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The Future of Competition

Co-Creation
Unique Value with Customers &
other partners in the eco system

Product variety is overwhelming to consumers.


Complexity of offerings, as well as the associated
risks and rewards, confounds and frustrates
most time-starved consumers.
Dissatisfied with available choices, consumers
want to interact with a firm or group of firms and
thereby co-create value.
The use of interaction as a basis for co-creation
of value is at the crux of Prahalad & Venkat
Ramaswamys emerging reality.

For profitable growth managers must also


strive for new sources of innovation and
creativity
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 , 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 manifests in many
ways.

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 & leveraging
information asymmetry, this shift is radical.
Global View
Today, a teen anywhere can aspire to owning one of the
car models listed on the Internet, creating a serious gap
between what is immediately available in the
neighborhood and what is most desirable. Curtailing
freedom of MNCs to vary price or quality of products
from one location to another.

Networking
"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. Consumer networking
inverts the traditional top-down patterns of marketing
communications
Experimentation
Consumer networks allow proxy experimentation-that is,
learning from the experiences of others.
Activism
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. Networking
embolden them to act & speak out.

Some of the divides

Consumers are increasingly having a role


in defining choice
What they mean by choice is not what
company thinks about choice
Company view vs consumer view
Product & service centric view vs
individuals unique contextual
experience based view

Changes taking place in health care industry


Consider the evolution of the health care industry.
Innovations in pharmaceuticals, biotechnology, nutrition,
cosmetics , and alternate therapies are creating various
treatment modalities and transforming our concepts of
health.
Traditional medicine, preventive medicine, and
improvements in the quality of life are rapidly merging
into a wellness space
Changing dynamics of interaction between a consumer
and firms that participate in the wellness space. Health
care earlier 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

Now one can decide his own path through the wellness
space, thereby constructing a personal wellness portfolio.
If one has high cholesterol, then he can include
pharmaceuticals for blood pressure and cholesterol,
health supplements (even though not FDA approved), a
fitness regimen developed with an instructor, and genetic
screening for hereditary heart disease.
My wellness portfolio does not fit neatly into any
traditional industry classification. But other services in my
wellness portfolio fall outside the conventional doctorbased health care, pharmaceutical, or insurance
industries.
one can more actively determine the value bundle that
is appropriate for cutting, cutting across customary
industry boundary.

Cardiac Pacemakers and the Patient Co-Creation Experience


Primary
Doctor
Medical
Specialist

Patient with
Similar condition

Patient
Pacemaker
manufacturer

Scan and
Diagnostics clinic

Emergency
Services

Doctor on call at
Out-of-town hospital

How far the pacemaker story is practical?


Medtronix Inc a world leader in cardiac rhythm
management
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

Co-creation of Value..
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.

Traditional model

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

The Traditional Concept of a Market


Firm-Consumer interaction
(1) Interaction is the locus of economic value extraction by the firm
(2) Interaction is the basis of consumer experience

The Firm:
Creates value

The Market:
Exchange of value
(products &services)

The consumer:
Demand solution
for the firms
offerings

The market is separate from the value creation process

Emerging Model

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.

The Emerging Concept of a Market

The Firm:
Collaborator in co-creating
value & competitor in
extracting economic value

The Market:
Co-Creation Experiences
Of Unique Value
In the context of an
individual at a specific
moment

The Consumer:
Collaborator in co-creating
Value & competitor in
Extracting economic value

Interaction between consumers and the Firms become the


Locus of co-creation of value . Context contribute to the
meaning of a given experience to the individual

What managers need to do to graduate


towards co-creation ?
What do firms need to have in place before they
go for co-creation?
Managers and consumers need to challenge their
biases & legacy mindsets / dominant logic. ( how to
innovate, create experience networks). Forgetting
curve

Firms deep rooted Product centric. They think


they know how to create value. Experience
does require processing of joint problem.. Value
is unique to each individual
PDA , Cell phone feature rich but experience
poor

How practical it is?


As it is difficult to innovating on products, if
mgrs have to listen to large number of
consumers then it becomes impractical has it
benefited companies ? Give examples
Microsoft
Eli Lilly
Napster
Linux
Lego Mind Storms robotics
The lord of the Ring

Crux of Prof Prahalads message


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.

