that as you get bigger, as you have more adoption, willingness to pay increases because of network effects, it should be impossible to enter that market. And in fact, the two dominated the market for quite some time, and then this PDD company came along and you go, wow, what happened if you and I wanted to compete with Amazon tomorrow, that will probably not have a happy ending for exactly the reason that everybody understands. So what was special about PDD? A couple of things that they did that was really interesting. First, e-commerce tends to be a thing of the cities very popular in cities, in particular, more affluent customers who don't have much time, so they like to shop online and so on and so on. So they focused on smaller cities in China, which by the way can still be millions and millions of people. But outside the main centers. The second, which I think is absolutely brilliant, their first product is something that essentially was never really sold online in large quantities. Fruit. What is so hard about fruit? Well, it turns out everything is hard about fruit.
Chris Linnane:
Yes, I would think.
Felix Oberholzer-Gee:
The logistics is super, super complicated because it's perishable, so how quickly can you deliver it is a big issue. We generally do it using cold chains, which are just incredibly expensive to build. And then if you look at the margins in fruit, often not that great. So everything conspires to say that should not be a reasonable business. They do something which I just love, incredibly smart. So which you go on PDD, you see two prices. The first is a little higher and is if you buy that product right now just for yourself. The second is a lower price. If you quote unquote group buy where group can be as small as really just two or three people. So, they basically solved the customer acquisition issue because now everybody looks at it and says, oh, my aunt Rosie might also need peaches in the next week. Why don't I quickly and so on and so on and so on. What that does is it makes demand very predictable because it doesn't show up, drip, drip, drip, drip, one customer by another spread all over the country, but it shows up in a combined fashion among people who typically live close to one another because they have relationships with one another. They're my friends, they're my acquaintances, they're people I work with. So now imagine our fruit problem has gotten so much easier. It comes in predictable ways. It comes from geographically concentrated areas. So we can now contract with farmers and say, oh, actually we need this many peaches in this many weeks. And then most people are not that price-sensitive. You will have seen this on the Temu app also. You have incredibly low prices and you got to wait. Sometimes that's terrible because I'm incredibly impatient that I don't want to wait my strawberries or my peaches, do I really need them in the next five minutes? Probably not so much. And so they combine a notion of value creation. They ultimately end up using AI to predict when farmers should collect the fruit, pick the fruit so that it arrives in optimal fashion at the household where I'm shipping them. Eventually they're big enough to invest in something that looks like a sophisticated cold chain operation. But in the beginning, it was really just the core was can we do something for customers that are underserved away from the big cities in a product category that doesn't lend itself naturally to be traded online? And so we see this pattern all the time. It's always just, can I create value for someone else where someone else is someone who hasn't been very well served, where someone else requires once a product or a service that is not generally available, and then you have an explosion in the business at one point in time. They're the most valuable company in all of China because they grew so quickly. They're now a really serious contender to Alibaba and jd.com, the big superstars in e-commerce in China, where probably I, and most everybody, thought no one could ever really displace them.
Chris Linnane:
And they sell other products, obviously?
Felix Oberholzer-Gee:
And now they have, of course, tack ed on agricultural products, but also, of course, the same thing works basically for any product category. They're also very good at gamification. So it feels like I'm spending my free time playing fun games, and then I'm shopping a little on the side, so it's a match made in heaven.
Chris Linnane:
That's fascinating. I'd heard a little bit about that. We did a little bit that with Feng for his course on platforms, but that's even more detail. I thought that was just one feature, but not how they got their foothold. That's really cool. Let's head into some questions.
Felix Oberholzer-Gee:
Yeah, Perfect.
Chris Linnane:
This first one is from Renee. What's one business trend you're most excited about seeing develop over the next 10 years?
Felix Oberholzer-Gee:
I know I'm supposed to say AI, but I'm not going to say ai.
Chris Linnane:
Okay, good.
Felix Oberholzer-Gee:
I think we're in the middle of a demographic revolution that would fundamentally change how we think about the relationship between companies and the employees. As you probably know, the planet decided not to have kids other than in some countries in Africa. We are far from fertility rates that would keep the world's population stable. So, over the next 20, 30 years or so, you see most rich economies will lose anywhere from 20 to 30% of their population, and there's nothing we can do about it. Hungary is a great example. They spent almost 5% of GDP on incentives to have kids, and people just don't. So now the question is, oh my God, we're going to have fewer and fewer people, and we will compete for these people. If you think it's tough right now because the US economy is working so well and the labor market is really tight, I tell you, you have seen nothing yet. So that trend, how do I compete better for the employees with a differentiated value proposition, which is really the key here. For some reason, differentiation in the relationship with customers. That's very intuitive. Everybody does it. You don't even have to think about it. It's really at the core of what it means to be a business. Somehow with employees, we're not nearly as sophisticated. They wanted flexibility forever, and we didn't really give it to anyone. And even now, there's this fight between the bosses and the employees arguing over how much flexibility can you really have? And so I think if you want to think about the future and how to position your company thinking about competition for talent more important than anything else.
