Professor of Marketing; Academic Director of The Hive
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Cheaper, faster and stronger are the value drivers that business has prioritised for more than a century. We call them efficiency and effectiveness. The importance of experience, the third E in this equation, is also undisputed although, as is often the case, Peter Drucker summed it up neatly when he said: ‘The customer rarely buys what the company thinks it is selling’. In today’s global marketplace it is time to review the accepted hierarchy of the ‘3Es’. I’m going to put the case for experience to leapfrog to first place. Why? One reason is that it is difficult nowadays to create or sustain an advantage based on efficiency or effectiveness. In terms of efficiency, your prices need to be competitive to be considered, but with few exceptions it is not the reason you are chosen over your closest competitors. Ditto for effectiveness. Your products and services need to be of a required quality level to be considered, but any valued difference is ever more quickly imitated. Businesses are running faster just to stand still when it comes to efficiency and effectiveness.
I also believe it’s time to review whose experience we are looking at: it’s fashionable now to talk about customer experience, and that is valid, but businesses could truly differentiate themselves by looking beyond the purchaser to the user – the consumer.
This isn’t to say that you don’t need all three of the ‘3Es’ to be successful. On the contrary. Cost cutting is often essential. PWC’s survey of global CEOs last year found that 70% were launching a major cost-cutting initiative, roughly the same percentage as in the previous two years.
But common sense—supported convincingly by Deloitte data across industriesi —suggests that businesses simply cannot create maximum value via cost cutting alone: companies tend to be value creating (profitable) when they have higher-than-average costs compared to their peers, and value destroying (unprofitable) when their costs are below average. So when it comes to efficiency, the difficult-to-achieve objective is to identify and cut the bad costs (the fat), and to avoid cutting the good costs (the meat) that are investments into increasing effectiveness.
The challenge of competing on effectiveness, on the other hand, is twofold. First, in a global world, competitors will quickly follow suit when a quality advance has market appeal. Second, as industries mature, effectiveness gains rapidly hit diminishing returns, until customers no longer care about any performance difference between close competitors. Consider Gillette which launched the disposable safety blade in 1903. It lasted most of a century, until the dual-blade Sensor Excel launched in 1993. Then, just five years and more than $1 billion in research, development and marketing later, the Mach3 added a third blade. Rival Schick hit back with a fourth blade in 2003, so Gillette launched five blades in 2005. And 2016 brought a six-blade trimmer from Korea’s Dorco. But don’t hold your breath for a Gillette Mach7 any time soon. Like most maturing industries each successive blade delivered nowhere near the incremental value of the previous one. Five blades good, six blades better? I very much doubt it.
However, companies continue to conduct competitive benchmarking studies where they visualise the customer value proposition using effectiveness curves that measure the performance of certain attributes against their competition. An airline might consider its perceived on-time arrival performance or leg-room and use this to decide whether a price premium is justified should they perform better than the competition—a point-of-difference—or a discount if they lag, i.e., a point-of-inferiority. Unfortunately, based on competitive benchmarking and diminishing returns customers subjectively perceive most of these dimensions as points-of-parity. They award little credit to a safer airline, because they wouldn’t consider flying with an unsafe airline in the first place. It is important for the customer, but not in their choice of brand. In B2B procurement, suppliers have to meet standardised performance levels, creating commodity-market conditions that put tremendous pressures on prices.
But the real problem inherent in effectiveness thinking might be best illustrated by Michael Porter’s value chainii, a concept core to companies’ operating models. The ever-popular value chain visualises a chain of activities common to all businesses, horizontally displaying primary activities—operations, service, logistics, marketing and sales—and vertically displaying support activities, such as procurement, HR, technology and infrastructure. This effectiveness model presents a fundamental change to the efficiency thinking that guided the design of the assembly line in manufacturing. Whereas efficiency is all about producing the same level of output with less input, effectiveness is about producing a higher level of output with the same level of input. Both of them lead to productivity gains, but they have a radically different philosophy.
Professor Michael Porter’s Value Chain
What is striking in the visualisation of the value chain is the absence of the customer (the buyer) and the consumer (the user) in the value creation process. They might be surveyed to help deliver the specs, but value is entirely created by the business. Value is created for consumers, and not through them.
While the value chain (and concepts such as the sales funnel and sales loop) are useful conceptual tools, they ignore the most critical creator of value in the process: the consumer, who might moreover be an altogether different entity from the customer: a parent shopping on behalf of children, or a procurement department in B2B settings.
Putting the consumer experience, the third ‘E’, at the heart of the value-creation process fundamentally changes the way you think about everything from the purpose of your business to the behaviours of your people. In the absence of consumption, all the company and customer have created is a cost. In other words, there is no value created outside of the consumer experience.
Take Apple. People love its products because of what they can do with them to enrich their lives (experience). The more they do so, the greater their loyalty to the brand. And Apple knows this. The iPhone is clearly not bought for its low price (efficiency). Nor based on a side-by-side comparison of features (effectiveness). When you visit Apple stores and the Apple website, they are all about helping you to use the products as easily and as much as possible. Thus the point of iTunes was to enhance the iPod. Enabling people to more easily find, buy, manage, share, and listen to their music served the entire consumer experience. Perhaps not coincidentally, iPod sales only really took off once iTunes arrived.
