Value Hierarchy in a People-Centric EconomyFluffy-maltese-puppy-dogs-white-puppies-wallpaper-700x438

Are we obsolete? There are endless articles about what society will do once artificial intelligence, robotics, 3-D manufacturing, drones, and driverless cars can design, make, and deliver products and services better, faster, and cheaper than humans.  Will there be any jobs?  What does GDP mean when products are ubiquitous and almost free?  Will our world be a dystopia or a utopia? 

Obviously we are a long way from any of these extremes and we may never get there — at least in a form we can imagine today.  For reasons I write and speak about, I am an optimist in this debate.  But certainly many companies are, and many more will be, struggling.   

One major reason for this is that few companies know how to innovate at the speed of what is now a global innovation economy.  Growing numbers of companies can’t innovate fast enough to keep up with the market and go away.  

Another part of the struggle, which is not written about much, is that new products increasingly deliver almost all of their value to the consumer — not to the companies producing them.  That is terrific news for consumers, but it is another challenge for those companies.

The digital world powered by Moore’s Law is the most extreme example of this.  Digital companies need to double their product’s performance every 9-36 months at the same cost to stay even with global competition.  That is, these companies must, over time, deliver exponentially more value to their consumers to be in business.  Of course, if a company doesn’t do this, it quickly goes away.  Nokia, Motorola Mobility, Sun, Atari, Wang, ROLM, and Digital are only a few of the hundreds of major companies that have been overwhelmed by Moore’s exponential tsunami.   

It is a treadmill for many.  They are trapped in Lewis Carroll’s Through the Looking Glass:  “Well, in our country,” said Alice, still panting a little, “you’d generally get to somewhere else if you run very fast for a long time, as we’ve been doing.” “A slow sort of country!” said the Queen. “Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” 

Of course, if you can run twice as fast and deliver great value to customers, a company like Apple can thrive as never before.  It is now the most valuable company in the world with a market capitalization of over $750 billion.  However for many companies in Apple’s supply chain, it is a different story unless they have unique value, like Qualcomm, TSMC, or Universal Display.  Many suppliers without a major competitive advantage have margins that are woefully thin.  

Consider, for example, original equipment manufacturing (OEM) companies in Taiwan.  For decades Taiwan has led the world in the production of many essential parts for computers and mobile devices, such as circuit boards.  Morris Chang, the Chairman of Taiwan’s TSMC (which has a strong competitive position), said that the average Taiwanese company’s profitability has dropped from about 10% ten years ago to about 3% today.  That is unsustainable.

If most products become low-cost commodities, then where is the value?  Consider Nike.  On a flight from San Francisco to Hong Kong I sat next to the senior VP for Nike in Asia.  I asked her, “Tell me about the products you sell.”  She said, “They are not terribly interesting.”  I said, “Really, I am interested in them, how do you think about the value provided?”  She responded, “We don’t sell products, we sell a bit of an athlete.  Our products are commodities that can be made anywhere in the world for almost nothing.”  

Several months later I was flying from Seoul to Singapore and sitting next to me was another VP from Nike.  I asked what he did and he said, “I have the most important job in the company.”  I reacted with interest, “That’s fascinating, what do you do?”  He said, “I am the one who gets and takes care of the talent.  Do you have any idea how important and hard that is?  If one of our athletes gets in trouble it can represent billions of dollars to us.”  

Nike sells a bit of identity from a famous athlete. Its sport products are how they deliver that value.  How valuable is that?  It allows Nike to sell $30+ products for $100-$300.  Nike is a $100 billion dollar company selling good products by branding them as uniquely special.  

Nike and Apple understand the value hierarchy.* It looks like this:

Highest value

Human connection 
Higher meaning

Lowest value         

Conceptually, the higher up the value hierarchy a company’s product or service goes, the greater the value it can offer.  Commodities are products like wheat, pork bellies, gasoline, pencils, and most computer circuit boards.  That is a bad place to be.  You must have a competitive advantage to make enough profit to prosper.  

As Tom Friedman of the N.Y. Times says, “Average is over.  Be the best at what you do or go home.”  For example, wheat farmers can increase the perceived value of their products by growing unique strains of organic wheat.  Nokia became the market leader by providing excellent, durable phones at an attractive price.  But they did not innovate fast enough, the market got far out in front of them, and in less than a decade they were out of business.  

