[MUSIC] Now, moving on to the concept of effectiveness, what we thought of as the assembly line or the supply chain, if you think at the industry level, the focus shifted towards value creation. And Michael Porter of Harvard Business School introduced this concept of the value chain. Now remember, efficiency was all about having a certain level of output with less input. The value chain is quite different. It says, well, what if I have these inputs? Can I get more out of them? Both of them lead to productivity gains, but they have a fundamental different approach. So if you think about the people side of things, for example, one is about, can I do the same with fewer people? Can I basically fire people? Or from a value perspective effectiveness, can I train them? Can I develop them so I can get more out of them? So things have fundamentally shifted in this model. This idea of effectiveness at the product level, we can look at something like a razor. Think of the original safety razor by Gillette. It was a single blade and the idea was that you wouldn't cut yourself. The next big innovation was the second blade. Now, if you think about what the two blades do, well, you can think about the hair being inside, here is under the skin. The first blade gently lifts the hair out of the follicle. The second one swoops in and cuts it off. And then the hair disappears under the surface of the skin, so you have a baby smooth face. Now, the next big innovation of Gillette was the MACH3. Three blades. You might ask yourself, what's the third blade going to do? Now, it might not matter. Maybe it exfoliates your skin, because within six months, the competition came in with four blades. And of course, a few years later, Gillette came out with the Fusion which has five blades. As far as I know, they're already working on the MACH14 with 14 blades. So you can think of this idea of effectiveness, this race in terms of performance. But all of these races kind of have diminishing returns. The second blade add a lot over the first blade, the third just a little bit less, and so forth. If we add more and more blades, maybe you even have diminishing returns. And industry after industry, whether it's your computers or your telephones, whatever it might be, we don't compete on these functional benefits anymore. Most people don't even know what the RAM is on their PCs anymore. So think about one of the leaders in this space, Apple. Did you choose your Apple product, whether it's a computer or whether it's a phone based on its quality? Did it have a better battery life, higher screen resolution, a better camera? My guess is you didn't. Otherwise, you might have chosen an HTC or a Samsung. Now, if you think about that moment of choice, the moment of purchasing the product, go back to this concept of value chain. What we actually see in the value chain is the absence of a very, very critical component, and that's the consumer. We have the customer who is just at the tip of that value chain. They're paying good money for what you have created, but they're not part of the value creation process at all. If we think about values created within the value chain. And that's the real focus here of experience. My contention is there is no value created outside of the customer experience, outside of the consumer experience. Let's go back to the value chain. You'll notice something peculiar. Value is created entirely within on the production side of things. At the very tip of that value chain is the customer. They're paying money for the value you created, but from the customers perspective, this is not value at all at this stage. All it is is cost, it's something they paid for. The value is actually only created through use, and that's not even the customer, that's the consumer. And in many ways, that's the magic of Apple. What Apple has done is they've tried to get you to use your products as much as possible. If you think of iTunes for example, iTunes really helped sell iPods. iPods had been around for several years before they took off. And it was once iTunes that you could buy your music in easier ways, you could manage it in easier ways, and listen to it in creative ways. That's when the hardware sold much more, because they figured out the entire consumer experience. It wasn't just the hardware, their product, it was the consumer experience. And when Apple test their product, if you think about what quality metrics do we have on the customer experience, we don't have many. How do you test quality? It's probably something functional, something you can measure very easily, but do you actually measure what the customer experience is? My guess is not. Take a look at Apple, go to their website, maybe you have access to their stores. And you'll see that everything they do is about lowering the barrier to the consumer experience. They make everything easier, things are simple, the products are integrated. If you go to their website, they have videos on how to actually use these things. If you go into their stores, they have a genius bar where they can give you advice. They have a whole stage here in the store in London where they have demonstrations every afternoon on how to use your photography software, your music software. They have people talking about how to write books and use your editing software. It's all about allowing you to be creative. So value is created within the consumer, not within the product. The product allows you to release the value if you will. And that's really the magic of the Apple formula. Now, I gave you some examples of how you could find out about Apple products in the store, the demonstration of the software, the help you might get. That is the customer journey. There's many, many moments that matter, and each one of those is its little experience in and of itself. And the big shift is, that what we consider value creation within the industry is a cost for the consumer, until the value is released through use. And what we can do from a branding perspective is to increase the perceived value of the products by demonstrating, by documenting what the consumers actually experienced. Think about buying an energy efficient light bulb. To what degree can we demonstrate to the consumer maybe a few months in that they have been saving on their energy bill? In a business to business setting, what if we are selling a water saving device? Do we actually measure and document the value we've provided? Because then the customer might actually recognize the value you've provided and purchased you again or engage in word of mouth. One of the leaders in this space is SKF and they sell, for example, ball bearings at quite a premium, maybe 30% to the competition. And they realized that many procurement functions are focused on the landed costs. Meaning, what did I pay for the service, for the product, for the ball bearings in this case. But actually, the value you're providing to the customer is the total cost of ownership, or the reduction in the total cost of ownership. So, SKF have developed sales tools where they can demonstrate that value at the moment of sale, track the value over time, and they've even aligned their pricing so they engage in a risk sharing agreement. They will only get paid a certain amount if they deliver on what they promised. And that's the entire and radical shift we see going from efficiency to effectiveness, to the experience. At the business side, if it's just about efficiency, what you're really doing is you're assembling commodity like products. They're being sold in markets. At the brand level, you're designing products for customers, or you're delivering services to clients. Whereas experiences, you're really staging these experiences to consumers. So the questions I'd like us to end this first module with are, thinking about, well, what dominates your thinking in your industry today? Are you more efficiency focused, more effectiveness focused, or more experience focused? How much effort and attention is the top management paying to each of these three Es? And then take us over, look at you and your competition. Do you actually have efficiency advantages? If you do, are you actually trading on a lower price? Is that your differential advantage? Or are you pretty much the same as your competitors on the functional, the basic functional benefits that are being offered? And maybe whether you know it or not, whether you're acting on or not, the experience is actually what is differentiating you in terms of the competition. So as we go towards next module, what we're really going to think about, if it really is about experience, how do I design and deliver experiences? How is that a different capacity, a different capability from designing products and services? My contention is it's a radical change in the way you design and deliver value to your consumers. [MUSIC]