We create value when consumer has


experience of the product rather than
product itself.
From focus on product to focus on
experience of consumer co-created
Firm centric view to co-creation view
Consumers are resources not liability
when they write-in or give feedback.

The Traditional Frame of Reference for Value Creation


Premise

Manifestation

Value is created
By the firm

Focus on value
chain & quality
of internal processes

Products &
Services are the
Basis of Value
Focus on innovation
Of products, processes
And technology

The New Frame of Reference for Value Creation


Premise

Manifestation

Value is co-created
By the consumer
And the firm/firms
Focus on
The quality of
Consumer-firm
interactions

Co-creation
Experiences are
The basis of value
Focus on
Innovating experience
environments

Consumers
Represents demand
For the firms
Offerings
Focus on supply
Chains &demand
management

The individual is
central to the
co-creation
experience
Focus on
experience
networks

Building Blocks of Co-creation


Consumer-company Interaction is most important
facet in Co-creating Value
Sumerset Kentucky based company Worlds
largest builder of houseboats.
Provides deep interaction between consumer &
the company in designing and building unique
house boats. Can join & dialogue with community
of house boaters
Access to manufacturing plant through the Web.
Can request changes & get companys response

Quality of experience involved in co-creation in


case of Sumerset differs markedly from that of a
traditional houseboat purchase
Dialoguing with company & tracking creates a sense
of emotional bondage with product & company
Sumersets transparency enhances customers trust
Access to the community of Sumerset customers
increase the consumers enjoyment of boat
Co-creation process gives customer knowledge &
expertise about houseboats , with a greater degree of
self-esteem

From Sumersets perspective


The firm & its suppliers can learn more about
consumers and get new ideas for design,
engineering and manufacturing
Sumersets employees can more deeply
understand consumer aspirations, desires,
motivations, behaviors, and agreeable tradeoffs regarding features and functions

The Building blocks of Co-creation


The Sumerset story exemplifies the
emerging reality of the consumer company interactions as the locus of value
creation.
The process of co-creation requires the
key building blocks : Dialogue, Access,
Risk assessment, and Transparency
referred to by the acronym DART.

DART

Dialogue: involves interactivity, deep


engagement & propensity to act on both
sides. It more than listening to the
customers. It implies shared learning &
communication between two equal
problem solvers
Dialogue also involves building thematic
communities.
InnoCentive LLC : brings together
companies and researchers from around
the world to solve scientific problems

Access: The traditional focus of the firm and its


value chain was to create and transfer ownership
of products to consumer.
Increasingly , the goal of consumers is access to
desirable experiences not necessarily
ownership of the product. One need not own
something to access an experience. Access to
experiences could be at multiple points thereby
broadening business opportunities
Example: Access to life style of a car owner,
Mobile CarShairing, POD technology

Risk Assessment : if consumers become cocreators of value with companies, then they will
demand more information about potential risks of
goods and services; but they may also bear
more responsibility for dealing with those risks.
Managers traditionally assume that firms can
better assess and manage risks than consumers
can. Marketers have focused almost entirely on
articulating benefits, largely ignoring risks. Risk
disclosure & trade off between risks and benefits
is a major bone of contention ( Monsanto) .
Eg: Lotronex introduced by GlaxoSmith-Kline

Transparency : is necessary to create trust


between companies and individuals. Firms can
no longer assume opaqueness of prices, costs,
profit margins, technologies.
Transparency facilitates collaborative dialogues.
Constant experimentation, coupled with access
and risk assessment on both sides, can lead to
new business models and functionalities
designed to enable compelling co-creation
experiences. Eg: Sony, Nokia, MicroSoft

Co-Creation of experiences

Can the company unilaterally control the


choice of experiences in the co-creation
process? N
Many companies have begun to
experiment with co-creation of value.
Emerging tension between traditional
company think and emerging consumer
think
The Co-creation experience as basis for
Value : The Napster example
(Kazaa)

Tension between traditional vs Emerging


concept

Company ( music industry) think we


package it, you buy it
Consumer think want to consume
more but in my own way. Want open
access to worlds music libraries, select ,
experience music before pay for,
according to my current preferences,
context, and communities

Huge changes necessary in the industry


Remove the music industries multiple levels of
distribution system
Music lovers will wrest the choice of selection
away from company executives and brand
managers
Question the appropriate price experience
relationship, question the value added to the
consumer experiences from packaging,
distribution, marketing, advertising, and
promotion.
Reveal the heterogeneitry of music consumersdemonstrating consumer centric experiences for
the first time.

