[MUSIC] I've already mentioned the importance of the consumer experience, and I thought I would put this idea of value creation into its historical context. And what I'd like to introduce is a very simple 3Es I call them. Efficiency, Effectiveness and Experience. And the idea is that you need all three of them in order to be a successful business to be a successful enterprise, but increasingly it's the experience part that differentiates you. It's increasingly difficult to have an efficiency advantage or even an effectiveness advantage. And just to give you an idea of how we value things or how we perceive quality or beauty or whatever it might be, have a look at this chap here. This is Joshua Bell. Joshua Bell is a famous violinist. And in this image, he is playing his Stradivari from 1713, it cost 3.5 million dollars. He bought it himself, and he's embossed in Symphony Hall. The auditorium is packed with 1,000 people and even the cheap seats went for about $100 per seat. And he's playing some of the most complex music, some by Bach, Chacon. And the audience is hushed, he's very particular about it being quiet. And at the end of the performance, the whole auditorium erupts into applause. Now, the Washington Post decided to run an experiment. They asked themselves, well, what would happen if we took the same product, if you will, and put it into a different context. And they went into a metro station, a subway station in Washington DC which has great acoustics, and he dressed up as a busker, just some musician on the street trying to earn a little bit of money. And he's playing with the same Stradivari. There is security around. He's playing the same pieces, and they decided to wait for about 1000 people to pass through this hall. This is in the morning during the week. And you can imagine what happened. A crowd gathered everybody was hushed. They were mesmerized and they broke into applause at the end. Not quite. Take a look at what happened. So as you saw, not much happened at all. Few people stopped, few people gave money. He made something like $32.17, which means people gave him pennies for his performance. The reason he made $32 in the first place is because one woman gave him $20. She was interviewed afterwards, like many of the other people were. And they asked, why did you give him $20? And she said, I think it was Joshua Bell. I didn't know he had to do this to make money. So it's quite a humorous moment. But now ask yourself, what was different in this situation? Well everything was different and maybe it wasn't the right audience. They wouldn't have paid the money in the first place. It was not the right time. They weren't in the right state of mind. They weren't ready, they weren't expecting, they didn't desire to hear this music. And they couldn't judge it without the branding, without the context, without the conductor, the stage, the auditorium, the advertising and maybe the ticket prices they paid in the first place also lead them to appreciate the piece more. So it's the entire experience that's different between the Boston Symphony Hall and the Metro Station. And that's what the experience is about, it's not just the product. If we put it in a different place it's not the same. And I'll show you this image here is one I took in the underground here in London, which was quite a different experience. A crowd had gathered, what you're seeing is the busker is actually taking a picture of the crowd to show his girlfriend. because he's so excited a crowd had gathered, it was at 10:30 at night on a Thursday, I'd comeback from the theater with my wife, and some women started singing while he was playing his guitar. Somebody was sort of playing on his suitcase like it was a drum. It was one of those London moments which was magical in some sense. The quality of the product? Not so great. The experience? Fantastic. So let's go on a historical journey when it comes to the customer experience. And if we think about the three B model I talked about before, business, brand, and behavior, let's sort of allocate the three E's to this model. It's not a perfect match, but just stick with me for a moment. If we go back in time from around the Industrial Revolution to maybe 1950, of 50, 60 years. If you will. The whole idea about business was efficiency. It was about having access to the supply. It was controlling supply. Demand was far in excess of supply at that time. And if you think about some of the products from that time, the Ford Model T, The famous car which showed up in one color and it was black. The big invention of the time was the assembly line. And the assembly line was all about, if you think about the efficiency aspect. If you think about trying to get this level of output, can I do it with less input? That's basically the challenge of that time. And people like Frederick Taylor, who is one of the fathers of modern scientific management, it was all about the ergonomics trying to, you know, reduce waste in that sense. And by reducing waste, but keeping the value the same, that's how you increased, or the output the same, that's how you increased the value at the end of the day. Efficiency is alive and well today. In a recent report from PWC, when they interviewed CEOs, they asked them what were some of the major projects you're launching. 70% of them said they were launching a major cost cutting Initiative. And this is in the midst or on the back, if you will, of a global recession. Where they probably were doing the same cost cutting even the year before. So there is still a strong focus. Now, efficiency experts are also amazing branding experts. Here is efficiency in a variety of language. 1, 6, Sigma, that's greek, right? That's a cost saving initiative at least in practice. The Japanese characters you see there is spelled kaizen another way we've branded what basically is a cost cutting initiative. TQM, total quality management again Results in many cost cutting initiatives. What's interesting, we don't have the same focus on branding processes when it comes to effectiveness or experience, so keep that in mind. Now if you think about, does cost cutting actually work? There's a recent report in the Harvard Business Review by my colleague Jules Goddard who talked about this as well. And what they looked at were basically companies within their sector with below average costs, versus those who had above average costs. Now it turns out that very few of the companies with below average costs had above average profits. But those with above average costs had above average profits. At least, if you did have above average profits, it was typically because you also invested in higher costs. So, when it comes to cost cutting, it's okay to cut the bad costs. But be careful not to cut the good costs. [MUSIC]
