To stay ahead of competitors, corporate strategists must pay careful attention to the many ways in which today’s converging markets and technologies are redefining the role of the firm and the value it provides for customers. C.K. Prahalad, professor of corporate strategy and international business at the University of Michigan, summarized his approach to this topic in a presentation called, “Acting on Weak Signals: Transforming the Process of Innovation.” Prahalad spoke at the May 2 Wharton Emerging Technologies Management Research onference.

“Strategy is about searching for new sources of competitive advantage,” Prahalad said. “It is about being unique, creating wealth, and inventing new rules and new games … It involves creating carefully orchestrated experiments and thinking big. New opportunities may come either from the core or from the periphery.”

Prahalad cautioned his audience not to focus on matching the “Best Practices” of today’s market leaders but to pursue what he called “Next Practices.” “You can catch up using Best Practices, but you cannot become the leader. Strategy is not an extrapolation of the past.”

A first step in that direction is to analyze how changes in technology are challenging old assumptions about the way value is created, Prahalad noted, adding that he believes “there are more opportunities for innovation than ever before, but we must start by looking through a new lens.” His analysis, elaborated further in his upcoming book, The Future of Competition: Co-Creating Unique Value with Customers, began by analyzing the lens that corporate strategies traditionally use to define value creation. Prahalad called this “the implicit assumptions behind value creation that drive every effort at innovation.”

The traditional paradigm of value creation, Prahalad said, involves a set of assumptions about value – all of which are so ingrained that they are rarely challenged or even spelled out. Prahalad called these assumptions the “dominant logic; the lens through which we see the world; our standard operating procedure … embedded in the DNA of the company. It is the implicit theory of competition.”

Those assumptions, according to Prahalad, are the following:
  • Value is exchanged between the firm and a customer.
  • Value is created by the firm.
  • Value is embedded in products and services.
  • The value chain represents the value creation process; it is sequential and linear.
  • Innovation is about technologies, products and processes.
  • Customers have a choice – to buy or not to buy.
  • The manager’s job is to persuade them to buy; the interface between company and consumer is the locus for economic value extraction.

    The implications of these assumptions are significant: First, consumers represent the demand for what a firm can offer. Second, value is transferred from the firm to the consumer. Third, there are multiple approaches to value extraction at the point of exchange.

    But these assumptions no longer automatically hold true, especially in technology-based industries, Prahalad asserted. “We have to accept that maybe we are not as smart as we thought.” The old game was “about a focus on efficiency.” The new game must take into account not only new technologies but “such forces as deregulation, globalization and emerging markets,” including China and India. Among those new forces, Prahalad highlighted the “convergence of traditional industry values” that comes from the blurring of lines between various kinds of products and services.

    In that regard, Prahalad outlined several ongoing processes of convergence that exemplify the trend: For example, retailing, financial services and databases converge in companies like Wal-Mart and Citicorp; chemicals and electronics in Kodak; computing, communications and software in Sony and Dell.

    The fusion of new and old knowledge is creating hybrids,” Prahalad noted. “Companies respond by putting every possible feature into a device [or product] … But there is cognitive dissonance from the enormous complications. The good news is that there is tremendous product variety. The bad news is, experience is the essence of value,” not features. Customers are often frustrated and displeased because they feel “there is a better one” – another newer product out there already or about to come out soon.

    Nowhere is the profusion of newly defined, converging products more promising than in the “wellness space,” said Prahalad. “The new goal is creating ‘wellness,’ not just curing disease” and that means “lots of new products and services in addition to drugs.” These include “neutraceuticals,” “cosmaceuticals,” nutritional supplements, beauty aids, yoga, therapeutics and genetic screening – each of which combines knowledge and value added from more than one traditional discipline.

    The lesson for strategists, said Prahalad, is that “the definitions of the industry are driven by consumers – and not by the companies. [Individual] consumers are making their choices, not you [strategists].” Each consumer is “picking his or her own portfolio” of products and services – and defining the limits of the sector to meet his or her needs. Prahalad went on to show how customers in other sectors are also playing a more decisive role in defining the value of products.
  • Napster and the music industry: The controversy over downloaded music shows that “customers want the product, but in ways that they want; they want to put CDs together by themselves – and pay less” for them.
  • Lego Mindstorms and Fun: This electronic game is extremely popular because “you can share this toy with people around the world. Customers are in charge of product strategy. Consumer communities become integrated with one another.”
  • FedEx and Logistics: Its successful web site allows customers to see the information by themselves. “The problem is that this requires high quality and Six Sigma [Quality] all the time.” That kind of transparency isn’t possible in every industry. “But why doesn’t GM let you see the car getting built?” Prahalad asked rhetorically.
  • Patients and Healthcare: Many customers now download a great deal of healthcare information from the web so they can engage in dialogue with their doctors.
  • Pacemakers/Medical Devices: The value of each cardiac pacemaker depends on the needs and experience of the user. It is a “carrier of experience,” and the “individual is at the heart” of that experience (no pun intended.)

    The “New Value Creation Paradigm,” according to Prahalad, involves very different assumptions that are the basis for the success of the above companies:

    First, value is created at the point of exchange. Second, value is co-created by the consumer and the firm. “The value is created only when the customer and the firm work together. Third, value is embedded in experiences; products and services are carriers of experience. “The supply chain is not set. It is an experience chain that has to be selectively activated,” Prahalad said. Fourth, the value chain involves experience fulfillment webs; it is not sequential and linear. Fifth, innovation is about experiences; technologies, products and processes are critical, but they are not the goal. And sixth, customers make a choice.

    The implications of this new paradigm are significant. Prahalad suggested that strategists rethink the ways they define and assess the value of their products and services – using the lens of this new paradigm. More specifically, here is how the new paradigm affects:
  • Innovation goals: The traditional focus was on new products and processes; the new goal should be on “experience environments.”
  • Basis of value: The traditional focus was on products and processes; the new focus is on “co-creation experiences.”
  • View of Value Creation: The old assumption was that the firm will create value through “supply chain-centric fulfillment.” The new assumption is that value will be co-created in experience environments for individuals.
  • The focus of development: The old focus was on low cost, high quality, high speed and modularity. The new focus is on “granularity, extensibility, evolvability, and linkages.”
  • View of technology: The old focus was on features and function and on technical integration; the new focus should be on “experience enablers” and “experience integration.”

    Strategists who are striving to create “Next Practices” must adjust their mindset – and meet the new value paradigm, according to Prahalad. More specifically, they must create intelligent products/services, and they must develop and nurture an experience network among consumer communities. They must enable transparency and dialogue with their customers. They must provide customers with real-time access and action, and must cope with the heterogeneity and complexity of their changing needs. They must rely on input from alliances. And they must be prepared to rapidly reconfigure their products and resources in response to changing market needs.