The Co-creation Connection

Companies spent the 20th
century managing efficiencies.
They must spend the 21st century
managing experiences.

The
content strategy & competition

Co-Creation
Illustration by Steve Moors
1
Connection
by C.K. Prahalad and Venkatram Ramaswamy

For more than 100 years, a company-centric, efficiency-driven view of value
creation has shaped our industrial infrastructure and the entire business system.
Although this perspective often conflicts with what consumers value — the quality of
strategy + business issue 27

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

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

A
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
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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

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

tics, service, and points in between); conflicts between
companies and consumers are more visible and resolved How Companies Think How Consumers Think

more productively; and companies don’t dictate how CRM Hopes
value is created. Call Centers Dreams
ERP Desires
In short, companies must learn to co-create value Choiceboards Aspirations
with their customers. Enterprise Networks Peace of Mind

The Point of Exchange
Product Variety Family
Although it is only human to feel threatened by a Plants Lifestyle
loss of control, it makes little sense for companies not to Pricing Work Style
Logistics Compromises
be open and engaged with consumers. By partnering Product Needs
with them in the value creation process, companies can Manufacturing Chats
Engineering Stage of Life
better balance the objectives of value creation, managing Technology Consumer Reports
the bottom line (cost and investments) and the top line Science Activities
(growth and revenues). Furthermore, co-creation is be- R&D Communities
Platforms Word of Mouth
coming a competitive imperative. Information illumi- Expectations
nating what consumers value is voluminous, and it flows
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freely in information networks. If your company does
not capture this intelligence to create more fulfilling is generated; (3) the consumer need not respect industry
experiences for consumers, your competitors will. boundaries in the search for value; (4) the consumer can
compete with companies for value extraction; (5) there
The Art of Co-Creation are multiple points of exchange where the consumer and
How do companies co-create valuable experiences with the company can co-create value.
consumers? In the customer-centric mass production and mar-
The traditional company-centric view says: (1) the keting of automobiles, for example, suppliers provide
consumer is outside the domain of the value chain; (2) raw materials, components, subcomponents, and sys-
the enterprise controls where, when, and how value is tems to manufacturers, who create value by assembling
added in the value chain; (3) value is created in a series these inputs into vehicles. Consumers actively decide
of activities controlled by the enterprise before the point what vehicle to buy, but companies decide what their
of purchase; (4) there is a single point of exchange where choices will be. Cars are sold by dealers acting as inter-
value is extracted from the customer for the enterprise. mediaries for the automakers. For companies reliant on
The consumer-centric view says: (1) the consumer this scenario, value creation is defined solely by extract-
is an integral part of the system for value creation; (2) ing profit from end consumers.
the consumer can influence where, when, and how value The Saturn Corporation, billing itself as “a different

In a market forum, consumers define
value as experiences and push
companies to see value the same way.

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

Corporation launched Saturn, it didn’t just start a new they are:
car company, it created a “community.” Saturn works • How transactions are managed.
with its customers in the design, manufacturing, and • How choices are determined.
sales processes, and it engages Saturn owners to help • How the consumption experience is staged.
continuously innovate and improve its cars. • How price and performance relate.
Consumers think about the place of a car in their By examining the four basic elements that consti-
life — how it fits their budget, their desire for comfort, tute an exchange, companies can explore how current
their need for peace of mind, their aesthetics. management approaches may positively or negatively
Companies think about their competitive strategy and affect customer experiences, and discover better ways to
their operations — engineering, differentiation, logis- create value.
tics, pricing, and, above all, revenue and profit. • Transactions. Companies have been quick to
Although these views of value do clash, they’re not irrec- spot emerging technologies that reduce transaction costs
oncilable. Saturn is a company trying to merge these by having consumers perform functions formerly han-
two ways of looking at value. dled by employees (i.e., customer self-service). Gas sta-
In the pages that follow, we present a framework — tions’ transitioning from full-service to self-service was
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a new value creation paradigm — to suggest how com- an easy win for gasoline retailers and consumers. Com-
panies can better understand the consumer’s view of panies asked customers to fill their own tanks and pay
value and productively work with them to co-create through devices on the pump. And what drivers lost in
more satisfying value for both sides. attendant service they happily traded for the conven-
ience of self-service and, sometimes, better prices.
Elements of Exchange But most customer self-service scenarios aren’t this
The point of exchange is often the place where the con- smooth. Managers are usually so preoccupied with the
flict between the traditional company view of value and cost advantages of self-service that they misjudge its con-
the consumer view of value is most exposed. Although sequences on the customer experience. Or worse, they
companies are not inclined to interact with consumers don’t consider the consequences at all. Anyone who has
at all points in the value chain, opportunities for been foiled by automated multiple-choice customer
exchanges between the company and the consumer nei- service over the phone, or who has been left on hold lis-

