Digital Value Creation

A Simpler Digital Strategy

July 28, 2021 Tamas Hevizi
Digital Value Creation
A Simpler Digital Strategy
Show Notes Transcript

If you ask someone how to create more value in business, you’re likely to hear the obvious - drive revenue growth and cut costs. That is of course the physics of any business. But every executive knows that it is not that simple. To increase revenues, you likely have to spend more and if you cut costs, revenue tends to suffer. Either way, revenues, and costs are just indicators, they are not specific actions you can take. In the last few years, business strategists redefined what value creation means. It is all about the steps you take to improve customer experience and increase the customer’s willingness to buy. Let’s see how that may change your digital value creation strategy.

If you ask someone how to create more value in business, you’re likely to hear the obvious - drive revenue growth and cut costs. That is of course the physics of any business. But every executive knows that it is not that simple. To increase revenues, you likely have to spend more and if you cut costs, revenue tends to suffer. Either way, revenues, and costs are just indicators, they are not specific actions you can take. In the last few years, business strategists redefined what value creation means. It is all about the steps you take to improve customer experience and increase the customer’s willingness to buy. Let’s see how that may change your digital value creation strategy.

Every year I take a refresher on the latest in value strategy as the field moves very quickly. There is a clear shift from focusing on lagging indicators of value like revenues and costs to leading behavior indicators like willingness to take action. Influencing people as they make a decision and take action is the cutting edge of strategy today. It may be most obvious in the field of digital marketing but it is much broader than that. As companies formulate better digital value creation strategies they are actually focusing on three things: increasing the customer’s willingness to buy at a higher price, the employee’s willingness to work for less, and the supplier’s willingness to sell their products and services at a lower price. At first glance, this may sound very theoretical but it is far from it. It is as practical and real as you can get with strategy.

INSEAD has a series of courses focused on digital disruption and how strategy needs to shift as a result. They argue that ultimately all digital value creation comes down to maximizing the customer’s willingness to pay higher prices. The only reason a customer would do that of course if they perceive you are differentiated from your competition. Willingness to pay tends to be higher than price. You may be willing to pay $10 for a burger if you’re really hungry but if all burgers look the same for about $3, that is all you will pay. To maximize your revenues you must get as close to the customer’s willingness to pay as possible. You need to understand what the customer considers most important for their value (better digital experience, convenience, and so on) and rank higher than your competitors on those metrics. 
In the last 2 years, digital customer experience tends to dominate all customer touchpoints and rank higher on what customers consider valuable. That is how your strategy and your digital strategy become one and the same. As I mentioned in a prior video, customers now compare any interaction with a brand to their digital experience. Digital is where you must differentiate to increase willingness to buy. 
So your revenue growth strategy becomes your strategy to increase willingness to buy with a superior digital experience. That may mean a better storefront, mobile customer support, personalized recommendations, or faster returns processing.

Professor Felix Oberholzer-Gee at Harvard goes beyond just the customer. He wrote a book titled Better Simpler Strategy. He observed that a quarter of the companies in the S&P 500 have lower returns than their cost of capital. Despite great resources and access to the best strategic minds, a lot of companies still struggle to create value. He argues that corporate strategy programs are often way too complicated and should be simplified. Companies take on too many initiatives that do not drive value creation or destroy value. I spoke about this topic extensively on this channel.  We should have much fewer strategic initiatives focused on only what creates value. 

He argues that there are basically 3 ways we can create value. 
First - you increase the customer’s willingness to buy. 

The only way to do that is to be better at the criteria the customers consider most important. He calls the ranking on these criteria value maps. You need to place higher than your competition on these value maps in order to increase your customer’s willingness to buy.  Say the customer considers sales experience, speed of delivery, and support the most important, then that is where you should rank highest and where you should focus your strategic initiatives. If you do not differentiate on the customer’s top value criteria then you can only differentiate on price. And that leads to revenue erosion and lower profits. Makes sense, right?  As it turns out, it is relatively simple to construct these value maps and they strongly correlate with long-term revenue growth.

What about the supplier's willingness to sell? 

This term has been used less in strategy. It is actually easy to understand.  To keep your costs low, you need to convince suppliers to give you better terms or bigger discounts. Your strategic projects should significantly improve your supplier experience. You can increase their willingness to sell at a lower price if you rank higher on their value criteria. This may mean more predictable order forecasts, better payment terms, online ordering portals. Whatever helps your suppliers reduce their own cost of sales can be passed on to you. This is how you can increase their willingness to sell at a lower price. You need to understand what their value map is and how you rank against other buyers. Your strategic and digital initiatives on the supplier side should focus on areas that increase their willingness to sell. This will drive your purchase costs down and improve your profitability. 

The last category Felix talks about is the employee’s willingness to sell. 

Employee experience determines the talent you can acquire and how much you have to pay them to retain them. This in turn impacts your labor costs which are a major element of your profitability. If you create an employee experience that is the ultimate dream job for your employees, then they will be willing to take less compensation for all the other intangible benefits they receive according to their value maps. You need to understand what experiences employees value the most and rank higher on those than the general market. Your employee-focused digital initiatives will need to improve these value criteria. Once again, if your benefits, workspace, hybrid work policy, and career development programs are undifferentiated then the only thing is left is price, which is higher compensation and probably higher turnover.

That’s it. When your strategy is value-driven, all your initiatives focus on these3 things - increasing the customer’s willingness to buy and your supplier's and employees' willingness to sell. Understanding the value maps of customers, suppliers and employees give us a roadmap to launching high-value strategic projects. 

Talk Soon.