A brief about the write up:
It is a synopsis compiled by me from a new book that I read recently titled ‘New Age of Innovation’ co-authored by the management guru C.K. Prahalad, the #1 rank holder of ‘Thinkers 50’ (http://www.thinkers50.com/) He has had more winning ideas than most of his contemporaries put together. Be it the idea of ‘core competency’ that he coined along with Gary Hamel, the concept of ‘co-creation’ or the belief that there is a huge opportunity waiting to be tapped at the ‘bottom-of-the-pyramid’ (BOP).
I was impressed by the authors’ concept of transforming business model and decided to write a précis for the benefit of our readers.
Not only me, but corporate executives around the globe are inspired by this book and have created a blog (http://www.newageofinnovation.com/) to discuss the concept and add value.
It is a synopsis compiled by me from a new book that I read recently titled ‘New Age of Innovation’ co-authored by the management guru C.K. Prahalad, the #1 rank holder of ‘Thinkers 50’ (http://www.thinkers50.com/) He has had more winning ideas than most of his contemporaries put together. Be it the idea of ‘core competency’ that he coined along with Gary Hamel, the concept of ‘co-creation’ or the belief that there is a huge opportunity waiting to be tapped at the ‘bottom-of-the-pyramid’ (BOP).
I was impressed by the authors’ concept of transforming business model and decided to write a précis for the benefit of our readers.
Not only me, but corporate executives around the globe are inspired by this book and have created a blog (http://www.newageofinnovation.com/) to discuss the concept and add value.
Consider Starbucks where a customer decides whether to pick up the favorite coffee & run, stay & read the newspaper, have a meeting or do the homework. Or take igoogle which lets user create their own page. Both these companies serve millions of customers, but are providing a platform (storefront of Starbucks and home page of igoogle) around which a customer co-creates their own unique personalized experience.
The message is clear. We are moving to a world in which value is determined by one consumer co-created experience at a time. This is first of the two emerging pillars of innovation in all businesses.
During the industrial revolution many a large firm (e.g. IBM, Ford, Kodak, Philips, Siemens, etc) was vertically integrated. Around mid 1980s they started to source critical components from suppliers, and gradually moved towards global supply chains, accessing specialist and low-cost producers. Thus the supply of products, services, and competencies became multi-institutional. This trend towards access to resources from multiple sources, either local or global, and not just from within or subsidiaries is the second pillar of innovation in all businesses.
Therefore, in this new Era of Innovation, value is created by shaping consumer expectations as well as responding continually to the changing demands, behaviors, and experiences of consumers.
It can be achieved with the help of the two pillars - ‘one consumer experience at a time’ and ‘resources accessed from multiple vendors’, and have them connected together by a glue to be transformed into operations. The connecting glue is ‘Business Processes & Analytics’.
Business Processes is the social architecture of the firm – organization structure, performance measurement, training, skills and values - the link between strategy, business models, and operations. These must be clearly documented, transparent and resilient.
Analytics is the technical architecture of the firm, its information technology backbone. Commitment must be pledged towards Information & Communication Technologies (ICT) to make available the database required to focus on the behavior and needs of one individual customer among 100 million.
The relationship between the above various aspects of innovation in all businesses can be captured in the form of a “House of Innovation” as shown in fig. 1.1
Four driving forces are coming together for the first time in human history to enable emergence of new competitive dynamic that will create a need for continuous change without episodic big breakthroughs:
a) Connectivity and access to information. 3 to 3.5 billion people are getting connected thru cell phones or PC.
b) Digitization & the ability to move this information seamlessly across multiple devices, and dramatic reduction in the cost of computing, communication and storage
c) Convergence of industry and technology boundaries. Today your cell phone is a telephone, a computer, a camera, a watch, a radio & TV
d) Emergence of social networks
Despite of the above, 90% of the thinking on innovation is still very much firm-centric, product-centric view. Imagine passive consumers becoming innovators, rather than the innovation coming out from one genius or one firm. The world is moving at a breakneck speed. Why can’t we take one step forward and say in that new world of competition of active involvement of consumers there is a new and different way to innovate? Is there a different way to leverage the resources of others rather than assume that all the resources have to be inside the company? Once we start with this new perspective of managerial lens, we see change in innovation patterns all across.
Emerging markets are becoming major source of innovation. In the West there is a legacy system due to huge installed base. For instance, for the older generation of Americans, the cell phone is still a supplement, not the primary piece of equipment, but it is not so for the younger generation. Whereas people in the developing world (emerging markets) who never had a phone, that’s not a choice. The cell phone is the only thing they know. Western countries have a forgetting curve, developing countries don’t.
Companies must create a culture of highly decentralized innovation, where people can propose any ideas that they have for new products and services. They get a chance to do it. If it works, they can roll out the concept and scale it rapidly. If it doesn’t they kill it. This process must be based on a strategic intent: Global and Rural, simultaneously. It means they want to serve large global clients but also wants the ability to serve small local customers. The organizing principles between those two is to built resilient business processes that can be continuously changed at a low cost, have solid commitment towards information & communication technologies (ICT) and nurture a social infrastructure conducive to experimentation and desire to win within the broad goal of being simultaneously global and rural.
