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The Starbucks Strategy: At the coffee
chain, a cup of coffee is not just coffee, but a unique experience
shaped by the consumer
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BACK
OF THE BOOK
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Once
in a long while, a book comes along that changes the way corporations
think. C.K. Prahalad, the Harvey C. Freuhauf Professor of Business
Administration at the University of Michigan, did that once when
he and Gary Hamel came up with the concept of core competence in
an Harvard Business Review article in 1990. Circa 2004, he's ready
to do that all over again with The Future of Competition, co-authored
not by Hamel but Venkat Ramaswamy, the Michael R. and Mary Kay Hallman
Fellow of Electronic Business and Professor of Marketing also at
the University of Michigan. The book, as the authors note in its
preface, "results from unusual six-year collaboration between
a nontraditional strategy researcher (Prahalad) and an eclectic
marketing scholar (Ramaswamy)", who looked at the changes that
the 90s had ushered in, especially in terms of empowering consumers,
to predict how companies will compete tomorrow. Their conclusion,
now expanded into a book: companies can no longer unilaterally decide
what value is, instead must seek to co-create it with their customers.
The book is due for launch in India on February 16. Meanwhile, here's
an exclusive extract, besides an interview with the authors.
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, Web sites, 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, confounds and frustrates most time-starved consumers.
Product variety has not necessarily resulted in better consumer
experiences.
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The Future of Competition
By C.K. Prahalad and Venkat Ramaswamy
HBS Press
Price: Rs 1,500
PP: 371
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For senior management, the situation is no
better. Advances in digitisation, 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
non-traditional 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 twenty-first-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 characteristics
different from those we now take for granted? This question lies
at the heart of this book.
The emerging reality is forcing us to reexamine
the traditional system of company-centric value creation that has
served us so well over the past hundred years. We now need a frame
of reference for value creation. The answer, we believe, lies in
a different premise centered on co-creation of value. It begins
with the changing role of the consumer in the industrial system.
The Changing Role of the 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.
Global View
Consumers can also access information on firms, 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 seven hundred car models
listed on the Internet, creating a serious gap between what is immediately
available in the neighborhood and what is most desirable.
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...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.
INTERVIEW
"The Next Round is Experience Movement" |
| Authors C.K. Prahalad and
Venkat Ramaswamy field questions on the book.
Excerpts:
Why do you think co-creation is
the next practice that companies must adopt?
An involved and active consumer and emerging consumer communities
coupled with industry convergence are allowing us to create
value in a new way-by co-opting consumer competence. Consumers
and the company can now jointly create value for the consumer
as in the case of Lego or video games. This process of joint
effort to create unique personalised experiences (value) to
the consumer is what we label as "co-creation".
That is the substance of the book. The reason why this is
next practice, as against best practice, is that the process
of co-creation and its implications for the firm is still
evolving. But the process cannot be stopped.
How is this customer-company relationship
different from before?
In the world of co-creation, consumers and firms have to
accept four building blocks: Transparency in relationships,
access, dialogue between consumer and the firm and consumer
communities by themselves, and finally the involvement of
the consumer in determining the nature of the Risks that she
is willing to take. We call them collectively DART. This process
is gaining momentum everywhere, including in India. For example,
the farmer in ITC e-Choupal wants to check the prices of soya
futures in Chicago Board of Trade before he decides when and
how much to sell.
Does your co-creation theory presuppose
that a lot of customers actually have the inclination to help
co-create value with the marketer?
We need to think differently. Take coffee. Starbucks has
created what we would call "an experience environment"
where people do more than drink coffee. Besides being able
to customise their drinks, people chat with friends, build
their own community groups, chat with the baristas, work together
on wireless networks, and so on. It is the quality of consumer
interactions in this environment and the resulting experience
outcomes that creates value. Differentiation is not of the
product or service, but of the experience. No doubt there's
a significant amount of time and participation for a consumer,
but one that's worth the experience it generates. Given the
heterogeneity of consumer, all consumers do not want to be
involved all the time but some subset will want to.
