C.K. Prahalad heralds a new era of innovation
The Authors
Robert J. Allio,
Abstract
Purpose – This interview of C.K. Prahalad, one of the world's leading strategic thinkers, aims to offer corporate leaders a practical look at the radical concepts presented in his The New Age of Innovation (HBP, 2008), written with M.S. Krishnan. A lengthy review of the book is also in this issue.
Design/methodology/approach – The questions for this interview were researched by a team of Strategy & Leadership contributing editors. The interview was conducted by Robert J. Allio, a consultant who has previously been a senior executive at major US and Canadian corporations and a business school dean.
Practical implications – Prahalad believes that many businesses will undergo a transformation in the near future as value shifts from offering products to providing co-created personalized experiences.
Originality/value – Because his new ideas explore the cutting-edge of management innovation, managers will likely appreciate having Prahalad explain how his new model works. It posits that value will be determined by one customer co-created experience at a time, defined as n=1; and to compete successfully in this environment, firms must access resources from multiple outside sources, either local or global, defined as R=G. In this interview he discusses the practical steps needed to ready a company to compete in this new business landscape.
Article Type:
Viewpoint
Keyword(s):
General management; Innovation; Social groups; Networking; Outsourcing; Continuous improvement.
Journal:
Strategy & Leadership
Volume:
36
Number:
6
Year:
2008
pp:
11-14
Copyright ©
Emerald Group Publishing Limited
ISSN:
1087-8572
Fixed graphic 1C.K. Prahalad is the co-author, with M.S. Krishnan, of the landmark book The New Age of Innovation (Harvard Business Press, 2008). He offers his view of the future of business as value is shifting from products to co-created personalized experiences. In this interview with Strategy & Leadership Contributing Editor Robert J. Allio, Prahalad explains how managers can meet this new challenge by accessing resources from multiple outside sources, either local or global. Contributing Editor Brian Leavy, who reviewed The New Age of Innovation for this issue of S&L, helped develop questions for the interview. As Professor Leavy's review explains, “Increasingly, companies will have to learn how to mobilize the resources of many to satisfy the needs of one,” and C.K. Prahalad aims to help them in that endeavor.
Strategy & Leadership : Your new way of looking at the innovation model is that value in today's environment will be determined by one customer-created experience at a time, defined as N=1. And to compete successfully in this environment, firms must access resources from multiple outside sources, either local or global, defined as R=G. What are the driving forces for this change in the competitive landscape?
C.K. Prahalad: We can identify four key drivers of change. First, connectivity. Over 6 billion people now have access to the Internet, creating access to information that is unprecedented in human history. Second, digitization is driving cost of products down dramatically. As a result, high technology is no longer the province of the rich. Everyone has cell phones, for example. Third, the convergence of technologies and industry boundaries–digital technologies, health, insurance, food products and many others. Fourth, social networking.
Businesses have moved away from being product- and firm-centric, business models in which the firm creates value in the form of a product or service.
Firms like Google, Apple, Starbucks, eBay, and others co-create personalized experiences. As a consumer I can take part in creating my own unique experience. So value is shifting from products to co-created personalized experiences. Hence we argue that N=1.
S&L : Isn't the N=1 condition equivalent to mass customization?
Prahalad: No. Mass customization assumes that I have created many components, and that you can pick and choose from those components to create the module you want. The assumption is that the firm still decides which components to offer and thus controls what modules can be assembled and whether they can be connected to other systems. But N=1 says that I am integral part of the transaction! For example, 5-10 thousand people are writing programs for Facebook. That is not mass customization – it is co-creation of value.
S&L : Doesn't this simply represent a shift from firm-centric to customer-centric?
Prahalad: No, it is not customer-centric – it is co-created. We need two joint problem solvers—the consumer and the company. Together they create value, and at same time they create partnership value.
S&L : But can we extrapolate to the situation in which N is very large, say 100 million?
Prahalad: Google serves more than 100 million consumers, but the experience is different for each.
S&L : Does the model work for other older or more capital-intensive industries?
Prahalad: Let's take tires. Everyone assumes it's a B-to-B business. So current competitors sell tires to the fleet (B-to-B). Mostly they compete on price, since all have approximately the same quality. But suppose I am an innovator who doesn't want to just sell you tires. I want to sell on the basis of usage. I will charge you by the km/mile, and I will tell you how to get better usage by monitoring tire pressure, rotations and quality of driving. I will help you improve usage, reduce cost, and reduce down time for repairs and maintenance. This is a different model – it yields a unique solution for each person, each company, and each fleet. And I can help each driver to become a better, safer driver from data that I collect with the permission of the driver. Because of this model the cost goes down.
As a result, I change an arms-length transaction based on price from a B-to-B transaction to more detailed and specific relationship with the customer and with the fleet. So we convert transactions into relationships. Switching costs from the first stage, only selling a tire, to final stage are negligible for fleet owner. We now go from C to B to C.
