Professional Documents
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The
content strategy & competition
Co-Creation
Illustration by Steve Moors
1
Connection
by C.K. Prahalad and Venkatram Ramaswamy
their experiences with goods and services — companies see value creation as a process of
cost-effectively producing goods and services. Now information and communications
technology, the Internet in particular, is forcing companies to think differently about
value creation and to be more responsive to consumer experiences. In fact, the balance
of power in value creation is tipping in favor of consumers.
content management
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C.K. Prahalad Venkatram Ramaswamy
(cprahalad@aol.com) is the (venkatr@umich.edu) is profes-
Harvey C. Fruehauf Professor sor of marketing, the Michael
of Business Administration at R. and Mary Kay Hallman
the University of Michigan Fellow of Electronic Business,
Business School, Ann Arbor. and the director of the
He is also the founder and Community for Business
chairman of Praja Inc., a pio- Innovation at the University of
neer company in interactive Michigan Business School.
event experiences.
The disconnect between what companies and con- Because companies have historically controlled all
sumers value traces back to the early-20th-century business activities involved in the creation of the things
content strategy & competition
industrial principles. Frederick Winslow Taylor’s scien- they sell, it is their view of value that is dominant.
tific management focused on lowering unit costs of pro- Indeed, the consumer typically has little or no influence
duction. The value chain, a concept introduced by on value created until the point of exchange when own-
Michael Porter in the 1980s, gave managers an integrat- ership of the product is typically transferred to the con-
ed framework to identify and manage costs of designing, sumer from the firm. This is true whether the consumer
producing, marketing, delivering, and supporting goods is a company or an individual.
or services. And Michael Hammer and James Champy’s Now consumers are challenging this corporate logic
business process reengineering was widely interpreted as of value creation. Spurred by the consumer-centric cul-
implicitly linking cost reduction and internal efficiencies ture of the Internet — with its emphasis on interactivi-
to value creation. ty, speed, individuality, and openness — the consumer’s
During the 1990s, notions of the extended enter- influence on value creation has never been greater, and
prise and the boundaryless organization encouraged it is spreading to all points in the value chain. (See “The
managers to broaden their search for efficiencies and Five Powers of the Connected Consumer,” page 7.)
discover ways of creating value from their supplier net-
work and beyond. Starting in 1995, the Internet further nd therein lies a fundamental
A
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invigorated the corporate pursuit of efficiency, this time challenge for business. Companies
expanding it to include all the activities directly involv- have grown used to viewing con-
ing or affecting the company–customer relationship. sumers as passive target markets
Still, throughout this evolution, the assumption that for what they create. But, interest-
internal cost efficiency is the source of value creation has ingly, markets are not passive;
remained unchallenged. they are now becoming more like
Consumers appreciate and expect efficiency when it forums, largely because of the
improves their experience with a product or service. But Internet. In the “market as a forum,” consumers active-
most of the time, managers are so preoccupied with ly define value the way they see value — as experiences
operating efficiently that they don’t even think about — and push companies to see it the same way. Today’s
value in terms of the consumer’s experience. (See Exhibit companies know just how dramatically 40 million con-
1.) Ask yourself: Do you as a consumer of a digital cam- sumers networking with each other and challenging the
strategy + business issue 27
era think about the complex sourcing patterns and logis- status quo online, in categories as different as music and
tics that the manufacturer has to deal with, or are you mortgages, are shaking up the business world.
thinking about the fun you will have when you bring In this environment, we believe companies need to
the camera to the beach to record your children’s first embrace a new approach to value creation, one in which
ocean swim? the basis for value shifts from products to experiences;
consumer influence is spread across the value chain (in Exhibit 1: Value Creation:
research and development, design, manufacturing, logis- How Companies and Consumers Think
kind of car company,” has spurned the industry’s tradi- sumers, we need to identify the factors that determine
tional ways. In 1985, when the General Motors experience. We call these the elements of exchange, and
content strategy & competition
ther begin nor end when a consumer purchases some- tening to bad music, knows the limitations of call cen-
thing from a company. Indeed, the point of exchange ters. When hospitals, laboratories, and pharmacies put
need not be restricted to where the company and the health records, diagnoses, and prescription information
consumer trade money for finished goods or services. online to cut costs, are they taking into account con-
If experience is the critical source of value for con- sumer concern about privacy?