Both of you have been doing research
on Indian companies. Can you give some Indian examples?
Take self-help groups (SHG). The Bank, let us say ICICI,
lends money to an SHG. The members of the SHG decide how that
money will be disbursed, to whom and for what project. They
will have to follow procedures-discussions, minutes of the
discussion and the rationale. But they decide. That is co-creation.
Think about the role of the SHG in evaluation of credit risk,
allocation of funds, collecting the funds, keeping records
and so on. Are they the typical functions of the firm or of
the consumer? In an SHG, the role of the consumer and the
company merge, enabling the co-creation of value.
Are you saying that an economy
like India's is a better place to move to next practices,
given that it doesn't have expensive historical baggage to
offload in terms of practices?
Absolutely. India has less "forgetting" to do
compared to the USA. The roles of the consumers and the firm
have been built over 100 years. In India, most of the poor
are experiencing their relationship with the firms and a commercial
market for quality goods and services for the first time.
Take wireless. For the first time, all Indians have access
to connectivity. And they talk to each other a lot. Send SMS
messages. They are building communities. But most important
is the fact that consumers in India-be they rich or poor-are
very value conscious. That forces a lot of word-of-mouth,
community building and co-creation.
What is the groundwork a company
needs to do before it can embark on the co-creation journey?
Isn't co-creation an expensive proposition for companies?
Companies thought that quality improvement meant higher
costs. After Six Sigma and TQM, we know that high quality
and low costs go together. Then we had the same debate with
differentiation through product variety. After flexible manufacturing,
modularisation, and mass customisation we know that high product
variety and low costs can go together. The next round is the
experience movement. We must invent the next practices where
experience networks that enable a variety of personalised
experiences and low cost can co-exist. We call it efficient
experience innovation. This new frontier means going beyond
traditional TQM. If you want an acronym, we call it EQM or
Experience Quality Management. It is a journey. In the book
we discuss the new infrastructure capabilities required for
building experience networks and EQM.
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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 Web sites 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) that present an individual's
worldview through texts, images, and Web links, facilitate public
expression and debate.
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 co-create value. The use of interaction as a basis for co-creation
is at the crux of our emerging reality.
Consumer-Company Interactions: The Emerging
Reality of Value Creation Consider the evolution of the health care
industry. Innovations in pharmaceuticals, biotechnology, nutrition,
cosmetics, and alternative therapies are creating various treatment
modalities and transforming our concepts of health. As both consumers
and technologies advance, traditional medicine ("curing sickness"),
preventive medicine, and improvements in the quality of life are
rapidly merging into a "wellness space". Let us examine
the changing dynamics of interaction between a consumer and the
firms that participate in the wellness space.
Twenty years ago, when I was feeling ill and
visited my doctor, I might have undergone a battery of tests that
would have informed my doctor's diagnosis, which he would explain
to me only if he had to. He would then choose a treatment modality,
prescribe some medications, and schedule a follow-up examination.
Health care back then was generally doctor-centric, just as commerce
was company-centric. Doctors thought that they knew how to treat
me, and since I wasn't a physician myself, I probably agreed. Similarly,
most businesses figured that they knew how to create customer value-and
most customers agreed.
Now, the health care process is far more complex.
As soon as I feel ill, I can tap into the expertise and experience
of other patients and health care professionals. I can access an
abundance of information, some of it reliable, some not. I can learn
what I want about breast cancer or high cholesterol or liposuction.
I can investigate alternative treatments for any condition and develop
an opinion about what might and might not work for me.
Ultimately, I can cut my own path through the
wellness space, thereby constructing a personal wellness portfolio.
If I'm grappling with high cholesterol, then I can include pharmaceuticals
for blood pressure and cholesterol approved by the FDA, health supplements
not approved by the FDA, a fitness regimen developed with an instructor,
and genetic screening for hereditary heart disease.
Notice that my wellness portfolio does not
fit neatly into any traditional industry classification. Yes, I
visit my doctor. I get tests and medications and submit the bills
to my medical insurance, provided through my employer. But other
services in my wellness portfolio fall outside the conventional
doctor-based health care, pharmaceutical, or insurance industries.
