Since the article is not available in English, I made a quick translation:
“The question nowadays is how to create value in the future, in collaboration with your customers? How to obtain more and new ideas on that? That is the big challenge now.” He starts his story from a recent shopping success, where the lead role is given to a teddy bear.
His first name are just two letters. They stand for Coimbatore Krishnarao, but everyone calls him “Cee Kay”. He was born in a village in Tamil Nadu, India, but has been working in the USA since the 90′s, where he is now a professor at the University of Michigan.
C.K. Prahalad gained international fame as guru when he and Gary Hamel published their book “Competing for the Future” (1994). The book contained a range of new concepts, such as the fact that companies should focus on their strong points (their “core competencies”), that companies should be their own competitors, if they want to maintain an edge, and that thinking against the grain is a major quality.
A few years ago, in 2004, Cee Kay pushed the boundaries of thinking again with his new books “The Future of Competition: Co-Creating Unique Value with Customers” and “The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits“. The first book is about the question how you can “co-create” unique value with your customer, and how you can therefore avoid the commoditisation of your own products. The second book provides a surprising approach to the problem of the rising world population, by asking how to make the 5 billion world citizens earning less than 3,000 USD a year into a market.
These were also the two themes that C.K. Prahalad spoke with me about, while in Birmingham for a seminar with a selection of British businessmen.
“Have you ever been at a Build a Bear store,” asks Prahalad.
Build a Bear was founded ten years ago by the American retail specialist Maxine Clark. The group is listed on the New York Stock Exchange and has more than 300 stores globally.
Build a Bear is not just a store. The (young) customer has to assemble his own teddy bear: choose the empty “fur” shell, select the voice, pick and warm up a heart, stuff the teddy, close it up, give it a name, register it, select clothing and accessories. That way the bear becomes unique. And maybe it can become the first in a whole bear family, with cuddly brothers and sisters.
“It takes you half an hour or more to make such a cuddly creature. And when you then go to the cash register, you have to pay 50 euro or more,” says C.K. Prahalad. “But what are paying for actually? You are not buying a product, you are buying an experience, an experience that you will never forget anymore.”
The Build a Bear approach has opened up the sector. The toy industry is very seasonal with a strong emphasis on the Christmas period. Margins are low, and sudden trends and hypes are common. Build a Bear is not very seasonal, not trend sensitive, and very profitable. And the reason is the unique experience.
Prahalad thinks that most companies (say, 99 percent) are still too product oriented. Companies should instead increasingly aim for “experiences”.
The very paradigm of company management has to change. “Today it’s still about creating value through internal efficiency. The unit of analysis is still the company. We look at the world through the lenses of our own company.:
But there are some fault lines that could affect this company-centric view of the world: technologies are converging, the boundaries between industrial sectors are blurring, and then there is the ever more ubiquitous connectivity.
“Look at how things have changed. The television, for example: a product of fifty years ago. We know precisely what it is and what it does. But take a current product: the handheld computer. What does it do? Is it an agenda? A phone? A PC? A mailing device? One device now contains a great many programmes and functions.”
He tries to reinforce his point even more and shows me a piece of paper with dozens of terms: digital television, web TV, fax, MP3, stereo, e-mail, PDA, digital camera, video on demand, dvd… “When you see these terms, what sector are we talking about. ITC? Telematics? Entertainment? It is much more than that. We don’t even have a term for it. There is such a multitude of functions, such a diversity of experiences.”
“And that is not only so in the high tech industry. Think about everything that has to do with wellness and care. He shows me another page with dozens of other terms: yoga, hospitals, beauty farms, pharma, herbalist, therapy, cosmetics, self help, medicine…
The active customer
Prahalad takes pleasure in citing the example of OnStar, the satellite communication system developed by General Motors. Problems with your car? OnStar guides you to the nearest service station. Closed the car with the keys in the ignition? OnStar opens your door with one click. Looking for a nice Italian restaurant? The satellite is your guide. The car is therefore no longer a stand-alone product. Even the car has become a crossroads in a world of seamless connectivity.
Prahalad: “In the experience economy it is not about the product. It is not about the teddy bear or the car. It is about creating a network that eventually leads to the experience.”