On the Web — the ultimate self-service technology inventory management and pricing by channel charged
— corporate indifference to the consumer experience $48 for a shirt online and marked the same shirt down
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tomer exchange is made through an automated channel become much more astute about
or handled by an employee. Similarly, Lands’ End Inc. what consumers like and don’t like,
has invested in self-service technology and superior agent and that knowledge will greatly
training so that the consumer experience on its Web site improve companies’ ability to be
is as good as its catalog operation consumer experience. innovative and to anticipate con-
• Choice. Elaborately structured distribution and sumer needs. On the Web, consumer-
communications channels allow companies to control a to-consumer recommendations, new
consumer’s choices. But when companies don’t offer the ideas, critiques, musings, and more are having a power-
same choices across channels, they risk antagonizing the ful influence on choice. About.com (owned by Primedia
customer. One clothing retailer trying to optimize Inc.), one of the most popular consumer word-of-
The Five Powers of the Connected Consumer
Before the Internet liberated informa- cians more aggressively and partici- mation to sharpen global strategies.
tion, companies could do everything pate more fully in choosing treat- New competitors and potential part-
— choose materials used in products, ments. This is dramatically altering ners for large companies are also
design production processes, craft traditional pharmaceutical sales emerging in the global marketplace.
marketing messages, control sales practices. In the U.S., it is driving con- Even poor artisans in Rajasthan,
channels — with no interference. sumer-centric “defined-contribution” India, can sell high-quality table linen
Now, consumers exercise their influ- health-care reform wherein compa- on the Web for $10 and deliver it to
ence in every part of the business sys- nies give employees information and buyers in the U.S. in about a week,
tem. Nevertheless, companies should ask them to assume more responsi- and for one-tenth the cost of compa-
welcome, not resist, the consumer bility for selecting and managing their rable linen in the United States.
powers detailed below. own health-care benefits. 3. Networking. Consumers natu-
1. Information Access. With access 2. Global View. The Internet is the rally coalesce around common skills,
to unprecedented amounts of infor- first single source of information that interests, and experiences. The
mation, consumers have knowledge gives consumers the ability, 24 hours Internet amplifies this by encouraging
content strategy & competition
to make much more informed deci- a day, to see what is happening an unparalleled ease and openness of
sions. This is causing companies around the world. That is changing communication among perfect
across industries to cede control over the rules for how companies com- strangers. Indeed, “communities of
value creation and develop new ways pete. For example, multinationals are interest,” where individuals confabu-
of doing business. Consider health more exposed to consumer scrutiny late and commiserate without geo-
care. More than 70 million Americans of product price and performance graphic constraints and with few
have reportedly used the Internet to across geographies, which means social barriers, exist all over the Web.
learn about diseases and treatment those businesses have less latitude to People participating in a chat area
options and investigate how to get vary the price or quality of products may know nothing more about those
involved in clinical drug trials. sold in multiple regions. But it also they’re chatting with than the interest
Consumers now question their physi- means companies have more infor- they share. The power of consumer
mouth sites, is host to discussions about more than highly attuned to human behaviors, preferences, and
50,000 subjects, from allergies to zebras. Content, tastes because experiences are the essence of what they
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organized by topic, is kept fresh and credible with a sell. But the fact is, companies that manufacture prod-
thorough oversight system run jointly by About.com ucts bear just as much responsibility as restaurants and
and its community members. Sites like About.com are entertainment companies for enhancing or diminishing
trying to establish businesses promoting consumer-to- the value of consumer experience. For example, most
consumer communication, but thousands of Web sites antibiotics are prescribed to be taken several times a day
exist that buzz with conversations about what con- for two to three weeks. If you forget to take the pills, the
sumers value and don’t value. Companies need to listen, medicine is ineffective, and many people don’t remem-
learn, and absorb this valuable intelligence. ber to complete the full cycle. The pharmaceutical com-
Even in the world of drugs for treating life-threat- pany Pfizer Inc. saw this behavior as an opportunity to
ening diseases, consumer advocacy in online support make it easier for people to take medicine the way it was
groups seems to be as influential as company marketing. prescribed. It introduced an antibiotic called Zithromax
For example, when Novartis AG began clinical trials of that typically requires an initial dosage of two pills fol-
strategy + business issue 27
a promising leukemia drug, word spread so fast that the lowed by a daily single pill for only four days. Then
company was overwhelmed with demand from patients Pfizer marketed Zithromax in a blister pack called the
seeking participation. Z-pak, which clearly reminds users of their daily dosage
• Consumption Experience. Companies like the requirement and how much they have left to take. Pfizer
Starbucks Corporation and Walt Disney Company are effectively became the patient’s partner in making it as
networks is that they’re independent places where companies can learn of co-creation can tap into con-
and based on real consumer experi- what consumers are thinking. sumers’ creativity for the develop-
ences, not what the company tells 4. Experimentation. Consumers ment of products and services.