Apple created the iPhone, which was not just a phone – it was a computer platform that provided other customer solutions and services. It allowed Apple to garner a premium price and become enormously profitable.  But the iPhone itself was just the beginning of the value Apple created for its customers.  Apple eventually provided major services like iTunes, and unique experiences like Siri, which further increased the perceived value of its products, allowing even higher profit margins.  

Near the top of the value hierarchy is higher meaning.  Apple also addressed this fundamental need.  Apple tells their customers that they are uniquely sophisticated and smart because they appreciate the elegant, convenient products that Apple produces.  Their advertising says, “Think different.”  At Nike, their higher meaning is to make customers feel special by giving them a connection to a famous athlete.

At the top of the hierarchy is human connection.  That includes close interactions and connections with others, such as love, shared emotions, empathy, and the desire not to be lonely.  Today human connection is just beginning to be addressed by companies such as Zoosk and numerous social media and networking sites.  

But deep human connection mostly remains an unmet customer and market need.  Apple is only starting to address it with FaceTime and other apps.  Advanced versions of Siri will go well beyond answering questions to becoming your 24/7 personal assistant and loyal friend, as it was originally designed to be by SRI International.  Because products and services for customers are so complex today, a Siri-like interface will become essential going forward.

A thought-provoking article by David Nordfors suggests that in the future, when robotics and computers are able to perform most human tasks, many core products will become near commodities.  It will be the personal, human connections that garner increasing value in the economy.  He calls today the task-centric economy, which he predicts is going away.  What is emerging is the people-centric economy.  I would add, the people-like centric economy

As indicated above, I believe that in broad terms the world is moving that way.  Many products are becoming objects that can be made at extremely low cost.  Most of the world can now afford a smart phone. Going forward customers will have access to unlimited designs for clothes and shoes ordered over the web and delivered to their homes in hours.  It will be possible to buy clothes in any color or size and that matches your body shape, style preference, and identity.  Products with higher meaning, such as star appeal, social group or team connection, spirituality, unique design, history and memories, and individual identity will provide superior customer value.  But moving all the way up to a more complete human connection is harder. 

One famous indicator for assessing whether robotics and computers have superseded humans is the Turing test.  It is when an intelligent observer cannot distinguish a performance difference between a computer and a person.  IBM’s Watson computer passed the Turing test when it became the world’s best Jeopardy player. 

There are numerous Turing tests.  When, for example, will a computer be better than Steven Hawking at physics, or Mozart at composition, or everyone at everything – living or dead?  Or when will a robot be better than a fireman saving lives in a burning retirement home or an electrician salvaging essential electrical service after a winter snow storm? 

Some think that most of these achievements will be passed in just 30 years.  I think it will be considerably longer because humans are endlessly adaptable.  Creating that adaptability and creativity in a general-purpose, robotic-computer system will take time.

Another interesting question is when robotic-computers become indistinguishable in all ways from other humans?  That is, when will it reach the top of the value hierarchy for human connection?  That is certainly a different and much harder assessment than the Turing test. 

Nordfors quotes Martin Buber, who wrote I and Thou. “There are only two types of relationships:  I-You and I-It.  I-You is connecting with another living being.  It’s a completely different feeling from relating to an object.  My friend is a You; my computer is an It.” 

Nordfors suggests the need for a “Buber test,” which is not about doing tasks but about being human.  He concludes, “The Buber test is as important as the Turing test for discussing the emerging economy.  The humane economy defines meaning: improving interpersonal connection and relating to other living beings.”  This is an interesting, valuable observation by Nordfors (more discussion here).

But how much of the economy will ever reach this level of the value hierarchy?  Most of today’s product and service companies are struggling to get off the bottom of the value hierarchy. Some get to the distinguished product level (Toyota), a few get to the service level (Nordstrom), fewer get to the experience level (Disney), and even fewer get to the higher-meaning level (Tesla). 

Today, some products, such as communication systems and services, like Facebook and thousands of social networking sites, address a bit of the need for human connection, but they are far from the Buber test.  Going forward Facebook will move in that direction by becoming dramatically more “real.”  It will allow virtual 4-D interfaces (i.e., 3-D in real time), Siri-like personal assistants, and the transmission of emotions and other sensory indicators. Can traditional newspapers survive in this world, where connection to a human or human-like entity carries so much value?

Of course many products address unique combinations of the needs listed in the value hierarchy.  There are never-ending ways of satisfying customers, although if the bottom levels of the value hierarchy are not sufficiently addressed then the higher levels can be inaccessible.  (See Customer Value Analysis on this site for why that is so important.) 

