[MUSIC] This is Mike Rosenberg, and this the second session in strategy and sustainability. And the segment I'm continue to talk about is strategic issues this one on consumer response. So when we talk about consumer response the most fundamental framework that we teach in strategy class in the MBA and in our executive programs is this issue of willingness to pay. Willingness to pay is what level of money, of yen, or euros, or dollars, or RMBs, or rubles, am I willing to pay for some good or service, something I want to have as a consumer. Another cost is what a cost the company which is providing that good or service to produce it, and the difference between willingness to pay and cost is really the value added that company provides. If willingness to pay is below your cost, then you have a problem. If your cost is, because then you really don't have a business anymore. Now you might have a not for profit organization because UNICEF, for example, is providing food for people who have no money and that's a good thing to do, but in most businesses you want your willingness to pay to be significantly higher than your cost. Now that creates a question, which is where is price in this framework. So price is something that you theoretically want to have somewhere in between willingness to pay and cost. Because, of course, if your price is higher than people's willingness to pay, they won't buy it. And if it's lower than your cost you'll either lose money or get in trouble with the authorities because this is what's called thumping. So one way of understanding strategy is really to look at what is the way of dividing the value created, the value that is created by providing this product or this service between the entity or the company which is providing in the customers. The more you give your customers, the happier they'll be. The more you keep yourself, the happier your shareholder and the better your returns. And I just want to hold this for a minute because this whole issue of willingness to pay is essential for the debate about the environment. Because in most segments, other than food, it has been very difficult to get people to pay extra money for goods and services that they perceive to be somehow better for the environment, and this is a very important issue, very important point. In the food category, there are exceptions. This is Whole Foods Market, for example, which is founded by John McCain and some others. And Whole Foods, of course, has been tremendously successful, with 436 stores in the states, 11 in Canada, and 9 in the UK, and the price point is quite high. People joke and they call it Whole Paycheck in the state because you spend a lot of money on food when you shop at Whole Foods. But the food is perceived to be fresher, more locally produced, probably more organic than is actually labels to tell you what it is. And people do pay more money for products from Whole Foods than they would from the supermarket down the street. Now not all people go there, and not all people are willing to pay for that. So there is a category of consumers. There is a market segment of people who do believe very strongly that they want to eat food, drink beverages, and use cosmetics which they feel are produced more naturally, and with less chemical additives and less processing. Now Whole Foods have been tremendously successful. Sales last year were $15.4 billion, the company has a market cap of $9 billion. And this has lead McCain himself to think, hey, maybe we've invented a new type of capitalism. He wrote a book called Conscious Capitalism which talks about the Whole Foods approach to doing business. because this business started with McCain and some others buying a natural food store and making that work. And then buying another one, and then adding that to the network. And then buying another one, and over time they grew into this enormous company. I'm not sure if they've invented a new type of capitalism. I do believe for sure that they have found a segment of the market which is willing to pay a lot of money for a basket of goods and services, and which is important. Now how broad that can be, how many people are that, and whether your customers or your customers, customers are willing to do that. That's a huge issue, and that's something which I think every company needs to drill into. Another thing which is useful in looking at this is a framework by Professor Kano. He's a marketing professor from Japan. And he looked at customer satisfaction against performance, and he says, there's three types of attributes if you will to customer satisfaction. The one in the middle here these are what he called performance attribute. These are things where we will pay more money for things which are better. For cars which have more horse power, for phones with more pixels in their camera, for a whole bunch of things where we just know, as consumers, that we should pay more money and we'll get more for what we pay for. He says there are other factors which operate differently. These are what he called must be quality. These are things where if it doesn't have it, I'm not going to buy it. We demand a certain level, otherwise we're not going to get close. Things need to be safe, phones shouldn't blow up. We had a recall very recently with a brand new telephone where the batteries were not working correctly and phones were catching on fire. So, safety is something which is a must be quality, you're not going to buy something because it's safe and the other one. So it's a different thing. And then excitement quality is when we buy something because it's exciting. because maybe there's not so much a difference in performance but we get really excited because it's got this feature, it's got this ability. In the case of environmental sustainability, what seems to be happening, and again, there's lots of different studies out there. As in most categories other than food, people are moving directly to must be. That if I don't perceive this to be as sustainable as its competitors, then I'm just not going to buy it anymore. And this, again, has enormous implications for business. Now in this space there's a lot of stuff going on, there's a lot of green marketing. Some of which is legitimate, and some of which is perhaps questionable and if you're interested in the University of Oregon. School of Journalism actually has a website that they put together with a company called Envriomedia, which they called a green washing index and they invite people to post products and services. And to rate, to what degree do they believe, what the companies are saying. So you've got things on their thumbs down list, like Fiji Water. It doesn't make sense to bring a bottle of plastic water from Fiji to England or the United States, from an environmental point of view. I find it hard to get my head around that. But again, the Fiji Water people say it's okay. But, you figure out what you believe, and that's why this index can help. And then, finally, this whole issue is a little bit complicated because perception and reality may be different. In the case of chickens and eggs for example, we buy eggs and the eggs can be from normal chickens, or they can be from free-range chickens, or they can be from chickens which don't live in cages. And when I think about a chicken which is not in a cage, I think about a chicken which is on a happy farm, and a happy farmer. But in fact, according to the regulations, if there's no cage around the chicken, it's not in a cage, even if there's 10,000 chickens in one big a chicken house. Yeah, so now is the life of these chickens any better than the one in the kit, I don't really know. But this stuff, when you start to dig into it, you get very, very complicated regulations, which tell you what different things can be labeled. You sometimes get some cases of misrepresentation, where companies know that people think one thing even they're doing something else, but they're very careful to follow the regulations. And then you get, what's really very, very complicated mathematics, complicated reality. When it's not even sure what things are. If you look at the difference between an electric car and advanced internal combustion car, which is cleaner. Well, that depends on how you drive, and it depends where you get your electric power from. So an electric car driven in France is probably powered at least 70% by nuclear power, and therefore has a very low carbon footprint. Whereas an electric car powered in Australia, probably has less of a good carbon footprint then maybe a brand new gasoline powered car. So when you start looking at this stuff, you've got to really do the math and really try to dig deep into the reality of the situation. If you're a consumer, if you're a company then I think you need to be very clear with your consumers about what you're talking about and what it really means. In any case, what's absolutely important is to pay attention to this whole issue of consumer response. Just because consumers don't care today, doesn't mean they won't care tomorrow. And I would urge each one of you to really look deeply at who you're selling to and who they're selling to, and try to understand in their specific business exactly what is in people's minds. [MUSIC]