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 consumer 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

occurs constantly. Witness the number of abandoned to $24.99 in a retail store. Over time, consumers will
“shopping carts”; perhaps shoppers who stop short of recognize such differences, and they might accept them,
purchasing find the interfaces confusing or don’t feel but only if an explicit policy exists that says online and
secure using a credit card online. For the consumer who in-store pricing (or styles and colors) may differ.
doesn’t believe a company will not sell his or her per- Information technology has opened a whole new
sonal data to someone else, giving profile information in opportunity for manufacturers to cost-effectively offer
exchange for the convenience of “one-click” purchasing customized products faster and cheaper. In the comput-
or instant recognition on a password-protected Web site er industry, companies like the Dell Computer
may not be worth the risk. Companies also have greatly Corporation have an impressive competitive advantage
underestimated how differently older and younger peo- in build-to-order PCs. Now BMW is offering a “cus-
ple view issues like privacy and security online. tom” car, delivered in 12 days. For the Z3 roadster, the
The key issue in automating transactions is con- automaker offers a choice of 26 wheel designs and 123
sumer heterogeneity. Customers differ in their skills, console options.
their propensity for problem solving, and their willing- Mass customization allows companies like Dell and
ness to spend time to learn a new system, as well as their BMW to offer variety, but who decides what can be cus-
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willingness to trust it. This is true whether it involves the tomized? Customization ultimately is a matter of what
Web or any other system that is unfamiliar. can be built and delivered to suit the efficient operation
Self-service works best when it’s applied by compa- of a company’s value chain. Even in the most sophisti-
nies that manage their costs and the customer experi- cated mass-customization schemes, the customer choos-

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ence with equal care. Southwest Airlines Company es from a menu dictated by the company.
works hard to make sure its standards for being prompt,
accurate, and friendly are the same whether the cus- hanks to the Web, companies can
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

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-

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

worldwide interactive marketing, the Apache Web server software and former and current AOL customers.
reached out to the more than 400 fan the Linux operating system. The Web has also become an influen-
sites before the movie was released to The ability of consumers to experi- tial tool for social groups focused on
communicate with the early influ- ment with each other goes beyond such issues as child labor and envi-
encers and give them insider tips. software and digital products. Cooks ronmental protection to get corporate
Consumer education and feedback can share recipes. Gardening enthu- attention and promote reform.
sites are struggling to prove them- siasts can share tips on growing Although activism might seem men-
selves as viable businesses. But this organic vegetables. Homeowners can acing to companies, it also opens the
does not diminish their utility as share stories about their home door to competitive opportunity.
places where consumers can com- improvement projects. The list goes — C.K.P and V.R.
pare and share information, and on. Companies that choose the path

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.

about $11,000, and it has comfort features, such as spa-
cious seating and headroom, that are highly valued by Building Blocks for Co-Creation
consumers in India. Businesses operate in a networked environment in
Even the world’s 4 billion poorest consumers, who which it is possible both to learn continuously about
earn less than $1,500 a year, are aspiring to a better life what people want and need, and to interact with them
and demanding more goods and services. This situation in ongoing exchanges of value. But companies need to
represents a huge opportunity for companies to change be much more aware of where these opportunities to
their mind-sets and their business models (e.g., “the interact with consumers exist.
poor can’t afford or have no use for consumer products,” We suggest there are four building blocks for co-
or “we can’t make money in this market”). In 1995, creating value. Dialogue at every stage of the value chain
Unilever PLC’s subsidiary in India, Hindustan Lever encourages not just knowledge sharing, but, even more
Ltd. (HLL), drastically altered the management of its importantly, understanding between companies and
value chain so it could sell a detergent, called Wheel, to customers. It also gives consumers more opportunity to
the poor. HLL decentralized its production, marketing, interject their view of value into the creation process. In
and distribution and quickly established sales channels short, access challenges the notion that ownership is the
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through thousands of small storefronts. HLL adjusted only way for the consumer to experience value. By
the cost structure of its detergent business so it could sell focusing on access to value at multiple points of
Wheel at a very low price point and still make money. exchange, as opposed to simply ownership of products,
Today, Wheel has gross margins and a return on capital companies can broaden their view of the business
as good as, or better than, HLL’s higher-end cleaning opportunities creating good experiences. Risk reduction
products, and Unilever has used this business model to assumes that if consumers become co-creators of value
create a new detergent market in Brazil. with companies, they will demand more information
Patients at India’s Aravind Eye Hospital, the world’s about potential risks of goods and services; but they may
largest eye-care facility, pay about $10 for cataract sur- also have to bear more responsibility for handling those
gery, compared to $1,600 for equivalent care in the risks. Transparency of information is required to create
United States. The hospital, which operates on more the trust between institutions and individuals.
than 200,000 patients per year, gives 60 percent of its 1. Dialogue. Dialogue is creating shared meaning.