Tesla is an interesting case.  It has a higher purpose: “You are an exceptionally perceptive person helping lead the world into the future of transportation.  You have a strong identity as one cool character who wants to have the highest quality products that are both unique and fun. You are environmentally green and you want to demonstrate that to the world.” 

For many people with enough money this is a compelling value proposition.  And, for the most part, Tesla superbly delivers on that promise.  But the car’s current refueling value proposition is barely acceptable.  Waiting 40-minutes for a full charge at a Supercharger station is a long time, especially when compared to 5-minutes for a gasoline refill.  For most people that long charging time removes a great deal of value from the car.  Obviously Tesla is working feverishly to get the charging time to under 10-minutes.  And, ultimately, when cars become driverless they will develop a human-like persona where our “chauffer” aviator, who always knows the best route, does what we ask it it to do.

Consider next Amazon Prime and Google Shopping Express. Both companies are working to provide one-hour delivery of products.  Eventually a huge array of products will be available, including groceries, fast food, hardware, pharmaceuticals, computer products, and most everything else we use in our normal lives.  Delivery by either drones or driverless trucks will create a disruptive service innovation – immense product selection, no trips to and back from the store, and essentially no wait. To make an order you will simply talk to your smart phone’s Siri-like personal assistant, which already knows the brands you prefer, and your order will show up an hour later. 

Over time Amazon Prime, Google Shopping Express, and others will add experiences, higher purpose, and human connection to this offering.  For example, imagine a Bobby Flay avatar as your cooking companion. We will become connected to our favorite human-like avatars, which will provide a sustainable competitive advantage for those companies that develop them.

How much might this delivery service be worth to you?  Even if you value your time at the minimum wage of $15 per hour, if the service saves you 1-2 hours it is worth $15-$30 each time you use it.  For most of the U.S. population the service is worth much more than that.  This will become a trillion dollar innovation. 

It is startling to note that the need for personal connection is so great that simple stuffed toys, such as Nemutan in Japan, are being used to replace human relationships.  Not surprisingly, anatomically-correct, artificial-intelligence robotic dolls are a fast growing market.  Nordfors ironically notes that it is not robots we need to worry about; it is cute robots. Or, as my colleague Norman Winarsky says, once we feel that our computers love us, we will have entered a new era. And for narcissists, why not an avatar that is an exact copy of themselves.

By way of comparison, today’s major alternative for aspects of a human-like connection is a pet. Dogs superbly fill this need for almost 100 million U.S. owners.  But dogs can be inconvenient when the owner travels and the pet must be placed in a kennel, and they require constant care, like feeding and going for walks.  These may not be such serious detriments because some owners apparently love their dogs more than their spouses.  Dogs are never going to fully pass the Buber test, although in some human-like ways they are already world-record holders. Of course we may eventually bioengineer them to be even friendlier, cuter, and more human like. Clearly there will be increasing competition between humans, dogs, and robotic alternatives!  

But we are getting ahead of ourselves.  Companies must first learn how to move up the value hierarchy.  Companies in Taiwan, for example, are struggling to do just that.  Commodity OEM manufacturing is going to China and other low-cost regions of the world.  And even in China, robots are being widely employed because labor is rapidly becoming too expensive.  

That will only work for a while.  Being superb at cost and quality is a diminishing competitive advantage.  Chinese companies will also need to provide new, clearly differentiated customer value.

An additional complication for companies in Taiwan and China is that, since many are in the middle of the value chain, they have little or no contact with end customers.  It is hard for them to move up the value hierarchy.  Companies optimize their entire enterprise around their existing business models.  A truism is, “A company is a prisoner of its business model.”  Redirecting a company’s business model was always excruciatingly hard, even when the world changed ten-times slower than today.

The only systematic way for companies to create higher value is to start a wholly new division or company that serves customers directly.  Many, if not most, of today’s companies will go away.  It is arresting that the average lifetime of an S&P 500 company is now down to under 18 years and company lifetimes continue to drop.  

This is a time of great and unpredictable change.  To survive companies need to profoundly improve their innovation practices and move up the value hierarchy. Getting to the human connection level for most companies will be a grand challenge but some will and they will be among the world’s leaders.

Improving a company’s ability to innovate at the speed of the market is a serious undertaking.  In a world where many technologies improve exponentially, a company must innovate exponentially or fall behind exponentially.  If you want to survive and then thrive, you better start – yesterday. 

* Special thanks to Michael Markowitz, Norman Winarsky, and Herman Gyr who help inspire and add to this discussion.