them they will experience. use the Internet to experiment with 5. Activism. As people learn, they
Such networking among con- and develop products, especially digi- become more discriminating in their
sumers turns traditional company- tal ones. The German research com- choices about what they buy, and as
controlled marketing and advertising pany Fraunhofer Institute for they network, they become embold-
upside down. For example, rather Experimental Software Engineering ened to speak out. Now consumers
than attempt to shut down unofficial released MP3 as a freely available provide unsolicited feedback to com-
Hobbit fan sites, New Line Cinema co- compression standard that accelerat- panies and to each other. There are
opted them, to help spread word of ed the transmission of digital audio. hundreds of “sounding-off sites” on
mouth and create buzz about its The collective competence of soft- the Web that target specific compa-
movie The Lord of the Rings. Gordon ware users has enabled the codevel- nies and brands. AOL Watch, for
Paddison, senior vice president of opment of popular products, such as example, publishes complaints from
easy as possible for the medicine to do its curative work. also powerful tools consumers can use to collect and
Zithromax now dominates its market. Consumers compare price and performance data.
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like Zithromax’s shorter cycle and the convenient Global television and the Internet make it easier for
reminders to take their pill. Doctors, too, applaud these people to see the kinds of products companies sell in dif-
features, because they make the drug more effective. ferent regions and countries and compare them to
With the Z-pak, Pfizer has creatively incorporated the what’s offered in their own market. That is altering
consumption variable into the manufacture and design consumer desires and raising consumer expectations,
of the product to increase its value. especially in developing countries. Consumers in emerg-
• Price-Performance. The traditional psychology ing-market countries (e.g., India, Brazil, and Indonesia)
of price setting, largely based on cost structures, is with annual incomes sufficient to purchase cars, refrig-
becoming increasingly irrelevant. Further, the relation- erators, branded clothing, and other mainstays of com-
ship between price and performance is no longer implic- fortable living expect these products to be affordably
it and controlled by companies; it is explicit and debated priced and to meet global quality standards and local
by consumers. cultural requirements.
Independent consumer-feedback Web sites, such as The new challenge for companies accustomed to
Epinions.com, PlanetFeedback.com, and BizRate.com, producing lower-priced, and often inferior, goods for
allow people to share price information recommenda- these markets is to raise the consumer experience bar
tions, reviews, and comparative price information for and make a profit. For example, Hyundai in India is suc-
thousands of products. Search engines like Google are cessfully selling its Santro sedan for the equivalent of
about $8,000. The Santro’s driving performance is com- turing arm. Like Unilever, Aravind is testing this busi-
parable to that of a compact car sold in the U.S. for ness model in other regions.
