Hello, I'm Shlomo Maital, welcome back to Cracking the Creativity Code, Part Two, Delivering Ideas. I'm very glad you're joining us for discussion of tool number six. We're building a toolbox together, a set of proven tools that will help you build your startup. How to implement your great idea. Let's see, let's open the toolbox here and let's see what we have in here. Yes, we have tool number six, learning curves and learning organizations. One of the most important tools, perhaps a hard one a bit to visualize, but very, very, very important. So let's go off on our journey to understand this important tool. As always, I'll describe the tool, different forms of it, and then tell you some stories about how the learning curve has been used to build great businesses. Let's begin with Charles Darwin. As you know, Charles Darwin came up with the theory of evolution and survival of the fittest, and he's often been quoted in saying things that he really didn't say, but he could have. Two of the quotes often attributed to him are these. It's not the strongest of the species that survives nor the most intelligent that survives. It's the species that is most adaptable to change. The one that reacts best to constant changes in the environment. And another thing he didn't say, but he could have, maybe he should have is that in the long history of human kind and animal kind too, those who learned to collaborate and to improvise most effectively have prevailed. So this has to do with learning. Organizations that learn quicker survive. Organizations that fail to learn disappear. The company that made slide rules, and many of you don't even know what a slide rule is, it's a method for calculating and multiplying numbers using the principal of logarithms, that you add logarithms in order to multiply numbers. The company who made slide rules didn't see the arrival of the calculator, the electronic calculator, and they were gone, even though that technology signaled itself well in advance. So, let's ask, why is the ability to learn so crucial a skill? Well, first of all, we live in a global village, a global marketplace, and there are rapid changes in technology and social trends, economics, geopolitics, exchange rates, markets, interest rates. Everything is in rapid change. We have to read those changes, track the changes, but most of all, react to them quickly. We have global hypercompetition. Borders have disappeared, distance is dead as someone once said. That's not quite true but it's partly true with Internet businesses selling all over the world. So we have hyper-competition which also demands that we learn quickly. And then there's this psychological tendency of many businesses to grow complacent and comfortable when they come up with a winning formula. One of the worst things ever said, at least for management, is if it ain't broken don't fix it. If you wait until it's broken to fix it, it's too late. You have to work to repair things before they break. All of this requires good learning ability and from day one, when you start to build your startup, you must build it as a learning organization. So what is a learning curve? A learning curve is a graph showing the relationship between the number of units you have provided or produced, resold or delivered over time, cumulatively, usually from the first one to the last one. And the cost of delivering, making that product, selling it, the unit cost, cost per unit. And as we see on your screen, the unit cost for a learning curve declines simply reflecting the fact that the more you do something, the more you do a process on an assembly line, the more cars you make, the better the workers get of it and the less time they take, the less materials they waste. The cost declines. So we're trying to build as steep a learning curve as we can, and the point where the learning curve cuts the unit cost, or average total cost curve, is the point at which we break even. If you include the opportunity cost of the capital you invested, and your cost estimates, as you should, then after that breaking point, we start to make good above average profits which can help us grow the business and create better innovative products. Another way of looking at the learning curve that you see on your screen is a performance learning curve. So here, as we produce more and more units of our product or service, the quality increases, our ability to satisfy our customers improves, the customer experience improves. So if we have a learning organization, the performance learning curve increases steeply. And this, too, can create a powerful business. There is a kind of a magic circle that you see on your screen which is very important and this magic circle has created great global businesses that become market leaders. The magic circle is a feedback loop. And it works as follows. You come up with a great idea, discovering ideas, and then you begin to deliver it. And you build a learning curve. In the learning curve, the more you do something, the more of something you make, the more services you provide, you lower the cost and you raise the performance, the quality, the ability to create value. And in doing so you attract more customers. And as you attract more customers, you