S&L : This example seems plausible for large multinational firms. But will the model work for regional or midsize firms?
Prahalad: Absolutely. Everyone can get access to technology, so even a small company can get the information it needs. And social networks are a fact of life. Communications networks are becoming very inexpensive. The model may not apply or apply fully to some businesses, but it should be the default relationship.
S&L : Doesn't R=G imply outsourcing to the point at which I have only a virtual corporation? Should I not own some R as a source of competitive advantage?
Prahalad: In order to serve effectively one consumer at a time, we may have to access resources from a large number of vendors. Apple, for example, produces no content – they rely on large number of suppliers. At same time, they don't even produce the iPod. To create personalized experience, you need resources from multiple vendors, both large and small companies. Hence our assertion that in the limit, R=G, although the essential principle is the centrality of the customer.
I don't like the term outsourcing. The boundaries of a firm today are not clear-cut. And we need to continue search for best talent and resources. Think in terms of nodal companies – those that provide the standards for service, technology, etc. These will retain power of influence over companies. Think in terms of interdependence.
S&L : Yet at the same time, you contend that we must protect and leverage our legacy assets, as opposed to adapting or modifying them.
Prahalad: I refer to all the databases, such as our history of relationships with customers and vendors. The key is that in building our new architecture, we must make sure that we exploit existing assets as much as possible.
S&L : Let's talk about cost. At the limit, when N=1, R=G, don't the costs of managing this complex system rise dramatically?
Prahalad: Cost of managing parts may go up, but the total system costs should come down. For example, the cost of access to Google is essentially zero. We've historically debated cost versus quality, differentiation versus cost. Now we debate efficiency versus innovation. This is a false polarization.
I believe that with a good analytics, cost and innovation both will improve. If you deeply understand and are willing to invest in new social architecture, skill building, performance metrics, and IT architecture, you will change the value proposition. Note that R=G also applies to talent – you don't need all the talent in your own company.
S&L : I concur that in this brave new world, we'll need new systems and skills. How does a manager acquire or develop these resources?
Prahalad: Managers must start from a point of view. How will a new value proposition change my specs? How can we coordinate many, many suppliers? Can we audit our capabilities? What's the quality of skills – in our managers, call center operators, etc. Is there a systematic way to fill the gap? Moving forward begins with adopting a point of view, establishing the ideal specs, auditing where we are, then asking what steps in the short term we need to take. Then we can move forward and experiment.
S&L : So the process of transformation need not be revolutionary, it can take the form of stage-managed evolution. Still, all of this sounds rather utopian. I may be an enlightened leader, but am I not hobbled by an organization that's loathe to change? What must I do to overcome this resistance, this attachment to a legacy mindset?
Prahalad: Yes, there are obstacles to progress. What underlies the resistance to change? There are three reasons for much of the opposition. First, the logic of what we are trying to do is not always obvious. Second, if change occurs, the accumulated intellectual experience of the players gets devalued and change therefore is personally threatening. So we need a safety net. Third, we must provide hand-holding for managers while they are learning. Even though our managers' prior performance has been OK, they now need new skills.
S&L : What kind of hand-holding would work?
Prahalad: Managers must have an overarching logic, they need to communicate their strategic intent, and they must understand that different people will have different levels of discomfort. To apply N=1, we must give them an appropriate safety net, help them transform their skills with training and practical experience. If you do this, the resistance to change will go down. I'm not naive, but all you need is to convert 30-40 percent of managers to believers. And we can de-risk change by taking small steps.
S&L : Until we reach the tipping point. You predict that we'll reach the N=1, R=G state by 2015 or 2020. What's the basis for this bold forecast?
Prahalad: Consider 2020 –who will be the managers? The 25-year-olds who are today 13! What will have been their life experience? Social networks, personalization, connectivity, etc. They're technologically savvy. They want to compete. But they also want to co-create, and they are collaborative by nature. They are trained at multi-tasking. These will also be the new target consumers. When I look at these emerging trends, I see 2020 as a conservative estimate. We must embrace the inevitable – it won't go away.
S&L : So this transformation is not a choice! It's the inescapable consequence of the driving forces. Still, doesn't R=G and N=1 imply transparency of our business model? And do we not then give away our competitive advantage?
Prahalad: A firm's only protection is continuous innovation, not protecting its past.
S&L : And today's competitive advantage is therefore transient, ephemeral?
Prahalad: Right. There are no sustainable advantages. There is only advantage for the moment. Firms must continuously innovate if they want to survive!
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Corresponding author
Robert J. Allio, a Contributing Editor of Strategy & Leadership, is one of the publication's founders (rallio@mac.com). As an interviewer for S&L he has questioned thought leaders such as T. Boone Pickens, Gary Hamel and Jay W. Lorsch.