Digital Camera : great features. Managers


implicitly assume that their physical product is
the basis of value. For consumers easily
viewing memorable experiences captured by
the camera is the basis value.
Managers rarely consider the aspirations,
frustrations, and wishes of the heterogeneous
groups of consumers who experience their
products or services.
Misled by company think , they clutter the
market with Feature rich but experience poor
products

Dimensions of Choice in Consumer- company


interaction

DART forms the foundation of cocreation of Value. We need to attend to


dimensions of choice in the interaction
that condition the co-creation experience
Co-creation across multiple channels
Co-creation through Options
(Netflix)
Co-creation through Transactions (banks -jargons
The Price-Experience Relationship in Cocreation

Businesses typically set prices largely based on


companys cost structure
In emerging scenario, what determines the value
is the quality of experience I expect to enjoy
because of the product
This experience, and therefore the associated
value, will vary from one consumer to another.
Traditionally , businesses viewed priceperformance through the lens of company think.
Is the economic framework flexible enough to
permit the kind of pricing that reflects the true
value of experience within specific context?
( say camera)

Experience Innovation
We need an experience environment a
framework that allows the firm to facilitate a
variety of co-creation experience with large
number of consumers
Experience environment : Lego learning
through fun. A young child values the Lego
bricks or variety of experiences using the bricks?
Thus the Lego consumers co-create value
through its experience environment.
The Lego Mindstorms example. (Mindstorm combines gears,
wheels, motors, sensors & software to allow users to create intelligent robots)

On-line communities may serve as product


innovators, as with Lego Mindstorm. They may
revolutionize distribution channels and
marketing alternatives, as with Napster.
The role of consumer communities evolves and
cannot be predicted apriori.
As a result the firm is forced to concentrate on
innovating experience environments with
consumer communities. Prahalad calls this new
challenge experience innovation.

Innovating Experience Environments


Business leaders must shift the focus of
innovation away solely from products and
services to building robust experience
environment
Accommodate heterogeneous groups of consumers
most sophisticated, unsophisticated and passive
Involve consumer communities
Engage consumers emotionally & intellectually
Recognize both social & technical aspects of cocreation
Facilitate new opportunities afforded by the evolution
of emerging technologies

Emerging Technologies as Experience Enablers


Some of technologies fuelling potential for robust experience
environments:
Miniaturization : Miniaturization in electronics allowing smaller,
lighter, more portable products.
( Mobility &seamlessness)
Environment sensing: Microsensers can scan the environment
measuring biological, chemical,magnetic, optical, thermal conditions.
MEMS sensors activate air bags in cars. Sensors in clothes, belt of a
walker track blood pressure. Nanotechnology will move such
capabilities to the molecule level.
(self & remote diagnostics)
Embedded Intelligence: control & monitor automobiles, machines,
microwave ovens etc. RFID tags tracking items in supply chain.
Tag on carton of a perishable product inside a shipping container can
alert on temperature rise.
( tracking & monitoring)
Adaptive Learning: TiVo serves as intelligent digital video
recorder among other functions. Entertainment / program selection
based on customers preferences
Networked Communication
( connectivity & interacrtivity)

Integrating Experience enablers into Experience


Environments
Experience environment at fashion company Pradas
store epicenter (Dec01) to enhance shopping
experience
Every item RFID tagged, sales associate scans by handheld
wireless device. Information on item includes videoclips
Dressing rooms have glass walls which switch from transparent
to translucent
A video-based magic mirror allows the shopper to see herself
from all angles
Allows shopper to view their selections under various lighting
conditions
Technical capabilities in the Prada store created by 20 firms ,
deep probing into consumer think

The new frontier of Experience innovation


Experience innovation is a new frontier in cocreation, one that requires a seamless
integration of imagination, consumer insights,
and advanced technology.
The challenge of experience innovation is to
combine the building blocks of DART with
dimensions of choice in co-creation experience
and the levers of tecnology
Interactive technologies are increasingly
embedded all around us

Infrastructure for personalized intractions


requires a nodal firm to orchestrate a large
number of suppliers, partners, and
consumer communities as an experience
network

