Value Based Strategy
My biggest takeaway from this trip came from a classmate — a senior figure in business — who said that everything needs a model. So, while reviewing what I'd learned, I tried to use models wherever possible, and it really did help me understand the problems better.
What Is a Model
I still can't fully grasp the precise definition of a "model," but I've summed up a few of its characteristics:
It can define certain elements in a business;
It can precisely describe how those elements interact with each other;
It helps people abstract business problems more effectively, so they can think more completely and better grasp the core problem and the key elements.
The "Value Based Strategy" Model
Willing To Pay (WTP): the highest price a customer is willing to pay; above this price, the customer walks away.
WIlling To Sell (WTS): the lowest price a supplier is willing to accept; below this price, the supplier walks away.
Price (P): the selling price
Cost (C): the cost
WTP-P = customer value
C-WTS= supplier value
Looks like a no-brainer, right? Let's look at two Harvard cases: Apple and Uber
Case: Apple — Willingness to Pay (WTP)
Apple, as the earliest personal computer to appear, very quickly became the most popular computer. When IBM came along, even though it was cheaper than Apple, was it bound to seize the market? Not necessarily — because at this point Value A = Value B: the customer value customers got from Apple was the same as what they got from IBM.
Implication here is... being more expensive than others doesn't mean I don't offer higher "customer value."
What really changed things was the rise of software. Apple's closed system was excellent, but a huge amount of software couldn't run on it. At this point "network effects" kicked in: the more people used IBM machines, the more popular they became ➡️ the more popular IBM became, the more software was developed for it.
IBM's WTP kept rising, while on the other side Apple's WTP kept falling in the competition.
Until one day, having lost its market share, Apple's revenue would no longer be enough to cover its operating costs.
What brings you down can also lift you up — the later success of the iPod owed precisely to Jobs being forced to accept making iTunes work on Windows. Here's what he said... (it's really hilarious)
"Over my dead body will Windows users get to use the iPod."
Thankfully, the rest of Apple's senior team forced him to change his mind, and he finally gave in. iTunes and the iPod are very important "complementary products" — when one product's usage goes up, it greatly expands the use cases for the other. Think razors and blades, or cinemas and snack bars.
So, with the iPhone's market share now falling steadily, will Apple be in trouble?
The problem is how big the market share needs to be, it will be really hard to be small, and also, don't miss the next disruptive scenario and product.
Case: Uber — Willingness to Sell (WTS)
In this case, let's hold back and not consider the decisive role technology played. We'll focus on just two variables: WTP and WTS
What did Uber bring passengers?
Availability: hailing a cab used to be hard; now it's easier.
Control: you know the exact time
Convenience: getting a ride is more convenient
Safety: before, I wouldn't dare let my kid get into a stranger's car
Easier payment
More transparent prices and room to choose: a clean car, a luxury car, a cheap car
But Uber isn't always cheaper than a taxi ➡️ WTP went up.
What did Uber bring drivers?
A lower barrier to entry
Flexible hours
You can do it part-time
Drivers' safety is better assured
It added a social element
There's a heat map, so drivers have more productive time and the power to choose passengers
But Uber drivers earn less than taxi drivers ➡️ WTS went down.
Implication here is... it isn't only "good product, high cost" — we can equally make "good product, low cost." The questions to ask yourself are:
Do I do sth. to make a product better? Higher the WTP.
Do I do sth. to make a job a better job? Lower the WTS.
There's also a "Selection Effect" (two-way selection) here.
If I lower WTS, the people who come have been reverse-selected — we see that many Uber drivers are highly educated people and women. A more extreme and famous example is Harvard Business School itself, where faculty and staff earn US$20,000–30,000 less than the market average. This makes it easier to attract people whose values align — at HBS, people who don't love teaching don't stay.
Strategy comes in two steps:
Step one, create value;
Step two, ask why I can do what others can't.
Ask whether you've created a new WTP or a new WTS. Pursue creating a value axis different from everyone else's. For example, ZARA and Raksul.