raise your market share and you increase your production. And as you increase your production, you race down the learning curve as you would race down a beautiful ski slope with new snow. And that enables you to lower your cost or raise your performance even more, hire better people, invest in improving your product, and you raise your market share again. If you get this fly wheel going, you can generate great momentum, and very soon become a true market leader. So learning curves are about generating this strong momentum and creating market leadership by building a steep learning curve. To do so, you need to build a culture of learning from day one. When you start your startup, think not only about who to hire and how to develop your product, but think about the culture of learning, the value of learning in the company and how you instill this as part of the company's DNA. I once visited a company, a great company, KLA, and the original founder Told my managers that I had brought on a bench marking trip, you get one chance when you start your company, that establishes the cultural DNA of the company. Take that chance, seize it, and create a learning organization. How do you do this? There are a number of practical ways. First of all, in the military they have a concept known as debriefing. After an exercise or an operation, there is a meeting. A group of people involved, the officers, the soldiers. They discussed what happened, what they did, what went well, what didn't go well. The object is not to levy blame. But simply to learn and get better in the future. To learn from mistakes and operational problems. Create a debrief culture in your start up. Everything you do, make sure that you analyze it, discuss it. Not in an atmosphere of, who's going to take the blame? Who's the fall guy? Who's the scapegoat? But let's learn about this, let's learn from it and get better and improve in the future. We also need a culture of truth-telling. Learning curves are about telling the truth. You know, this sounds like I'm a pastor in a church. Or an imam in a mosque or a rabbi in a synagogue preaching on the Sabbath. But telling the truth is not just a Biblical principle. It's vital for a company and a start up in order for it to succeed and to grow. A psychologist who taught for many years at Harvard University, he passed away in 2013 named Chris Argyris. Perhaps the only faculty member in Harvard who could say that he taught in every single faculty because what he taught was universal. He was a founder of a whole branch of psychology called organizational development. How to build a powerful, learning organization. And Chris Argyris used to teach that organizations that have a lot of smart people, and startups are such an organization, they have a problem with truth-telling. Do you know why that is? Because smart people are used to being successful. And when they mess something up, it's very embarrassing to them to admit that they've failed, even to themselves, even though we learn from failure. That's how we learn. Nonetheless, smart people are usually unaccustomed to failing. And they don't always willingly admit to that failure. So, the smarter the organization, sometimes the harder it is to get it to tell the truth. And tell the truth is an absolutely rock solid foundation of a learning organization. We need to implicate a culture of trial and error. So sometimes the only way you learn about things, the only way you can learn if your product really creates value, is to get it out there. And even if the product is flawed, even if we've messed up on some features of it, the only way you'd know that really is to get people to use it. So we need an atmosphere of let's try things and even though they fail, sometimes failure leads us to achieve success much more rapidly. So, here is a story about Ford Motor Company. And how a great company was built by an insight by Henry Ford, a genius. Leading the Industrial Revolution, the Second Industrial Revolution, and then how the learning curve that he built became an actual enemy. So I have in front of me a graph showing the learning curve of the Ford Model T, and here's the story. Let's begin at the end. Ford Motor Company today, and I looked this up just now, just this morning. Has a market value of $58.6 billion. It's a great company. Used to be a lot higher, but Ford Motor Company is still a great global company in 2015. How did this all begin? It began over a century ago. Henry Ford looked at the car business. He saw how people made cars, which was to take a pile of parts on the shop floor and then have skilled workers begin to assemble them, and then when there were no parts on the floor, you would finish the car. Then you did the next one. That was very inefficient and very expensive, and cars at that time cost $5000 in the money of those days, which today would be 20 times more. Only the rich could afford them. And Henry Ford asked himself, there's a better way. So he looked at the most efficient industry at the time. And the most efficient industry at the time was the meat packing business. So he went to Chicago and he observed how Chicago meat packers took the carcass of the cow and it was on a pulley. And as it moved along, butchers