[MUSIC] So in this section, I want to spend a little time with the framework that I just introduced. So I can show you what an effective tool it is for planning marketing strategy, and for facilitating conversation within your company about different assumptions people have. So let's go back to what the framework said. As you recall, there were three dimensions. There was the operational excellent dimension. There was performance superiority dimension and there was customer intimacy dimension. So, the first thing you do in using this framework is to think within your industry for your product and your firm, what does it mean to be operational excellent? Typically these are things like customer service, reliability, cost considerations. Delivery, inventory control, those kinds of things. But what's important here is that you determine what operational excellence means in your industry. And so you define that axis in terms of what your customers think, your competition thinks and you think determines that axis. Similarly with performance superiority. What does it mean to have the superior performance in your industry? Financial service, it's about the performance of stocks or financial instruments. It could be product design, it could be style, it could be technology. Whatever it needs to be product superior or performance superiority that's what goes on this axis, that's what this axis is. And this axis is customer intimacy, which mean you're delivering what the customer wants. It's about customization, delivering to what unique aspects that a customer demands. And what it means to be truly customer intimate, this is something that is going to discuss in the next section. But think about what does it mean to be customer intimate in your industry. That's the first thing to do, agree on what these dimension stand for in your industry for your product or service. The second thing to do is to determine what fair value is. Fair value is the expectation that the customer has on each of these dimensions. And you must meet fair value, if you're below fair value customers reject you, so you've got to be at least at fair value. What the framework suggests is that you're going to meet fair value on two dimensions and be the best on one. But first you have to determine what are those customer expectations. And these customer expectations change over time, they're not static. They change as customer expectations escalate. So just to give you an example, let's talk about what would happen in a brand new industry when a brand new product enters the market. As an example, let's think about Apple's iPad. And when they introduced that product, it kind of changed everybody's expectations for what a tablet should be. When you have a brand new market and nothing existed before, customer's expectations are at the origin. They don't have any expectations because the product doesn't exist. When a new product comes into the marketplace it tends to enter with a new product feature. And so when the iPad came in, it came in with a new feature, the product features of that iPad, and that was better than what people expected. And Apple was wildly successful. Overtime people started to expect that a tablet had to have at least those features and that became the new fair value. So there was pressure on Apple to come up with new feature and they came up with an iPad mini. So they came up with a smaller size screen, a better resolution on the screen. Different kinds of things that would exceeded those expectations. But over time, those new features will become the new expectations, and you can imagine, as the product gets more and more mature, the fair value or the customer expectations can go far out. If you're in a very mature product category, customer expectations are quite high. And if you want to enter a mature category, you really have to deliver products that meet very high customer expectations. In most markets if the expectations in product features becomes so high that it's very hard to differentiate and be a leader on that. Many times what you tend to see is movement on the operational act. So people will deliver those benefits at a cheaper price. And over time in mature industries, these, the competition here gets very hot for very efficient, low cost, in personal computers for example, the features are quite high and the price is driven down. And so you see very high expectations on both the operational and the performance superiority dimensions. It tends to be in mature markets that operational excellence is high, performance superiority is high, but the customer intimacy line is not as high. So this tends to be what you'll see in mature product markets. But you can imagine lots of different scenarios. For example in personal services, you might have very high expectations on customer intimacy. You expect your hairdresser to cater the hairstyle that they give you to you, so it's very personalized. It may be that they use state of the art products, but perhaps they're not very good at operational excellence. So you might see in some market like that, very high expectations on customer intimacy, very high expectations on performance superiority, but not as high in operational excellence. The point here is, you determine what are these axis and what are customer expectations for fair value on each of these axis. This is actually the hardest part of this framework, determining what fair value is. You can do market research on it, you can kind of predict it based on your experience in the industry. Some people use the average of all competition to plot this. Sometimes fair value is, at the minimum, and all firms are above fair value on some dimension. Other times, fair value or customer expectations are higher than any firm can deliver to. So for example, in the airline industry, I would argue customer expectations are for 100% on time landings and on time take offs. But no firm commits to that or can perform to that level. So in that case, operational excellence might be higher than any firm is delivering to. So that's the first step in this framework. Determine the axis and determine where you are, where your fair value mark is on each of these axis. So the next thing you do is you plot how your firm is delivering to fair value. So let's just for the sake of argument assume fair value in this industry is here, and is here, and is here. So then I either do market research or discuss it and try to get some kind of managerial insight on where my company is on these different dimensions relative to fair value. So it may be that I'm below fair value on performance superiority. Maybe I'm above fair value on operational excellence. And I'm kind of hitting the relatively low expectations on customer intimacy. So that's the next thing where is your firm. Then you plot where's the competition. So perhaps the competition is way below you in operational excellence but above you on performance superiority and also hits the spot on customer intimacy. Now you're ready to plan strategy, and what you want to do in this case is plan short term strategy and long term strategy. In the short term, what you have to do, if you remember what the framework says, it says, you have to meet fair value on two dimensions and be the best on one. So if I was the red firm, what I might argue my short term strategy would be is to get up to speed on performance superiority, because I'm below. And if I don't keep up with my product, I might ultimately be shaken out of the market. And so in the short term, I might plan strategies to improve my performance superiority. In the long term, perhaps, I want to be known as the market leader in operational excellence. So I need to do what it's going to take to keep that operational excellence leadership. And become like a Walmart or a Vanguard, that's known for being the best at operational excellence. That's just one example of the kind of strategy you can plan. But what's great about this framework is it forces everybody to identify their assumptions, to map in a very complex market what matters to the customer, where customer expectations are. Where you think the competition is delivering, and where you as a firm are strong and weak. And it puts it right on one framework. Now this framework can be used very systematically. You can run market research studies to actually plot where you and your competition customer expectations are. The other thing to remember is fair value's not a static concept. These things change over time. So you need to map this over time to see where customer expectations are. The other thing that happens, and you have to think about this as a dynamic strategy, is when you make a move, competition reacts, they're not just standing still. So you need to think, well if I move here or if I move there, what's competition going to do? So it gives you a way to plan those kind of moves over time. And lastly, you think about how costly it is to move up at these different kinds of things and that might effect your strategy. Perhaps it's very, very costly to move along this product axis, and so you may think about whether or not that's the right short-term strategy. Maybe that's something you're going to do in the long term, because you have to invest more to be able to move here effectively. The other thing you need to consider when you think about all of this is that these dimensions are not independent. If I move along the product dimension here, I'm going to change my cost position. I'm going to change my efficiency. So as I move here, I might be lowering my operational excellence. And similarly, as I become more product featured or product focused to deliver the technology and design, I may become less customer intimate. And so you have to think about the interactions of all these things. But what's very, very nice about this framework is that it's clear and simple and it maps in a very direct way, some of the intricacies and complexities of your marketplace, of your firm and of your competition. And for that it's a very, very effective planning tool. [MUSIC]
