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C. K. Prahalad on the New Age of Innovation

By June 21, 2011Article

A prominent world-class figure, Dr. C. K. Prahalad was named number one in the Thinkers50 (the most influential thinkers in management alive today) poll conducted by Suntop media and the Times of London. He is currently Distinguished Professor, Ross School of Business, University of Michigan and specializes in corporate strategy.
Among the books he has written, Competing for the Future (co-authored with Gary Hamel) was named the Best Selling Business Book of the Year 1994; The Future of Competition: Co-Creating Unique Value with Customers (co-authored with Venkatram Ramaswamy in 2004) was described by Business Week as “an important book full of disruptive ideas;” and The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profit was selected as one of the best books of 2004.
Interop/Software 2008 was the site of the U.S. launch of his most recent book (co-authored with M. S. Krishnan). During his keynote address, Dr. Prahalad explained the concepts behind the new business model presented in the book, the role of IT in this model, and the business imperatives for succeeding in The New Age of Innovation .
The Basis and Concepts Behind Creating Value in the New Business Model
SandHill: What led you to write The New Age of Innovation and what is the core concept of your book?
Prahalad: The core concept is that companies will lose their competitiveness if they deny four current trends and how the convergence of these trends is changing the way we think about innovation and value creation. It does not matter whether the business is selling tires, insurance or health care, or whether it’s one of the new age businesses like Facebook, Google or eBay.
For the last four years, I’ve been asking myself: in the age of the Internet, what is going to be the underlying source of competitive advantage for companies? What will endure for the next ten years? I noticed four trends.
First, connectivity – and I think it’s the core issue that will change the competitive landscape for all of us, whether it’s through PCs or cell phones. Second, the cost of digitization is going down, so the cost of technology is not going to be a limiting factor for deploying it across the world. A third trend is the convergence of technology. Is your cell phone a telephone, a computer, a camera, a watch or all of the above? And industry boundaries are breaking down like technology boundaries. The fourth trend is the emergence of social networks.
If you take globalization, which feeds on connectivity, digitization, convergence and social networks – and the other way around – all of them together will change the way we think about innovation and value creation.”
To Stay Competitive, Companies Need to Adopt the New Way of Doing Business
SandHill: How will it change the way companies do business and innovate to create value for their customers?
Prahalad: It causes the relative balance of power between the consumer and the firm to change. Ten years ago, the firm had significantly more influence than the consumers. Now consumers can have as much influence and, in some cases, more influence than the firm.
As an example, Google does not create firm content. The content is sourced from a large number of suppliers around the world, none of whom Google owns, but to whom Google has privileged access. In the new business model, the firm does not have to own the resources but must have the capacity to access the resources.”
SandHill: Besides ownership of resources, are there any other characteristics of this new “connected” business model?
Prahalad: The second part is how the value is created. Even when Google may have a hundred million consumers, it may still have to treat each consumer’s experience as unique. You and I can decide what content we want to look at and how we want to experience Google at any point in time. So one consumer experience, which is co-created with Google, is what creates value. This is a huge shift from the Model-T’s unappreciated consumer, where Henry Ford said they could have any kind of color they wanted as long as it was black. And all the resources for the Model T were within the company.
In the new business model, it’s not one consumer; it’s one consumer experience at a time. So the new game will be co-creation of a personalized experience. Co-creation is important because I am involved as a person in constructing my own experience. And that is true, whether I go to Starbuck’s, or iPod, Google or eBay. Co-creation means two joint problem-solvers: the company and me. And it is about experience, not about products. So we have a co-created, virtualized experience real value instead of a product-centric real value.”
SandHill: Isn’t this just a new concept or new way of viewing value, rather than a new model that requires actually changing the way a company does business?
Prahalad: No; in order to create co-created, personalized experiences, the resources will not be in one company. A large number of facilities may have to work collaboratively. That is a shift. Resources based upon a supply chain have a predetermined sequential process.
In a co-created customer experience, there cannot be a predetermined sequence or positioning of activities and vendors. For example, if I want to get some information from BBC, Google has to access BBC for that particular request. The next request may not involve BBC at all. Each one is new and different.
Instead of a predetermined supply chain as you would use for creating products, you will now need to create a web with various elements that can be articulated depending on the consumer experience you want to create. You must access multi-institutional and, in some cases, multi-geographic, vendors in order to fulfill that one unique experience at a time.”
Examples of Successful Businesses Using the New Model
SandHill: Are there any examples of companies already successfully operating within this new business model?
Prahalad: I’ll share two examples. In the first one, diabetes is a chronic public health crisis in this country and in most developing countries. There are 40-45 million people in India who have type 2 diabetes, even though it’s a poor country. In most countries, the insurance goes up dramatically if you have type 2 diabetes. In many cases, you cannot be insured because it’s a high-risk disease with life-long problems that require diagnosis and medication on a continual basis. I was involved in trying to create a product where we could apply new principles to create a different insurance product for type 2 diabetes and improve opportunities for not only rich but also poor people with this disease.
We started with a simple principle. Lifestyle diseases need effective management by individuals, need a personalized routine, and need an individual context for the treatment. Dealing with this disease needs to be unique for one individual at a time.
The second principle is that economic incentives can be a source of feedback to individuals So an insurance company can start with a base price and a regimen; if you as the patient follow the regimen, your risk goes down and it also goes down for the insurance company – which can therefore reduce the premiums. The company gives enough of a stretch for compliance so there are economic incentives for people to take care of themselves. But this involves diabetics needing to test themselves, have medication that is inexpensive, diagnose themselves, check their blood sugar. One firm cannot do all this. Therefore, you have to create a large number of vendors who can work together to create a system that allows you to deliver this product.