at different stations removed one cut of meat, and they did the same thing again and again. So, that they were really expert at slicing off tenderloin steaks. And at the end, there was nothing left of the carcass. It was all done and he saw this operation in Chicago meat packing plants and he thought, wow, that's really efficient. Maybe I can make cars this way. So he took the chassis of a Model T Ford, attached it to a winch, and then the winch with an electric motor, pulled the chassis along, And at each stage someone put the wheels on, the steering wheel, the doors, the windshield, and then at the end the car was finished, and another chassis came rolling along. This was the invention of the assembly line. It was brilliant invention because it created a learning curve. That is the more you did your job, putting in the wheel, or putting the wheels on the car, the steering wheel, the doors, the windshield. The more you did it, the better you got at it. So Henry Ford built a learning curve, and we now know, and I'm looking the learning curve, visualization. Which is the number of Model T Fords from the first until the 15 millionth Model T Ford, all of them identical. That was the key, a standard product. And, I'm looking at the cost of making the Model T Ford, and I see that it declines every time cumulative production doubled. The cost fell, the unit cost over the whole history of production. The cost per car fell by 15% for each doubling. This is called an 85% learning curve. And it's quite a steep learning curve. And it brought the cost of the car in the market down from $5000, down to $500, an order of magnitude. And that made it available to the whole middle class who could afford to buy a Model T. And that was Henry Ford's dream, to make every American family capable of buying a car. And then he envisions them getting in the car on Sunday after church and going out into the countryside and enjoying a picnic and improving the quality of their life. So this is the story a learning curve. Fast forward to Thomas Wright in 1936, an aeronautical engineer. He wrote an article about the learning curve and making airplanes. Airplanes, of course, were quite primitive in those days, but he also found a learning curve very similar to that of Henry Ford's, around an 85% learning curve. And, in many cases, assembly line production of electronic goods, cars, planes, have rather similar learning curves. The Lockheed Tristar had a 78% Learning curve. So learning curves are an essential part of the industry revolution and mass production of a standardized product. Makes it possible to supply a variety of products to buyers at ever decreasing prices. And of course with every blessing there is a negative on the flip side. So we learn from an article called the the Attacker's Advantage by Foster that innovative companies can attack a learning curve. So Ford Motor Company built this learning curve and for almost 20 years, used it to achieve market leadership. But there's a weak point, an Achilles heel of a learning curve and I think we can see it in the next diagram. This diagram shows lifetime sales of a product could be a Model-T, with calendar time, or years, on the x-axis, and the cumulative, or total, sum of units ever sold, on the y-axis. And you can see that, initially, the slope of the curve increases as our sales rise. Our prices fall, we have this magic circle working. As we raced down the learning curve, costs fall, more people buy the product. We race down the learning curve, we sell more and more products. Gradually, the market becomes saturated, the gradient begins to decline, although, the curve is still raising. We're still selling product and this product clearly is running out of steam. And then it's time to shift horses, to jump to a new learning curve with a new and innovative product, a modern one, that creates value and is in line with our customers' preferences. And this isn't easy because if you have a profitable product like the Model-T, it's very expensive to create a Model-A, and change the assembly line and production and parts, and the whole works. Henry Ford was stuck to his Model-T for too long. Along came a company called General Motors, created by Alfred P Sloan. And General Motors had cars of different colors and closed bodies, more modern, more value-creating cars. And Henry Ford was forced to shut down his assembly line, 1928, for almost a year. And meanwhile, General Motors took huge market share away from Ford with its innovative cars. So Foster's point is you attack a learning curve by innovation, by creating better, more beautiful products and services, and you force your competitor to move to your learning curve, rather than you try to chase your competitor down a learning curve. There's a famous article of over 48 years old in Harvard Business Review called Limits of the Learning Curve, and this essentially is the point. You have a great learning curve your costs are low but you may have to dump it in favor of a new and innovative product and start the whole process again with a higher cost level but again racing down the learning curve. This is a another story about learning curves and the dangers and benefits of learning curves. And the story involves