My wellness space springs from my view of wellness, my biases, values,
expertise, preferences, expectations, and financial wherewithal.
My spouse, meanwhile, can construct her own wellness portfolio.
Rather than rely solely on my doctors' expertise,
I can seek experts among my peers-other health care consumers-organized
into thematic communities, such as a high-cholesterol group. This
networked knowledge encompasses not just the medical aspects pertinent
to my condition but its sociology, psychology, and likely impact
on me, my family, and the community.
Thus, my next visit to the doctor can differ
dramatically from the conventional checkup. I can ask, Why did you
prescribe this treatment? Why not the alternative that I found through
my exploration with other consumers and the Web? My doctor probably
won't enjoy my challenging his expertise and authority. After all,
I'm asking him to explain and defend his approach, which takes time
and energy. What's more, I'm testing the depth, breadth, and currency
of his knowledge What if I'm experimenting with alternatives-herbs,
dietary supplements, and so on-that he may not yet understand? Will
he know of any complex interactions between these treatment modalities?
Now position yourself as a manager in a pharmaceutical
firm. The commingling of traditional industries into a complex,
evolving wellness space challenges deeply entrenched and implicit
assumptions in managerial tradition, which have evolved over decades.
For starters, what constitutes or defines a product or service?
Is an antiwrinkle cream with Retinol a cosmetic, a fashion, or a
pharmaceutical product? With unclear industry boundaries, how do
we identify the nature of our competitive advantage? More important,
what value does the pharmaceutical firm provide in the wellness
space of an active, involved consumer? How does the consumer's increasing
desire to interact with both the providers and their provisions
affect the various parties involved in that consumer's wellness
space?
REVIEW
When the Customer Is Really the King |
| One
of the platitudes that managers learned to mouth in the 90s
had you believe that the customer is the king. Customers, of
course, have always known the truth to be otherwise. Now, here
comes a book that tells you just how little corporations may
have done by way of crowning the customer. For, what the authors,
C.K. Prahalad and Venkat Ramaswamy write about in their The
Future of Competition is not new ways of delighting the customer,
but a fundamentally different model of their engagement for
creation of value. A model where the customer collaborates not
merely to build a better product, but to construct a totally
new framework of "experience" that changes at every
point of interaction relative to the customer's own needs at
that point in time.
Take something as simple as a PC. Most made-to-order PC
websites, the authors note, allow techno-savvy users to configure
PCs using technical specifications. But that's a company-centric
view. "How often do manufacturers ask how I intend to
use the product?" ask the authors. Tech specs do not
always match use. A graphic artist buying a printer would
need a certain configuration, a publisher of a local newspaper
would need another and a mom making greeting cards out of
pictures yet another. Can they test print at a retail store
and get it with even software loaded?
But why is a co-creation model required in the first place?
For an answer, see the interview with the authors on the previous
page. But to tell you what are the building blocks of co-creation,
it is something what the authors call dart (how management
loves buzzwords), which stands for Dialogue, Access, Risk
assessment and Transparency. Some of these are not new. In
fact, a lot of companies like FedEx employ bits and pieces
of it already.
The authors devote three chapters to expand the experience
idea-designing experiences, letting customers innovate, and
creating an infrastructure to personalise experience for customers.
As this idea plays out many current practices will need to
change. For instance, current CRM systems only capture structured
data about customers. New technology might have to support
more unstructured data like video and conversations. It might
also mean real-time technology. The idea of pricing could
change-auctions or real-time pricing. Again many of these
ideas have been discussed in the last seven or eight years.
But then the authors themselves say that the book is a synthesis
of several ideas, and co-creation explains the need for these
ideas.
-Vidya Viswanathan
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Co-Creation of Value
Let us stay with the wellness space and look
at cardiac pacemakers. More than five million adults in the United
States suffer from various cardiac maladies. Many of them could
get a pacemaker that monitors and managers their heart rhythm and
performance, a valuable benefit. However, a patient's comfort level
would increase substantially if someone or something monitored his
heart remotely, and alerted him and his doctor simultaneously of
any deviations from a predetermined bandwidth of performance, relevant
to his condition. Doctor and patient together could decide on the
remedial response.