A company in India is partnering in a joint venture with an insurance company and has created this product. They put together an ecosystem of a company that makes insulin, a monitoring company that makes testing equipment, diagnostic places where people who cannot afford their own testing equipment at home can go to a testing lab, and in some areas the ecosystem also includes collaboration with resources that can help transport people to the testing lab. It can also help customers create a new lifestyle and health consciousness by constantly sending messages. In fact, the system today can monitor you and send you a message: don’t eat the cheesecake for the next week because your sugar is out of control.
This was launched last year and already compliance rates have dramatically gone up when people are signed up. This system works, and it is totally transforming the traditional insurance industry, which did not even want to talk about high-risk individuals; now they are a viable business opportunity.
So essentially the transformation that I see happening is that the firm used to be the center of attention and center of analysis, whether it’s ERP, supply chain management, CRM-these are firm-centric views of suppliers and customers. I believe we will move to consumers activating the systems through multiple channels (either through a PC or a cell phone or other channels such as an ATM or bank branch); but it looks like a network, not a sequence of a supply chain.
Another example is DHI, a fleet management company in the United States, with helicopters, jets, and other models in the fleet. It has multiple customers from various places such as the arctic, deserts, mesas and oil-drilling platforms. Each one uses the fleet very differently, from a medical emergency, to somebody going to Africa for a safari. So there is tremendous complexity in managing the business. There are also multiple software vendors and more than 1,000 databases, which keep increasing because nobody knows where the stuff is. Those systems and business processes are not resilient. You could not change it very easily for customer service. And of course you have poor performance and loss of business.
So to transform this company, you start with the goal of one consumer at a time, one application at a time. For each one, you do personalized pricing based on usage (oil drilling as opposed to transporting cargo, for instance) instead of flight hours, and you depreciate assets differently. So you’ll have a large number of vendors because it’s a large fleet, and different people service the fleet. So the system has to be reconfigured differently-to be transparent, flexible, protect the legacy systems, and also have new analytics and insight on how each customer is using the fleet very differently and therefore what you have to do to create value for each customer.
DHI went through a very elaborate process for transformation. Results include the aircraft on the ground reduced from eight to two hours – that means real money. There was a 50 percent reduction in overall price of service and $6 million in warranties. But you cannot create this real value without transparency to all vendors and logistics, flexibility in business rules, analytics and insight. So we have gone from product innovation, to specific solutions, to co-created experiences.”
IT is Crucial in the New Model for Value Creation
SandHill: How will companies migrate into this new business model of co-created experiences?
Prahalad: The business unit of the mid-1990s looked at the whole corporation as a source of competence, especially the intellectual assets of the organization. The extended supply network also was a source of competence. Today we are saying the consumers also are a source of competence. So company strategists need to increase and improve the importance of the company’s resource base so it can build a system that it can access.
To do that, you have to build fundamentally new capabilities in the organization’s social architecture: the values, skills, attitudes, strengths, training, and performance measurement. But more importantly, you have to re-think the technical architecture of your business and how ICT can become a strategic asset. So if you go through that logic, you come to two simple conclusions: (1) talent matters more than we thought, and (2) IT matters more than we thought.
You may still need a product. For instance, if your business is an emergency-management system, you need a product, but it doesn’t mean you still need an ambulance. And what I find exciting is that every company can differentiate itself because it’s dealing with unique personalized experiences and not commoditized products.”
SandHill: How does this impact the future of the software industry?
Prahalad: Investment in products is not the game. Now it’s global talent leverage, new business models, collaborative capacity, and common shared standards and platforms. So I believe that companies will go to consumer-centric global businesses, and I believe our systems must move toward citizen-centric public services. If somebody gets married and wants to change their driver’s license and want to change the passport or something else, why do they have to fill out eight forms asking for the same information? That is the business opportunity. And it cannot be done without understanding how the underlying systems work.
For the diabetes example I described, you need a network, sensors, the ability to do analytics so you understand out of five million customers which ones need to get some notification that they’re not in compliance. And looking at business processes, you need the ability to identify and change pricing, the ability to identify one individual behavior at a time; you need an extraordinarily interesting large database, focused analytics, and a flexible business process. You also have to leverage legacy assets. And you need to worry about scalability and interoperability because multiple organizations are involved. And how do you build platforms? That’s the IT side. On the business side, you have to worry about constant change, quality, flexibility – and it has to be Six Sigma all the time.”
SandHill: What will be involved in creating such platforms?
Prahalad: I think of a platform not as a single company or just companies merging but, rather, a platform as an ecosystem of large and small companies working together to common shared standards. It will involve little companies and big companies, all of them working on three areas: collaboration, connectivity and computing.
SandHill: Will these platforms become the backbone of the new business model for innovation and creating value?
Prahalad: I believe there is a new house of innovation on two pillars of co-created experiences and equal demand/access to global resources. The basement of the house is the technical architecture of the firm – the information and communication technology backbone. The social architecture of the firm is the values, skills, attitudes of all managers and people in the company form the roof. But the thing that holds everything together, the glue, is the IT architecture, which is the flexible and resilient business processes and focused analytics. Value creation becomes understanding and managing tensions and frictions across all these parts.
The competitive landscape is changing. I think the next generation of systems is one consumer co-created experience using the resources from multiple vendors. The nature of advantage, I believe fundamentally, is access to capital, raw materials, technology, and resilient processes and analytics. And new value creation and innovation depends on rethinking technical architecture of your firm. I believe information architecture and capabilities will become new strategic assets; therefore, IT matters.”
To learn more about the concepts behind C.K. Prahalad’s book, The New Age of Innovation and how the convergence of customer-focused strategies and global networks is transforming modern business models, watch the complete video of his Software 2008 keynote address at the post-conference video page.
Kathleen Goolsby is a writer for

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