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Firms must partner with customers to create value: Prahalad
Priya Ganapati in Mumbai | February 17, 2004 20:21 IST
Two years ago, Hindustan Lever Limited, one of India's largest fast moving consumer goods companies, had 2,000 salesmen networking with retailers to sell the company's products to consumers across the country.
Today it has 250,000 'consultants' who directly market the products virtues to consumers even as it plans to hire 30,000 more.
"We have moved to direct selling for our personal and home care products. The numbers shows how with very little investment we can unlock so much value by co-opting our customers who now become our sales persons," says MS 'Vindi' Banga, Chairman, HLL.
It is this idea on how companies can partner with customers to create value and innovation that noted management thinker, C K Prahalad has written about in his latest book, The Future Of Competition: Co-Creating Unique Value with Customers.
Co-authored with Venkat Ramaswamy, a professor at the University of Michigan Business School where Prahalad also teaches, the book puts forth a new idea: Customers are need not just be recipients of a company's product.
Companies need to work along with their customers and get them to do research, market their products, provide feedback and suggest innovations, he professes.
"The dominant logic has been that firms create value; products and services represent value and innovation is about creating products and services. So firms extract value at the point at which they meet customers. The new logic is that value is created at the point of consumer-company interaction and co-created with the firm," says Prahalad.
Most management books and leading thinkers have always put firms at the center of the business universe. How firms can work better and improve themselves -- be it through increasing efficiency or through the amount allocated to research or developing new products -- has been the key questions that management leaders have been seeking answers for.
But dwindling profit margins caused by increased competition, commoditisation of most products and technological changes that empowers customers especially using the Internet means a 'new industrial system' needs to be evolved, says Prahalad.
Innovation or efficiency is no longer what firms should worry about for the future. Instead the future of competition will lie in how value can be co-created is what he suggests.
"Access to resources today is more important than just leveraging the resources. The drivers of value are now co-creation, individuals and an experienced network," says Prahalad.
Under the new regime that Prahalad proposes, consumers will want to influence every part of the business system. And companies in turn will accommodate them as evinced by HLL's experiment where its customers now not only provide feedback that directly reaches the company but also sell its products becoming brand ambassadors for the company.
So rather than simply selling their products and services, companies will begin to design environments that comfort the consumer.
Prahalad cites the example of General Motors' On-Star satellite communications system, which can summon help after an accident, open the doors if the driver is locked out and even direct motorists to the nearest restaurant.
"No longer can firms autonomously create value. Value is not in products and services per se. Now products are just something around which compelling individual experiences are created. So innovation will shift from products and services to environments where to co-construct their own experiences. These personalized experiences are going to be the source of unique value for both consumers and companies," says Prahalad.
In his new book, Prahalad has presented his view of the new organisational, infrastructure and governance capabilities that firms will need to build for competing on experiences and co-creating value.
Deepak Satwalekar, Managing Director and CEO, HDFC Standard Life, says HDFC is already to trying to see how it can move to this level. HDFC has been tapping self-help groups across India to leverage them in their efforts to sell insurance products.
"These groups know the customers that they are working with and they have an amazing collection rate because of that. Partnering with them has helped us in ways that could have never been possible if we had done it with our own agents," says Satwalekar.
Satwalekar agrees with Prahalad that the companies need to put customers at the center of their universe and use them to enhance their products and services in ways not imagined before.
"Anyone seeks to deliver value through innovation is barking up the wrong tree. In the insurance business innovation will give you just give you a two-month lead before the competitors catch up. Now it is all about service delivery and that is where you can partner with your customers to create value," he says.
Launched in India on February 16, two days before the official book launch in the US and researched over six years Prahalad's book will go through nine language translations including Chinese.
At the book launch, Prahalad suggested that corporate India had an advantage compared to companies in developed markets."India doesn't have to do best practices anymore. We are now ready to move to 'next practices' because we have seen that if everyone follows best practices then they will eventually converge and look alike. So Indian companies can skip the best practices step and move on to next practices," he says.