The Value Bar Tool is a strategic tool that simplifies and makes a strategy stronger by assessing and linking all activities within a company to link value creation and financial reporting. In this article, we analyze the definition and operation steps of value bars and share them with you.
The Value Bar Tool, invented by Felix Oberholzer-Gee, a tenured professor at Harvard Business School. The aim is to establish a holistic and easy-to-understand framework for evaluating and connecting all activities within a company, linking value creation and financial reporting, and ultimately simplifying the strategy to make it stronger.
1. What is a value bar
The idea of the value bar is that the basic intuition of value-based strategic dependence is simple: companies that are financially successful in the long term create significant value for their customers, employees, or suppliers. This concept can be illustrated by a simple graph, the value stick, as shown in the image below.
The Willingness-to-pay (WTP) at the top of the value bar, which represents the customer's perspective. Specifically, this is the maximum amount a customer is willing to pay for a product or service. If companies can find ways to improve their products, customers' willingness to pay will rise.
价值棒的底部是销售意愿（Willingness-to-sell，WTS），它代表着员工和供应商的视角。
- For employees, willingness to sell is the minimum salary they are willing to accept for a job. If companies can find ways to make jobs more attractive, employees' willingness to sell will decline. If a job is particularly dangerous, the employee's willingness to sell will increase and the employee will demand a higher compensation package.
- For suppliers, willingness to sell refers to the lowest price they are willing to sell for goods or services. If businesses can find a way to make it easier for suppliers to produce and ship products, suppliers' willingness to sell will decrease.
So we can divide the value bar into 3 value zones by price vs. salary/cost.
- The first part of value is the difference between the willingness to pay and the price, that is, the value that the enterprise creates for users
- The second part of the value is at the bottom of the value bar, that is, the difference between the employee's salary and the employee's willingness to sell, which is the satisfaction that the employee obtains at work; or the difference between the price given by the enterprise to the supplier and the supplier's willingness to sell, which is the supplier's transaction surplus.
- The third part of value, the difference between price and cost, is the value that belongs to the company.
So what we need to do is to make the middle of the willingness to pay and the willingness to sell longer, and strengthen the company's value creation. As for how to increase the willingness to pay, reduce the willingness to sell, and make the value creation in the middle longer, we can start from three aspects.
1. Means of increasing willingness to pay
1) To improve products and services
We provide value to target users through products and services, so continuously improving products and services based on user needs and improving user satisfaction is the core way to increase willingness to pay
2) Complementary
We refer to products or services that increase willingness to pay for other products or services as complementarities. These easily overlooked helpers can increase the willingness to pay for almost any product that is created. For example, the complementary products of automobiles: roads, parking lots, gas stations, repair shops, GPS, and driving schools. Without them, the value of the car would be greatly reduced.
The importance of complementarity cannot be overstated, without which the willingness to pay for many products would be much lower, and sometimes even zero. Smartphones and apps, printers and ink cartridges, capsule coffee machines and capsules, e-books and tablets, razors and blades, slippers and manicures, electric cars and charging stations, soups and bowls: complements are everywhere.
So how do we go about finding complements? Here are five insights to help us better understand what complements are the best fits for us.
- Complementarities can help increase willingness to pay. What is really valuable in the competition is user pleasure, and complementary products are a powerful means to increase the willingness to pay, which can create higher value for users.
- More often than not, complementarities don't seem to have anything to do with your core business. Therefore, identifying complementarities requires creative thinking about the user journey.
- We always want complements to be cheap (unless we sell them ourselves). This is because the formal definition of a complementary product is that if a decrease in the price of one product increases the willingness to pay for another product, then the two products are complementary to each other.
- Complementarity is friend and foe. It may seem simple to distinguish between complementary and substitute products in mature areas, but it is often difficult for emerging technologies or emerging industries to distinguish between complementary and alternative products. For example, food delivery platforms such as Ele.me and Meituan are complementary or substitute products for restaurants. If a customer discovers a new restaurant through a food delivery service and wants to dine at the restaurant one day, the food delivery platform is a complementary product to the restaurant. But if no one patronizes the restaurant because the customers are ordering takeout, then they become a substitute. Identifying complements is difficult because complements and alternatives are friends and foes. Producers of complementary goods co-create value, while also bargaining for the distribution of value, sometimes even with the smell of gunpowder.
- A company that produces its own complements can shift the profit pool from one of its complements to another.
3) Make good use of network effects
Network effects are a positive feedback loop: more and more merchants attract a large number of customers, and then more merchants join. Network effects can bring a market to a tipping point: a bounce from very low usage to widespread adoption, and vice versa.
It would be helpful to distinguish between three different types of network effects. They can increase willingness to pay by increasing product usage, but the mechanism by which each of the three occurs is different.
- Direct network effects. Under the direct network effect, the willingness to pay for a product increases for each additional customer who buys the product. All communication tools are good examples in this regard. Imagine the first user to sign up for QQ: at that time QQ has no value because there are no other friends to interact with him; With the gradual popularity of QQ, its willingness to pay has increased with the increase of users with QQ. So, if a lot of people have the same product, and that product becomes more valuable or useful as a result, then there's a direct network effect.
- Indirect network effects. Increase users' willingness to pay through complementary products. Consoles and games, cars and repair shops, smartphones and apps are all prime examples of indirect network effects. As more users buy smartphones, technology companies develop more apps; And a large number of easy-to-use apps can increase the willingness to pay on smartphones, which in turn will attract more users. Indirect network effects often produce a dynamic relationship between chickens and eggs. If we have more charging piles, more people will choose new energy vehicles; However, there will also be a shortage of charging piles because there are too few people driving new energy vehicles. To break this deadlock, companies often invest in complementary products with limited demand, hoping to stimulate indirect network effects.