You don’t even have the be the owner of the entire network. GM is not a shareholder in each garage, service station or other service provider in the OnStar system. The key is providing access to each of these players, and providing the customer with an active role in the entire process. Do you happen to know how many people have tested the Beta version of the new Windows Vista operating system for Microsoft. Prahalad does: 600,000 people globally. “Think about what that means. A lot of research, a lot of development is being done in collaboration with consumers outside of the company. This is enormous. This also means that innovation itself has changed meaning. In the earlies nineties we still talked about product innovation. In the late nineties we were thinking about client-specific solutions. Now it’s all about the co-creation of client experiences.” And that will, according to Prahalad, also affect other sectors, e.g. the insurance company that calculates the premium on the basis of driving style patterns as shown in GPS data, the intelligent pace maker that signals when a problem is arising and who the patient should turn to; the internet bookstore that provides you with individual suggestions based on your passed buying patterns. “The only problem,” says Cee Kay, ” is the tendency in the corporate world to postpone things.” Managerial procrastination, he calls it. “You know what I mean. How often are decisions postponed? ‘We will talk about that next week,” they say then. Why not now? Next week there will be improvement of the problem, nor will the numbers change.”
“But let’s talk about the bottom of the period,” says the professor starting on his second topic. He means the five billion people who have to get by with less than 3,000 USD a year. It is a theme close to his heart and he spices his insights with many examples from daily life in India.
He doesn’t refer to them as ‘the poor’ though. “I am not talking about aid organisations, NGO’s or Bono. My approach is different. How to make five million people into a group of consumers? How to make them into a market? Because that’s what it is: a market of 5 billion dollars, for food, living, transport, energy, water, healthcare, ICT.”
He shows me a newspaper clipping with a photo of two elephants somewhere in the Indian country side and asks me to describe what we are looking at, with a warning though: “You don’t see what you see.” We see a traditional image, an illustration of a civilisation that is somewhat behind. “Right, but what are these animals carrying on their back? They are transporting the electronic voting machines that are used during parliamentary elections. In India elections are 100 percent based on electronic voting. You don’t reach that level, do you, in your so advanced country.”
Prahalad scores: we, westerners, often have a biased view of what he calls the “bottom end of the market”. We don’t believe that this market is real, we think that new technologies are not accepted there, or that market entry is impossible.
Prahalad: “There is incredible potential for innovation and creation of wealth. And what’s more: it has been done already. It has been proven. Look at the mobile phone industry. Have you been to Africa or Asia recently? Everyone is running around now with a mobile phone. India is the fastest growing mobile phone market in the world, and with the lowest price for phone traffic. The mobile phone industry has cracked the code to this market. Yet the mobile phone is not a low tech device.”
How did they succeed? The professor provides a number of reasons. The transition from an unorganised market to an organised and efficient private sector, for instance. The long road to market development, the search for breakthrough innovation. But the key concept for him is on another level: price. “An affordable price, that’s what it is all about. An eye operation that costs 3,000 USD in the United States, may cost 20 USD in India. People may be able to afford only an outlay of 60 USD for a computer. And a one minute mobile phone call costs hardly one dollar cent.”
This starting point leads to an entirely different approach to the pricing mechanism. While companies in the West still apply the model ‘cost + margin = price’, the model here is ‘acceptable price – margin = cost’. And it works, says Prahalad. He provides some more examples. The Indian company Jaipur Foot makes 16,000 leg prostheses a year, with a sales price of 25 euro a piece. “And they are as performing as the high tech prostheses that you can find in the US,” he says. He talks about the small soy farmers on the Indian country side, that use their cheap internet-enabled PC’s to check the soy prices on CBOT, the Chicago commodity trading market. He tells the story about the dairy company Amul, that collects every day the milk of two million livestock farmers in 11,000 villages and has a turnover of nearly one billion dollar. “Unilever’s real competitor.”
Western companies better take note. “What is happening on the bottom end of the market, will eventually also have consequences for the West. You don’t need much imagination for that. We will have to let go in the West of the traditional idea that only rich countries can innovate. At least a number of ideas that originated at the bottom end of the market will move up to the top.”