content strategy & competition
care at no cost and still is highly profitable. Between In dialogues, people listen and learn from each other; in
1998 and 1999, Aravind’s total income was Rs. 230.6 the most productive dialogues, people communicate
million (about $5.2 million), with a profit of Rs. 110.1 and debate as equals. Dialogue helps companies to
million (about $2.5 million), and return on capital of understand the emotional, social, and cultural contexts
more than 200 percent on surgery and its lens manufac- that shape consumer experiences and provides knowl-
edge companies can use to innovate. Dialogue with con- European and U.S. cities have begun to offer a novel
sumers is central to Harley-Davidson Inc.’s being able to service for people who want more than just a rental car;
co-create a multigenerational “way of life.” Building a they want the convenience of having a car they don’t
forum for dialogue was how, early on, America Online own at their disposal all the time. For example, in
Inc. created a community — a group of enthusiasts Switzerland, people who join Mobility CarSharing
whose shared interests bonded them to the service at the receive a personal access device that unlocks a dedicated
same time that it gave the company insights into service pool of cars, which are rented on a pay-as-you-drive
improvements. Dialogue was what kept a loyal commu- basis, making the service ideal for running short errands,
nity of Macintosh users together when Apple Computer visiting friends in the suburbs in the evening, and the
Inc.’s product development began to wane. And it is dia- like. What do Mobility CarSharing and similar compa-
logue that is helping the personal-computer manufac- nies sell? A new urban lifestyle that is not only econom-
turer to recover with the introduction of the new iMac. ical and convenient, but also reduces pollution and
parking problems.
ialogue involves more than listening In the music industry, consumers are not fighting
D
and reacting. It requires deep engage- for all music to be free; they just want more freedom to
ment, lively interactivity, empathetic choose how they access music once they’ve paid a fair
understanding, and a willingness by price. This is a classic instance of the consumer being
the consumer more responsibility for risk. But that is awarded to researchers who offer the solution judged
not enough. Companies will need to be more willing to “best” by the company that posted the problem.
content strategy & competition
engage in open dialogues with concerned people. InnoCentive represents a bold open source approach to
Companies should not approach their communications innovation for industries that in the past have been
defensively. On the contrary, proactive risk communica- closed and private.
tion and management offers new opportunities for firms
to differentiate themselves. umerset Houseboats, the world’s
S
4. Transparency. In the wake of the Enron debacle, largest houseboat manufacturer,
shareholders are demanding more transparent, or thor- based in rural Kentucky, shows how
ough, financial disclosure; but transparency is also nec- all the pieces of a co-creation model
essary for consumers of goods and services to become — dialogue, access, risk reduction,
co-creators of value. When companies make vital busi- and transparency — can fit together.
ness-process information visible to consumers, compa- Imagine interactively codesigning the
nies, in effect, relinquish control of the value creation layout and configuration of your
process before the traditional point of exchange. dream boat, negotiating specs and prices, connecting
The Federal Express Corporation has high levels of with the factory to participate in your boat’s construc-
transparency in its logistics system. Customers can log tion, and monitoring its progress in real time. Now
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on to its Web site and check the progress of packages in imagine a personal Web page where you can review
real time using the same information that FedEx drawings; access architectural, aesthetic, and structural
employees use; large corporate customers can also expertise; and consult a customer representative. You
reroute packages themselves. Individuals have choices can see pictures and read the biographies of the people
they wouldn’t have if FedEx controlled all the informa- who are crafting your boat. You can critique design ele-
tion, and that improves the customer experience. ments and fully furnish your boat before it is delivered.
This same type of information transparency has cre- You can have dialogues with other Sumerset customers
ated a revolution in the trading of securities. Global and a wider community of avid sailors.
agency brokers like Instinet Group Inc. build trans- What is co-created in this process is not just a boat,
parency into their trading systems so that customers can a physical artifact, but also experiences. Even before
monitor in real time how much the fund manager’s trad- owners set sail, they begin to form an emotional attach-
ing is costing them. ment to their boat while building their stake in the out-
strategy + business issue 27
In June 2001, Eli Lilly and Company launched a come of the value creation process.
new e-business research venture called InnoCentive The company also benefits. Sumerset and its sup-
LLC. It brings together, via its Web site, companies and pliers learn more about the end consumer and access
researchers from around the world seeking solutions to new ideas for design, engineering, and manufacturing.
scientific problems. Significant cash incentives are Everyone from design engineers to carpenters gains a
deeper understanding of consumer desires and the Firms also need new and different IT strategies and
potential value trade-offs. This reduces investment risk applications that incorporate the principles of a more