Chris Linnane:
That's awesome. Really, numbers are going down?
Felix Oberholzer-Gee:
Oh yeah. South Korea will lose about a third of its population over the next 20 years. China will go from 1.4 billion to 800 million.
Chris Linnane:
Wow. So we're what, 8 billion people in the world right now? 30 years from now. is it...
Felix Oberholzer-Gee:
Probably depending on how long girls go to school, but in places where girls don't go to school for very long periods of time, they still have large families. But other than that, basically nowhere are we close to replicating the size of the population.
Chris Linnane:
Wow. Maybe this AI thing is not going to be able to take as many jobs because there won't be as many things out there.
Felix Oberholzer-Gee:
Yeah, exactly.
Chris Linnane:
All right.
Felix Oberholzer-Gee:
Exactly right.
Chris Linnane:
Wow. Okay. This next question is from Wu Hao. How do intangible assets like brands, culture and reputation factor into strategic advantages?
Felix Oberholzer-Gee:
It's a great question. So the reputation of a company, of a product, the social prestige, all of that flows into willingness to pay. The reputation of a company obviously flows into willingness to sell. What I love about the question is think of willingness to pay as a wide open concept. There's a million things that go into it. And then the same, all the aspects of your job, of your daily work that matter to you. All of these influence, willingness to sell. And what's really beautiful and interesting about Wuh ha's question is each one of these is a potential candidate for differentiation. If I do that one thing right, that customers really care about, or if I differentiate work in a way that really changes willingness to sell, I get a particular group of employees, I get a particular group of customers who are interested in my service or this particular job. When you don't give people a reason to choose your company specifically, you're sort of like everybody else, and maybe your prices are a little lower, or maybe it's just chance I buy from you. You essentially get a random set of customers. You get a random set of employees managing these customers, managing these employees, super, super difficult. Why? Because it's a random selection. So think about the role of compensation. Last I checked, who likes money? Everybody likes money. So if you compete by paying people really generously, you have humanity apply for those jobs. But managing that workforce, oh my God, is a total nightmare because expectations are so different. If you have a clear value proposition, people will look at your company and will say, well, this one's actually not quite right for me. Another one is maybe the best for me. And so you get sorting both among customers, but you also get sorting among employees, and then the management tasks become so much easier. One statistic that I always think is so interesting, 60% of people in the US who quit their jobs say, I quit because of my boss. Can't be that all of these bosses are terrible at managing must be that somehow we make their job really difficult and we make their job difficult by not having clearly differentiated value propositions. So Wu Hao's idea of all of these levers that we can pull to create bigger differentiation is actually really important because it directly impacts the difficulty of managing customers, the difficulty of managing employees in the organization.
Chris Linnane:
Perfect. Alright. This one is from Brian. How do you balance long-term strategic planning with the need to experiment and adapt quickly in dynamic markets?
Felix Oberholzer-Gee:
Yeah, so we talked about this a little bit before. The key is to focus on these longer run underlying customer preferences. So I think I used the banking example if I want convenience, of course. How you do convenience today is radically different from how you did convenience 5, 10, 15, 20 years ago before the internet. But always keep two things in mind. You have to be long-term committed to a particular type of value creation. You can't easily flip flop from one to the other because otherwise you're not making the relevant investments. And also as engagement of employees is concerned, that's really hard In a company that doesn't have a steady course. I thought we were all about X and now you're telling me, no, no, no. Actually we're about y because I read something interesting in the paper this morning. That is not a way to win in markets. And so you want this long run consistency and then coupled with how you do it, how we're going to succeed in convenience. That of course is going to change dramatically over time.
Chris Linnane:
If you'd like to learn more about Professor Oberholzer-Gee, or his course, Business Strategy, please visit The Parlor Room Podcast dot com. You can also follow HBS Online on Facebook, LinkedIn, TikTok, Instagram, and X. My name is Chris Linnane. Thank you for listening. If you are enjoying The Parlor Room, please share the show with your friends and subscribe, rate and review it wherever you get your podcasts. Thank you.
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