Experience Networks
Creating an experience network entails
An experience environment with well integrated
experience enablers that individual can interact with
Access to a network of firms and consumer communities
to co-construct personalized experience
The capacity to adapt and rapidly reconfigure resources,
swings in consumer demands
The traditional supply chain remains important; the
physical movements of products and services will not
disappear

Experience Networks
Building an experience Network: The John
Deere Example.
The entire system is built around the farmer, his
farms well being, farming productivity and
creating unique value to the farmer
GPS guided on the intelligent tractor
Biosensensors on its combines to measure oil content
on grain or distinguish between weeds and crops
Deere can warn farmer of likely failure of equipment
Farmer not only uses a product ( combine) but also
knowledge, support services, and peer group access
on Deere network to generate decent return.

Rapid resource reconfiguration


Example of Cemex a Maxican cement
company

With the experience network that we have to


build, what happens to the nature of the firm
is that the scope of the firm changes.
It is not anymore the legal boundaries of the
firm or the supplier network but it is actively
involving consumers in the total process
the firm has to have a selective list of
suppliers. They need to have a relationship
with all of them. So based on a specific
customer demand, selectively activate a set
of suppliers not all of them.

Need to have capacity in the network for dialogue, ask


questions, get responses back. It cannot be pre-determined set
of questions
have to create the capacity for consumer communities where
the consumers may want to dialogue among themselves and
create their own experiences to provide for a dialogue for the
consumes to take place.
Event centric view not a product centric view what album and
artist is all about.

The first is how do we innovate and therefore


what are the implications of technology used
in innovating. Experience innovation looks at
technology in a very different way. That is one
part.
The second part of technology is the
underlying infrastructure that is required to
get real time information, real time ability to
act and reconfigure resources.

So instead of creating a transaction based IT


infrastructure, we need to move to an event based IT
infrastructure where we its the events that trigger
the reactions to the whole system.
In the case on cardiac care it is Metronix which
decides what the network is. The important thing is
that they dont have to own the network. They dont
have to own the people who are part of the network.

The Market as a forum


The traditional concept of Market
As the locus of exchange of Products & Services
Is an aggregation of consumers

Both these images of market are challenged by


the concept of co-creation of value.
An individual consumers willingness to pay will
be more a function of the co-creation experience
Co-creation converts the market into a forum
where dialogue among the consumer, the firm,
consumer communities, and network of firms
take place.

Evolving communities of consumers


Heterogeneity of interactions
Sophistication
Eagerness to engage into dialogue
Tolerance for irritants

The Experience is the Brand


Companies communicated a bundle of benefits through
their brand positioning
Power of advertising to create or sustain a product or
company image is steadily shrinking
Communication once flowed almost entirely from
companies to consumers. Now consumer / consumer
community feedback is beginning to overwhelm voice of
the company
Companies must seek not to target customers but hold
dialogues with them, an altogether different kind of
communication infrastructure needed.
Now brand evolves through experiences ( Yahoo, ebay, Amazon, Starbucks,
Harley-Davidson experience based branding)

The new Competitive space


The two core drivers
The shifting locus of competencies
Shifting locus of innovations

Many firms today still are in the product space


Many firms of firm are rapidly developing outside
sources for components & subsystems, building
global supply chains, and moving towards the
solution space
In the end, all firms will have to gravitate towards
the experience co-creation space. The question
is how fast?

Sources of Competence

Business Unit
as the source
of knowledge

Stage 1:
Pre-1990

Corporation as
a portfolio of
competencies

Stage 2:
1990 onwards

Supplier base
and partners
as a source of
competence

Stage 3:
1995 onwards

Consumers and
Consumer
Communities,
Along side suppliers
as a source of
competence
Stage 4:
In the new
millennium

The migration to the experience space will not


be easy.
The preconditions for co-creation, including
DART and the focus on building an experience
environment, arent easy to incorporate into a
traditional managerial system.
Neither are the implications of co-creation for
R&D, business development, marketing,
accounting, logistics, pricing, branding, and
other familiar business practices.

Building new strategic capital : It entails new


ways to think about opportunities, access
competencies, leverage and reconfigure
resources, engage the whole organization and
compete to co-create value based on
experiences. Several challenges
Building bridges between managers and consumers
Facilitating rapid knowledge creation
Strategy as discovery experimentation, analysis,
consolidation of gains, and further experimentation
Building new capabilities for the future