a great management consultant, a legend named Bruce Henderson. Bruce Henderson was a senior consultant at Boston Consulting Group in the 1960s and 70s, and he was a consultant who made the learning curve a very valuable tool for managers. And the story is this, Britain has a many venerable motorcycle brands. Those of you who love motorcycles probably know the names, Triumph, Norton, Wilier, BSA, and the British companies, these British companies dominated the American motor cycle market especially at the high end with engines that were 500 CCs or bigger. So in the 60s they had almost half or more of the market, the profitable high-end market in America's motorcycle business, and then they lost it. And they lost it within a period of three or four years, and their market share in America went down to almost zero, and you have Japanese companies coming along Yamaha, Kawasaki. Honda, and the question is, how come? And this happened very quickly and the British didn't know what hit them, so they formed a Parliamentary Commission of Inquiry and they hired Bruce Henderson, the American consultant, to come and do a postmortem. It was too late to save the industry and, he pointed out that essentially what happened is the Japanese companies created a much better learning curve, lowered their costs, lowered their prices, increased their market share, gained lower costs, lower prices using the learning curve and in no time. The British companies who had a much less steep learning curve, they were gone, they were out of business. So there's a lesson here, as we quoted Darwin or what Darwin might have said or could have said. If you do not adapt to your environment quickly and your competitor does, they will take the market you may be gone. So let me digress a bit here and think about learning, not in a mechanical sense of reducing costs or increasing performance, but learning also in sense of imagination. I'm very fortunate I have 13 grandchildren, and they range in age from little babies to 21 years old, and they're all truly wonderful. And from some of my grandchildren I learned about kindergarten. Some kindergartens are really wonderful and they have exercises that help stimulate young children's imagination. Although, I must say that the children that really need that stimulation are we adults, not the children. Children have great imagination. One of the exercises I really liked that kindergarten teachers use, is called look, think, and wonder. And this kind of is part of a learning organization, and I've seen great entrepreneurs use this with tremendous success and impact. Step one, look, really look at something. We call that zoom in, in part one. Zoom in, look at something, look at every detail, study it. Analyze it. Really, really, really see it in every single aspect. Step two, think, analyze, process what you're seeing. Think about what you're seeing. Analyze. Why is this? Could this be better? Is this comfortable? Is it too big? Is it too small? How could we do this better? Think, really analyze what you see. And then step three and this is key, wonder, imagine and dream, head in the clouds. What if this were different? What if it were red? What if it were multicolored? What if it were completely different? What if it were impossibly amazing? How could I make this impossibly amazing? So, learning curves are not just mechanical. They're not just Henry Ford reducing the cost of a Model T from $5000 to $500. They are also, learning curves are about imagining and wondering based on zoom in analysis, and then zoom out. Head in the clouds, imagining and wondering. And then back down, feet on the ground. Let's see, can we do this? Can we deliver value? So it's time to test your understanding. Please go to the assignment section, if you wish, and answer these multiple choice questions about learning curves. And it's also time for some action learning. So for your idea, I'd like you to think about designing a process that provides value, that delivers value for your customers. So that your business is constantly driven to test its value proposition. Constantly works to improve and innovate its products and services. Constantly struggles to lower costs one penny at a time, one euro at a time. Lower your costs and increase your value. Value up, costs down. Always, always scanning the world for relevant changes in behavior preferences, markets, changes in technology, crucial trends. And then thinking about how you can quickly adapt to those trends in order to survive better and faster than your competitors. So this ends tool 6, the learning curve. It's a visual tool. In most cases, in many cases, you can put a graph up on the wall showing how your costs are falling, where your performance is rising. Share that information, track that information, see if you can get that curve to be a little more steep. Learning curves are made, not born or inherited, or they don't just happen. You create them, and you create them by creating a learning organization. This concludes tool six. In our next tool we're going to talk about something important, but sometimes regarded as boring, tracking the money. How do you do the basic accounting that keeps track of the money going out and the money coming in?