Book Excerpt | The Future Of Competition - How to Put Your Customers to Work

Managers are under intense pressure to create value. But value creation by improving operational efficiency?through such initiatives as outsourcing, business process reengineering and workforce reduction?has limits in terms of morale and potential. Companies must couple such efficiencies with innovation and new business development. Internally generated profitable growth is at a premium. Even the best companies have struggled to create new markets or sustain a high rate of commercially successful innovations. C.K. Prahalad, professor of business administration, and Venkat Ramaswamy, professor of marketing, both at the Michigan Business School, contend in their new book, The Future of Competition, that companies need not (and should not) go it alone when trying to create value. Their research suggests an emerging economic model of value cocreation, in which consumers and companies routinely collaborate to create value that, to a large extent, is personalized to the individual. This excerpt explains that concept.

Variety Does Not Equal Value

A profound (but silent) transformation of our society is afoot. Our industrial system is generating more goods and services than at any point in history, delivered through an ever-growing number of channels. Superstores, boutiques, online retailers and discount stores proliferate, offering thousands of distinct products and services. This product variety is overwhelming to consumers. Am I buying the right digital camera? Am I getting the best treatment for my chronic ulcer? Am I signing up for the right service? Simultaneously, thanks to the propagation of cell phones, websites and media channels, consumers have increased access to more information, at greater speed and lower cost, than ever before. But who has the leisure and the proficiency needed to sort through and evaluate all these products and services? The burgeoning complexity of offerings, as well as the associated risks and rewards, confound and frustrate most time-starved consumers. Product variety has not necessarily resulted in better consumer experiences.

For senior management, the situation is no better. Advances in digitization, biotechnology and smart materials are increasing opportunities to create fundamentally new products and services and transform businesses. Major discontinuities in the competitive landscape?ubiquitous connectivity, globalization, industry deregulation and technology convergence ?are blurring industry boundaries and product definitions. These discontinuities are releasing worldwide flows of information, capital, products and ideas, allowing nontraditional competitors to upend the status quo. At the same time, competition is intensifying and profit margins are shrinking. Managers can no longer focus solely on costs, product and process quality, speed, and efficiency. For profitable growth, managers must also strive for new sources of innovation and creativity.

Thus, the paradox of the 21st-century economy: Consumers have more choices that yield less satisfaction. Top management has more strategic options that yield less value. Are we on the cusp of a new industrial system with traits different from those we take for granted?

The emerging reality forces us to reexamine the traditional system of company-centric value creation that has served us so well over the past 100 years. We now need a new frame of reference for value creation. The answer, we believe, lies in a different premise centered on cocreation of value. It begins with the changing role of the consumer in the industrial system.

The Power of the Connected Consumer

The most basic change has been a shift in the role of the consumer?from isolated to connected, from unaware to informed, from passive to active. The impact of the connected, informed and active consumer is manifest in many ways. Let us examine some of them.

Information Access With access to unprecedented amounts of information, knowledgeable consumers can make more informed decisions. For companies accustomed to restricting the flow of information to consumers, this shift is radical. Millions of networked consumers are now collectively challenging the traditions of industries as varied as entertainment, financial services and health care.

For instance, active health-care consumers (no longer the passive recipients of treatment, a.k.a. patients) are using the Internet to learn about diseases and treatments; the track records of doctors, hospitals and clinics; and the latest clinical drug trials and experimental procedures?and to share their personal experiences with others. Consumers can now question their physicians more aggressively and participate more fully in their own treatment modalities.

Global View Consumers can also access information on businesses, products, technologies, performance, prices and consumer actions and reactions from around the world. Twenty years ago, the two car dealerships (General Motors and Ford) in small towns in North America would probably have influenced the driving aspirations of a local teenager. Today, a teen anywhere can dream about owning one of more than 700 car models listed on the Internet, creating a serious gap between what is immediately available in the neighborhood and what is most desirable.

Geographical limits on information still exist, but they are eroding fast, changing the rules of business competition. For example, broader consumer scrutiny of product range, price and performance across geographic borders is limiting multinational companies’ freedom to vary the price or quality of products from one location to another.

Networking Human beings have a natural desire to coalesce around common interests, needs and experiences. The explosion of the Internet and advances in messaging and telephony?the number of mobile phone users is already over one billion?is fueling this desire, creating an unparalleled ease and openness of communication among consumers. Consequently, "thematic consumer communities," in which individuals share ideas and feelings without regard for geographic or social barriers, are revolutionizing emerging markets and transforming established ones.

The power of consumer communities comes from their independence from the company. In the pharmaceutical industry, for instance, word of mouth about actual consumer experiences with a drug, and not its claimed benefits, is increasingly affecting patient demands. Thus, consumer networking inverts the traditional top-down pattern of marketing communications.

Experimentation Consumers can also use the Internet to experiment with and develop products, especially digital ones. Consider MP3, the compression standard for encoding digital audio developed by a student, Karlheinz Brandenburg, and released to the public by the Fraunhofer Institute in Germany. Once technology-savvy consumers began experimenting with MP3, a veritable audio-file-sharing movement surged to challenge the music industry. The collective genius of software users the world over has similarly enabled the codevelopment of such popular products as the Apache Web server software and the Linux operating system.

Of course, the Internet facilitates consumer sharing in nondigital spheres as well: Aspiring chefs swap recipes, gardening enthusiasts share tips on growing organic vegetables, and homeowners share insights into home improvements. More crucial, consumer networks allow proxy experimentation?that is, learning from the experiences of others. The diversity of informed consumers around the world creates a wide base of skills, sophistication and interests that any individual can tap into.

Activism As people learn, they can better discriminate when making choices; and, as they network, they embolden each other to act and speak out. Consumers increasingly provide unsolicited feedback to companies and to each other. Already, hundreds of websites are perpetuating consumer activism, many targeting specific companies and brands. America Online’s AOL Watch, for example, posts complaints from former and current AOL customers. Blogs (Web logs), which present an individual’s worldview through texts, images and Web links, facilitate public expression and debate.

The Web has also become a powerful tool by which groups focused on issues such as child labor and environmental protection seek corporate and governmental attention and promote reforms. Consumer advocacy through online groups may have an even greater impact than company marketing. When Novartis AG launched clinical trials of a promising leukemia drug, Gleevec, word spread so fast on the Internet that the company was inundated by demand from patients wanting to participate. Activism by leukemia patients who were on the early clinical trials for this drug led to a highly effective lobbying effort via Internet support groups to speed up its production and even get the Food and Drug Administration to expedite its approval.

What is the net result of the changing role of consumers? Companies can no longer act autonomously?designing products, developing production processes, crafting marketing messages and controlling sales channels?with little or no interference from consumers. Consumers now seek to exercise their influence in every part of the business system. Armed with new tools and dissatisfied with available choices, consumers want to interact with firms and thereby cocreate value. The use of interaction as a basis for cocreation is at the crux of our emerging reality.

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