There is no right or wrong ways to bring about this transformation because each company has a different starting point. A Bridgestone or a Goodyear has a different starting point from a Nike. However, the common factors must be to have a point of view of where they want to go - uniquely developing personalized consumer experience based on co-created solutions - and the belief that no company today has the capabilities to service just one consumer at a time because of the complexity involved in building and sustaining the ecosystem.
So whether it is P&Gs ‘connect and develop’ or Unilever’s ‘Ponds Institute’ or IBM, none of them started with the assumption that we can be vertically integrated and still achieve the core principle of ‘one consumer experience at one time’. They built a supply chain that allowed their manager/s to selectively access resources depending on the demands of the consumer, thus making supply chain important not for cost reasons, but for competitive reasons. So the two put together is exact anti-thesis of Henry Ford and Model T where every consumer got essentially the same car model of the same color
Co-creation by definition reduces risk because consumers are already involved in thinking through what they want. It also reduces time and investment by virtue of inclusive participation of more people and suppliers in development. The assumption is that personalized experiences cost more, but the overwhelming evidence is it costs less. So the default outcome of collectively reducing time, investment and risk, is value creation.
Co-creation leads towards thinking about infinite ways of differentiating experiences, for e.g. unique personalized experiences. Unique experiences avoid the whole process of commoditizing products. If you keep buying books from Amazon, they know the pattern of your purchases and are able to tell you that you will like a particular book as well. The more they know about you, the more they can help you. That also takes care of analytics. So the switching cost for you is high. If you go elsewhere tomorrow, you don’t have the same relationship.
We must recognize that the nature of the relationships between consumers and the firm has changed radically. Starting over a hundred years ago, firms assumed undifferentiated consumers (for e.g. a consumer who bought the Ford model T). Since then, we have moved through various levels of marketplace segmentation of consumer groups.
Even very poor consumers in developing world have a pronounced need for differentiated and personalized experiences. Many of the solutions to poverty that treat the poor as one undifferentiated mass have failed, while approaches that recognizes their unique circumstances and needs by creating locally responsive and personalized solutions have worked. For example, self-help groups (SHGs), which are voluntary organizations consisting of about 12 to 15 women in a village, are able to obtain loans from banks that are developing micro-financing mechanisms. The loans are given to groups, not to individuals. The group then decides who among them and what projects need to be financed on a priority basis. Because the SHGs have intimate knowledge of the local circumstances – of individuals (their financial standings, their behaviors, and their character) as well as the community - their decisions are as local as they can get. The group co-creates their own experiences. They also implicitly supervise how the money is being spent. It is no surprise that the repayment rates tend to be extremely high – as high as 99.5%.
There are no differentiating factors at work anymore, as raw material, technology and capital is freely available. The real constraining factor was talent, but not anymore as now it is becoming possible to hire globally. So the real differentiating factor is the ability to be flexible to change. We need resilient, flexible growing processes. But it is not enough to have processes; we also need the databases and the analytics to focus on the behavior and needs of every individual. ICT comes handy here.
Needless to say, all the investment in ICT architecture is useless without focusing on the skills, behaviors, mindsets and training of managers & employees. It is known that one of the biggest impediments to make people change is not necessarily technology, it is the mindset. People have to genuinely believe that one person at a time - one experience at a time, is the way the world is going.
The focus should be on building organizational capabilities that allow a firm to create the capacity for continuous innovation. Successful innovations seamlessly connect concepts and ideas to their operations manifestations.
Companies who do not make the transition to this new world may risk their very existence. As supplies catch up with demand, consumer will start saying ‘I want to have influence on what happens’. Globally, variations based on customer preferences, biases and behavior will be the order of the day.
The message is clear. We are moving to a world in which value is determined by one consumer co-created experience at a time. This is first of the two emerging pillars of innovation in all businesses.
During the industrial revolution many a large firm (e.g. IBM, Ford, Kodak, Philips, Siemens, etc) was vertically integrated. Around mid 1980s they started to source critical components from suppliers, and gradually moved towards global supply chains, accessing specialist and low-cost producers. Thus the supply of products, services, and competencies became multi-institutional. This trend towards access to resources from multiple sources, either local or global, and not just from within or subsidiaries is the second pillar of innovation in all businesses.
Therefore, in this new Era of Innovation, value is created by shaping consumer expectations as well as responding continually to the changing demands, behaviors, and experiences of consumers.
It can be achieved with the help of the two pillars - ‘one consumer experience at a time’ and ‘resources accessed from multiple vendors’, and have them connected together by a glue to be transformed into operations. The connecting glue is ‘Business Processes & Analytics’.