- Platform network effects. These platform companies will attract different types of users (or suppliers), and the willingness of one type of user on the platform to pay will increase as other types of users increase, such as hotel booking platforms. When more and more people use Ctrip to book hotels, hotels will find it more advantageous to sell rooms on Ctrip, so more and more hotels will be launched on Ctrip, and more hotel options will attract more customers. Many companies create value by connecting different types of users. For example, Didi links passengers and drivers, Taobao attracts buyers and merchants, and the starting point attracts readers and writers; In these examples, the willingness to pay of one user group (drivers, merchants, writers) increases as the number of other user groups (passengers, buyers, readers) grows.
2. Means of reducing the willingness to sell
1) Improve employee satisfaction
Employees get pleasure and satisfaction from their work because of the difference between what they get paid and what they're willing to sell. If a company pays its employees at the best level to retain them, i.e., the pay is on par with the willingness to sell, then the company can increase employee satisfaction by raising salaries or making the job more attractive.
At first glance, richer pay and improved working conditions have the same effect: higher employee satisfaction. While the end result may be the same, there are important differences between the two strategies. Higher compensation reduces a company's profit margins. In this process, there is no creation of value, only redistribution of value. In contrast, more attractive working conditions create more value by reducing willingness to sell, i.e., the minimum salary that employees are willing to accept.
2) Reduce supply costs
In general, the relationship between the company and the supplier will be strained, and the two will compete with each other for fixed value. Companies want to increase their profit margins by reducing the amount they pay to their suppliers. If nothing else, this will lead to a backlash from suppliers, who also want to increase their surpluses. These practices create no value, and whoever wins, the cost is paid by the other.
Is there a second way to improve the company's profit margins? If we can reduce the willingness of our suppliers to sell, then more value is created, and our company and suppliers can achieve a win-win situation. So how can you reduce the willingness of suppliers to sell? By making it more cost-effective for suppliers to do business with the company, any convenience that can be provided to suppliers, and any investment that increases their productivity, can reduce suppliers' willingness to sell, which in turn creates more value. For example, retailers provide suppliers with sufficient product sales data and user consumption data to help suppliers replace goods, iterate and even develop new products that are more in line with the current user consumption habits, and help suppliers increase their market share, and suppliers are naturally willing to reduce their willingness to cooperate with sales.
3) Improve enterprise productivity
Productivity determines whether an enterprise is really leading, and economies of scale, learning effect, and management quality are the three forces that determine enterprise productivity.
The beauty of scale, looking for the best scale for the enterprise to win. Economies of scale are not always better, economies of scale mean that the average cost decreases as the company grows. However, if the increase in cost exceeds 10% under the condition of 10% growth in enterprise scale, it means that the scale is not economical, and the growth rate of cost is greater than the growth rate of the company's scale; Only less than 10% means economies of scale, so companies should look for their own minimum effective scale. If the size of the business is less than the minimum effective size, it will not be able to compete with larger competitors on cost. However, once a business reaches the minimum effective scale, continuing to scale up will no longer create a significant cost advantage. In fact, for many companies, the average cost increases as they scale up due to the complexity of running a large organization.
The learning effect makes the competitive advantage of the enterprise continue to rise. For businesses, the longer the learning curve, the faster the efficiency increases. But we also need to be aware of the negative effects of learning, which can trap companies and abandon innovation as they benefit from running a unified process multiple times.
Manage quality and enhance competitive advantage through differentiation. Good management practices and operational effectiveness help create differentiation across organizations. They are difficult to achieve, slow to proliferate, and can be the basis for long-term competitive advantage. There is no doubt that improving the quality of management can create significant value. But it's important to remember that good execution is never a substitute for an effective strategy. If you can't increase your willingness to pay and reduce your willingness to sell, no matter how perfectly implemented a project is, it will not be able to create value.
Second, how to apply value sticks
Step1: Form a value bar discussion group
The value bar is a tool for formulating corporate strategy, so the formation of the seminar group must include the decision-making level and management of the enterprise, involving the heads of business departments and supporting departments such as finance, personnel, and administration.
Step2: Build a value map, visualize the trade-offs, and depict the value bar
Companies that want to do everything for the sake of what they get will not be able to create significant value. From the perspective of the efficient use of enterprise resources, it is generally recommended to choose a maximum of three value drivers to increase the willingness to pay and reduce the willingness to sell. So how should companies decide on the most critical drivers?
First, list all the value drivers in terms of users, employees, suppliers, business productivity, etc., rank by importance, and score the performance of the company that drives them. As shown in the figure below, a value map is built from the user's perspective.
Secondly, the company's performance is also scored against its competitors, and each value driver is compared.
Finally, based on the company's strategy and the differences with competitors, the three most important value drivers for increasing willingness to pay are determined. Then, according to this logic, the three most important value drivers to reduce the willingness to sell are determined, and the corporate value bar is depicted.
Step3: Based on the value bar, formulate a strategy, clarify resource allocation and task division
Based on the corporate value sticks depicted in the previous step, focus on the key value drivers, formulate specific strategies to improve the company's performance score of these factors, and clarify the company's resource allocation and task division.
Columnist
Listen to the tide, WeChat public account: 弈呓 (ID: YiYi_TANG7980), everyone is a product manager columnist. An Internet practitioner who has done operations, data, and products, and a promoter of enterprise digital transformation.
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