The scenario gets more complicated when the
patient travels far from home. A mere alert will not suffice. The
patient needs directions to the best nearby hospital, and the attending
physician needs access to the patient's medical history. How do
the two doctors-his primary care provider back home and the physician
on call at the out-of-town hospital-coordinate their diagnosis and
treatment? Should he call his spouse? How can he recognize and assess
the risks and develop an approach to compliance and cooperation
with these medical professionals? Are the doctors, the facilities
and services, and the pacemaker all part of a network centered on
the patient and his well-being?
Companies are already installing elements of
these network capabilities. Consider Medtronic, Inc., a world leader
in cardiac rhythm management that seeks to offer lifelong solutions
for patients with chronic heart disease. It has developed a system
of "virtual office visits" that enables physicians to
check patients' implanted cardiac devices via the Internet. With
the Medtronic CareLink Monitor, the patient can collect data by
holding a small antenna over his implanted device. The data are
captured by the antenna, downloaded by the monitor, and transmitted
by a standard telephone line to the Medtronic CareLink Network.
On a secure Web site, physicians can review patient data and patients
can check on their own conditions-but no one else's-and grant access
to family members or other caregivers.
Medtronic's CareLink system goes beyond the
cardiac device itself and unleashes opportunities for an expanding
range of value creation activities. For example, each person's heart
responds to stimulation slightly differently, and the response can
change over time. In the future, doctors will be able to respond
to such changes by adjusting the patient's pacemaker remotely. We
believe that the pacemaker story is a prototype of the emerging
process of value creation.
Now, as a manager, consider the following questions:
1. How does the patient actively participate
in the process of co-creating value?
2. How does the quality of the patient's interactions
with the doctor, the family, and the staff of the out-of-town hospital
affect the quality of (her) overall experience?
3. What is the basis of value creation here?
Value does not stem from the physical product,
the pacemaker, or from the communication and IT network that supports
the system, and not even from the social and skill network that
includes doctors, hospitals, the family, and the consumer community.
Value lies in the co-creation experience of a specific patient,
at a specific point in time, in a specific location, in the context
of a specific event.
The co-creation experience originates in the
patient's interaction with the network. It cannot occur without
a network of firms collaborating to create the environment that
allows the patient to undergo that unique co-creation experience.
The network, not owned by any single firm, multiplies the value
of the pacemaker to the patient, his family, and his doctors. The
patient, by co-creating with the network, is an active stakeholder
in defining the interaction and the context of the event. The total
co-creation experience with the network results in value that is
more personal and unique for each individual.
In the conventional value creation process,
companies and consumers had distinct roles of production and consumption.
Products and services contained value, and markets exchanged this
value, from the producer to the consumer. Value creation occurred
outside the markets. But as we move toward co-creation, as with
the pacemaker, this distinction disappears. Increasingly, consumers
engage in the processes of both defining and creating value. The
co-creation experience of the consumer becomes the very basis of
value.
This company-centric view of value creation
is deep-rooted, as it has been the very foundation of competition
in the industrial era. The future of competition, however, lies
in an altogether new approach to value creation, based on an individual-centered
co-creation of value between consumers and companies. To see this
future, we must escape the past. And to escape the past, we must
understand it-that is, we must recognize the belief structures that
underlie our actions as managers.
Escaping the Past: The Traditional System of
Value Creation
Traditional business thinking starts with the
premise that the firm creates value. A firm autonomously determines
the value that it will provide. Consumers represent demand for the
firm's offerings. Managers focus on the "value chain"
that captures the flow of products and services through operations
that the firm controls or influences... The change that we are describing
is far more fundamental. It involves the co-creation of value through
personalized interactions...In the emergent economy, competition
will center on personalized co-creation of experiences, resulting
in value that is truly unique to each individual. This book provides
a road map to that future, a map for a journey that we believe all
business leaders must eventually and boldly make.
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