Value Investing with Legends
Felix Oberholzer-Gee - The Competitive Advantage of Value-Based Strategy
Episode guests
Podcast summary created with Snipd AI
Quick takeaways
- A company's competitive advantage lies in its ability to create value by increasing willingness to pay or decreasing willingness to sell.
- Productivity and minimum efficient scale play a crucial role in determining a company's competitiveness.
- Network effects and complementary products/services can significantly impact customers' willingness to pay and a company's value proposition.
Deep dives
The Importance of Competitive Advantage in Security Analysis
This podcast episode discusses the significance of using strategic analysis to determine if a company has a competitive advantage. The guest speaker, Felix Oberholzer G, emphasizes the importance of a sound framework and provides real-life examples to illustrate the concept. The episode highlights the role of value-based strategies in successful companies, which either increase customers' willingness to pay or decrease employees' and suppliers' willingness to sell. The discussion emphasizes the simplicity of strategy and the need for differentiation in order to create long-term value.
The Role of Productivity and Minimum Efficient Scale
Another key point in the podcast is the importance of productivity and minimum efficient scale in determining the competitiveness of a company. The episode explores how productivity and cost reduction can lower willingness to sell, enabling a company to offer more competitive prices in the market. It emphasizes that productivity gains are not always easy to achieve and differences in management practices can lead to significant variations in productivity within industries. The episode also highlights the significant impact management quality can have on operational efficiency and the overall success of a company.
Network Effects, Complements, and Willingness to Pay
The podcast also delves into the concept of network effects and complements, specifically in relation to willingness to pay. It discusses how network effects and the availability of complements can increase customers' willingness to pay for a product or service. The episode acknowledges the complex nature of defining complements and highlights that their relationship to a company's value stick can vary over time. It also touches on the challenges of pricing and value split when interacting with complementing companies. Lastly, the episode mentions the potential impact of scale on incentivizing complement producers to develop applications or products for a specific platform.
Creating Differentiated Value and Network Effects
Creating differentiated value is crucial for success as it drives willingness to pay. Companies can determine willingness to pay through techniques like conjoint analysis, which values product features. On the other hand, network effects can also play a role in creating value. Direct network effects, like Facebook, create value by connecting people directly, while indirect network effects rely on complementary products or services. However, the belief that all businesses with network effects will become winner-take-all is flawed. Willingness to pay remains the ultimate currency of value.
Compliments, Frenemies, and Simplifying Strategy
Compliments, or products/services that increase willingness to pay for something else, can be strategically advantageous. In-house compliments allow profit pool shifting, and the implicit orientation of a platform can create differentiation. Understanding compliments and distinguishing them from substitutes is essential. Frenemies, competitors who are also collaborators, can be spotted based on their impact on willingness to pay and willingness to sell. Simplifying strategy by focusing on core profitability drivers and avoiding unnecessary activities is key for success, as seen in the case of Best Buy's remarkable turnaround.
Success comes from value creation.
For a strategic initiative to create value, it must increase willingness to pay or decrease willingness to sell. Otherwise, the resources expended will not flow into profitability.
Today’s discussion is one I was looking forward to because we’re focusing on value-based strategy frameworks and using strategic analysis to understand whether a company has a competitive advantage. Joining us to explore this topic is someone who has taken a fundamentally sound framework and brought it to life with excellent insights and vivid examples, Felix Oberholzer-Gee.
Felix Oberholzer-Gee is the Andreas Andresen Professor of Business Administration in the Strategy Unit at Harvard Business School. A member of the faculty since 2003, Felix has won numerous awards for excellence in teaching, including the Harvard Business School Class of 2006 Faculty Teaching Award for best teacher in the core curriculum and the 2002 Helen Kardon Moss Anvil Award for best teacher in the Wharton MBA program. He teaches competitive strategy in executive education programs such as the Program for Leadership Development, the Senior Executive Program for China, and a program for media executives titled Effective Strategies for Media Companies. His course, Strategies Beyond the Market, is a popular elective class for second-year MBA students. Felix is the author of numerous books, and his latest book, Better, Simpler Strategy, will be a major subject of today’s conversation.
In this episode, Felix, Tano, and I discuss how Felix defines his strategy framework, why willingness to pay and willingness to sell should be at the core of every strategy conversation, the value of ROIC as a metric of success, how Felix thinks about driving competitive advantages, value capture versus value creation, how to think about complements and substitutes, the potential for innovation and productivity growth, and so much more!
Key Topics:
- Welcome Felix to the show (2:03)
- Why a Ph.D. for career advancement unexpectedly led to Felix’s transition into academia (2:24)
- How case writing guides Felix’s interests and research focus (4:20)
- Defining a value-based strategy framework (6:25)
- Why should every conversation start with “Are we increasing willingness to pay or are we decreasing willingness to sell?” (10:08)
- Why Felix chose return on invested capital (ROIC) as a primary metric (12:40)
- Looking at ROIC distribution over the long term (14:22)
- Focusing on creating a competitive advantage inside of your industry segment (18:25)
- The significant issues strategists have with P&L statements (21:31)
- Value capture versus value creation (24:56)
- Determining willingness to pay (28:21)
- Harnessing network effects to increase willingness to pay (29:19)
- When to be worried about new entrants (33:18)
- Types of relationships between complementors (36:59)
- Understanding complements and value creation (40:26)
- Identifying complements and subtitutes (43:27)
- The effect of different management practices on productivity and willingness to sell (50:53)
- Tying willingness to pay and willingness to sell to strategy maps (56:01)
- Case study: Best Buy (58:09)
- The potential for innovation and productivity growth (1:02:09)
- Why Felix is obsessed with the differences between how we think about products and services versus jobs (1:04:50)
- Felix’s book recommendations (1:08:18)
- And much more!
Mentioned in this Episode:
- Felix Oberholzer-Gee’s Book | Better, Simpler Strategy: A Value-Based Guide to Exceptional Performance
- Youngme Moon’s Book | Different: Escaping the Competitive Herd
- Frances Frei & Anne Morriss’ Book | Uncommon Service: How to Win by Putting Customers at the Core of Your Business
Thanks for Listening!
Be sure to subscribe on Apple, Google, Spotify, or wherever you get your podcasts. And feel free to drop us a line at valueinvesting@gsb.columbia.edu.
Follow the Heilbrunn Center on social media on Instagram, LinkedIn, and more!
Remember Everything You Learn from Podcasts