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-

D
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
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

both parties to act, especially when shut out of the value creation process.
they’re at odds. What is happening in The successful coupling of access with dialogue in
the music industry today is the the computer community’s Open Source movement has
antithesis of dialogue. If the record had a significant influence on traditional players in the
labels were listening, they would hear that consumers industry as they see its benefits. For example, to promote
don’t object to paying for music. They just want to cre- the use of Linux, the open source operating system,
ate their own musical experiences once they’ve paid for IBM is putting $40 million of its software tools in the
it. People have been packaging their own music for years public domain. More important, in 2001, IBM made
(in the 1970s, parents of Napster and MP3 player fans the largest commitment of any computer maker — about
made custom cassette tapes by copying songs from long- 20 percent of its R&D budget ($1 billion) — to Linux
playing records). Why, with even better technology and Apache Web servers.
available today to duplicate and mix their own music, 3. Risk Reduction. The obligations and responsibil-
would consumers want anything else? ities of the firm and consumers for risk management will
While recording companies fight the battle against always be debated. But it is safe to assume that as con-
“illegal downloading” and resist changing their business sumers become more involved in co-creating experi-
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models, music sales are declining and sales of blank CDs ences with companies, they may be willing to take on
are soaring. “If the industry doesn’t change the way we more responsibility for managing risk exposures, if com-
do business, we’re going to be bankrupt,” Val Azzoli, panies are willing to reveal more information about the
cochairman of Atlantic Records, told the New York risks associated with the products and services they pro-
Times in February 2002. The Sony Corporation shows duce. One key issue in the Firestone-Ford tire case cen-
just what’s at stake. Its music sales are currently about tered on the amount of knowledge Ford and Firestone
$4.6 billion, compared to about $40 billion in sales had about risks associated with the combination of vehi-
from consumer electronics, including CD burners and cle, tire pressure, and driving conditions. How much
MP3 players. should Firestone and Ford have shared with consumers?
2. Access. Ownership is the traditional way to look In a world where good information is widely avail-
at the transfer of value from the company to the able, consumers, within the limits of their technical
customer. But you don’t need to own something to knowledge, should be able to make more informed
experience its value. Indeed, access without ownership is choices about risks. Companies can be a part of that
desirable for consumers and can be very profitable for process by being both forthcoming in the discussions of
businesses. Thinking in terms of access expands a com- risk with the general public, and by disseminating
pany’s view of potential markets. appropriate methods for assessing personal risk and soci-
Over the past decade, numerous companies serving etal risk. Labeling is one way of explicitly passing on to

The world’s largest houseboat maker
shows how the pieces of the co-creation
model — dialogue, access, risk reduction,
and transparency — fit together.

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.

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

S
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
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-

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

for the company as well as the risk the consumer won’t balanced system of value creation, and a system more
be satisfied. sensitive to the consumer’s perception of value. A new
information architecture that allows a company to
A Quiet Revolution maintain a consistent brand identity and quality of cus-
As the noise from debates about the old economy and tomer experience across channels, for example, is an
the New Economy dies down, it is easier to detect a qui- essential strategic asset. Likewise, IT vendors need to
eter revolution — fomented by a shift in how value is work with companies to come up with replacements for
perceived and created. Movement toward a market envi- today’s company-centric business software systems.
ronment in which companies and consumers co-create Companies can and will make the adjustments to
experiences is gaining momentum, but as with any thrive in a world where value is co-created in experi-
change in deep-seated assumptions about competition ences. But it will take time, courage, and stamina to
and strategy, the adjustments for companies will be compete in a different value creation space. If companies
complicated and trying. rise to the challenge, they are sure to discover an excit-
First, companies must embrace the notion that con- ing new era of business creativity and opportunity. +
sumers can become partners in the co-creation of expe- Reprint No. 02206
12
riences. Only by letting go of the company-centric view
of value creation, once and for all, can companies pro-
ceed with the difficult and long-term work of making
lasting reforms to the business system. Managers must
make a major transformation in the way they conceive
of the tasks of value creation, and therefore change how
Resources
firms are organized. Management disciplines and the
relationships between disciplines need to be reexamined J. Philip Lathrop, Gary D. Ahlquist, and David G. Knott, “Health Care’s
New Electronic Marketplace,” s+b, Second Quarter 2000
— market research, product development, logistics, www.strategy-business.com/press/article/?art=19291&pg=0
branding, pricing, and accounting, among others.
C.K. Prahalad and Stuart L. Hart, “The Fortune at the Bottom of the
Companies are getting more used to competing on Pyramid,” s+b, First Quarter 2002
the basis of their adaptability and how fast they innovate www.strategy-business.com/press/article/?art=229761&pg=0
and apply knowledge, and they are rising to the chal- C.K. Prahalad and Venkatram Ramaswamy, “Co-Opting Customer
lenge of keeping down the costs of experimentation as Competence,” Harvard Business Review, January–February 2000
www.hbsp.harvard.edu/hbsp
they test new ideas. But business competition is a lot
more unpredictable when innovation and flexibility, Neil Strauss, “Behind the Grammys, Revolt in the Industry,”
New York Times, February 24, 2002
rather than efficiency, are the main drivers of value.

The Co-creation Connection

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