Value is Only Created in Use, the Rest is Cost
Implicit in Apple’s approach is the recognition that its products exist only to allow consumers to create value through use. To use an analogy from physics, Apple turns consumers’ potential energy into kinetic energy. That is the magic of the formula. And that is why it tests its products and services not in terms of engineering metrics or coding elegance, but through the delight on consumers’ faces when they use them.
Most businesses are still in their infancy when it comes to competing strategically on the basis of experience. Take a look at your budgets, major projects, or the metrics you employ. Are more around what you put in—or around what consumers take out? While companies are usually keenly aware of their own activities, they are often only vaguely aware of those of the consumer. This is evident in Forrester’s 2017 customer experience index,iii for example, with most industries averaging ‘poor’ and ‘OK’, only a few brands making it into ‘good’ territory and none rated ‘excellent’. In other words, unlike for efficiency and effectiveness, there is much room for improvement through differentiation based on experience.
This is surprising, because companies appear to recognize that experience is the key differentiator today. A convenience survey of over 1,100 participants in my brand management MOOC (enrol for free at: https://www.coursera.org/learn/brand), saw them perceive efficiency (“A lower price”) to be the least differentiating for their company (6.2%), and effectiveness (“A better performing or higher-quality product or service”) to be a distant second (21.4%) to experience (“A better experience across various moments-that-matter in the customer and/or consumer journey” at 72.4%). Data by IBM, Gartner, Forrester, and McKinsey and tell a similar story, with experience being more of a driver of repeat purchase than attracting new customers in both B2C and B2B markets. Efficiency and effectiveness are important, but today’s fiercely competitive environment has generated commodity-like conditions, albeit at ever-better quality and ever-lower prices. Experience, therefore, becomes a higher priority.
Everything changes when you think about the consumer journey across a variety of experiences, a non-linear journey across time. In this perspective the behaviours of the organization are not so much about making and selling, but about designing and delivering or stimulating differentiated experiences. There are many moments-that-matter along this journey, one that is the real spine of brand differentiation.
The consumer journey cuts across business functions
Critically, the consumer journey cuts across a myriad of business functions—the very functions that are so neatly deconstructed in Porter’s value chain: IT, operations, services, and communications. These functions typically reside in business silos, but need to work in concert to providing a valued consumer experience. On the one hand, companies have to disappoint at only one moment-that-matters to undermine the perceived value of the endeavour—think about your luggage being lost after an otherwise satisfactory trip. On the other hand, it is not sufficient to provide a problem-free experience either. That is entirely unremarkable. You must find ways to delight your customers at key junctions, and this is best done by understanding the nature of the journey itself—the goals and desires the consumer is aiming to satisfy. For example, by recognising the simple fact that its best consumers are those who love to cook, Hong Kong’s Towngas transformed itself from an efficiency-driven commodity supplier to an experience provider that enhances cooks’ goals with means ranging from apps that delight with recipe ideas and cooking classes, to ready-to-cook meals that address their time constraints. Along the way, it has not only bolstered the bottom line, but won Hong Kong’s most trusted consumer brand award.
I am convinced that a focus on experience will soon be the new normal, that today we are at the dawn of the age of the consumer. Take big data. In the past, this was all around the sales funnel: what business wants from the customer. New data is increasingly around what people are actually doing, whether it is fitness bands that track how fast and far you run, how you read the news online, brush your hair with L’Oreal’s smart brush, see the world through Google Glass, to medical implants that measure blood-sugar levels for diabetics, or the industrial internet that has transformed how Volvo trucks serves its customers. Your smart phone is loaded with dozens of sensors, and the days of dumb clothes are numbered. The industrial internet alone is estimated to be worth $300 billion by 2020. And it is largely about usage data. The old maxim says, “If you can’t measure it, you can’t manage it.” Well, when it comes to the consumer experience, increasingly you now can.
The competitive environment for brands and branding has fundamentally changed. It is not just about being cheaper or better. You have to have competitive prices and the right quality of solution, but there won’t be much daylight between you and your closest rival on those dimensions. Instead, you must focus on consumers’ goals and their experiences—those of users and not just buyers—in order to create superior value through use and, thus, a sustainable business for yourself. But this requires a fundamental shift in thinking, one that extends beyond traditional concepts such as the value chain and the sales funnel. It is about transforming the consumer, rather than yourself.
(i) For more insight into brand management and how the world’s most successful brands work from the inside out sign up for this free MOOC from Professor Tavassoli: https://www.coursera.org/learn/brand
(ii) Jules Goddard (2014) “The Fatal Bias”, Business Strategy Review 25 (2); and Michael E. Raynor and Mumtaz Ahmed (2013) “Three Rules for Making a Company Truly Great,” Harvard Business Review (April).
(iii) “The US Customer Experience Industry Index, 2017” by Rick Parrish relies on responses from nearly 120,000 adult consumers of 314 brands across industries.
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