Business Processes is the social architecture of the firm – organization structure, performance measurement, training, skills and values - the link between strategy, business models, and operations. These must be clearly documented, transparent and resilient.
Analytics is the technical architecture of the firm, its information technology backbone. Commitment must be pledged towards Information & Communication Technologies (ICT) to make available the database required to focus on the behavior and needs of one individual customer among 100 million.
The relationship between the above various aspects of innovation in all businesses can be captured in the form of a “House of Innovation” as shown in fig. 1.1
Four driving forces are coming together for the first time in human history to enable emergence of new competitive dynamic that will create a need for continuous change without episodic big breakthroughs:
a) Connectivity and access to information. 3 to 3.5 billion people are getting connected thru cell phones or PC.
b) Digitization & the ability to move this information seamlessly across multiple devices, and dramatic reduction in the cost of computing, communication and storage
c) Convergence of industry and technology boundaries. Today your cell phone is a telephone, a computer, a camera, a watch, a radio & TV
d) Emergence of social networks
Despite of the above, 90% of the thinking on innovation is still very much firm-centric, product-centric view. Imagine passive consumers becoming innovators, rather than the innovation coming out from one genius or one firm. The world is moving at a breakneck speed. Why can’t we take one step forward and say in that new world of competition of active involvement of consumers there is a new and different way to innovate? Is there a different way to leverage the resources of others rather than assume that all the resources have to be inside the company? Once we start with this new perspective of managerial lens, we see change in innovation patterns all across.
Emerging markets are becoming major source of innovation. In the West there is a legacy system due to huge installed base. For instance, for the older generation of Americans, the cell phone is still a supplement, not the primary piece of equipment, but it is not so for the younger generation. Whereas people in the developing world (emerging markets) who never had a phone, that’s not a choice. The cell phone is the only thing they know. Western countries have a forgetting curve, developing countries don’t.
Companies must create a culture of highly decentralized innovation, where people can propose any ideas that they have for new products and services. They get a chance to do it. If it works, they can roll out the concept and scale it rapidly. If it doesn’t they kill it. This process must be based on a strategic intent: Global and Rural, simultaneously. It means they want to serve large global clients but also wants the ability to serve small local customers. The organizing principles between those two is to built resilient business processes that can be continuously changed at a low cost, have solid commitment towards information & communication technologies (ICT) and nurture a social infrastructure conducive to experimentation and desire to win within the broad goal of being simultaneously global and rural.
There is no right or wrong ways to bring about this transformation because each company has a different starting point. A Bridgestone or a Goodyear has a different starting point from a Nike. However, the common factors must be to have a point of view of where they want to go - uniquely developing personalized consumer experience based on co-created solutions - and the belief that no company today has the capabilities to service just one consumer at a time because of the complexity involved in building and sustaining the ecosystem.
So whether it is P&Gs ‘connect and develop’ or Unilever’s ‘Ponds Institute’ or IBM, none of them started with the assumption that we can be vertically integrated and still achieve the core principle of ‘one consumer experience at one time’. They built a supply chain that allowed their manager/s to selectively access resources depending on the demands of the consumer, thus making supply chain important not for cost reasons, but for competitive reasons. So the two put together is exact anti-thesis of Henry Ford and Model T where every consumer got essentially the same car model of the same color
Co-creation by definition reduces risk because consumers are already involved in thinking through what they want. It also reduces time and investment by virtue of inclusive participation of more people and suppliers in development. The assumption is that personalized experiences cost more, but the overwhelming evidence is it costs less. So the default outcome of collectively reducing time, investment and risk, is value creation.
Co-creation leads towards thinking about infinite ways of differentiating experiences, for e.g. unique personalized experiences. Unique experiences avoid the whole process of commoditizing products. If you keep buying books from Amazon, they know the pattern of your purchases and are able to tell you that you will like a particular book as well. The more they know about you, the more they can help you. That also takes care of analytics. So the switching cost for you is high. If you go elsewhere tomorrow, you don’t have the same relationship.
We must recognize that the nature of the relationships between consumers and the firm has changed radically. Starting over a hundred years ago, firms assumed undifferentiated consumers (for e.g. a consumer who bought the Ford model T). Since then, we have moved through various levels of marketplace segmentation of consumer groups.
Even very poor consumers in developing world have a pronounced need for differentiated and personalized experiences. Many of the solutions to poverty that treat the poor as one undifferentiated mass have failed, while approaches that recognizes their unique circumstances and needs by creating locally responsive and personalized solutions have worked. For example, self-help groups (SHGs), which are voluntary organizations consisting of about 12 to 15 women in a village, are able to obtain loans from banks that are developing micro-financing mechanisms. The loans are given to groups, not to individuals. The group then decides who among them and what projects need to be financed on a priority basis. Because the SHGs have intimate knowledge of the local circumstances – of individuals (their financial standings, their behaviors, and their character) as well as the community - their decisions are as local as they can get. The group co-creates their own experiences. They also implicitly supervise how the money is being spent. It is no surprise that the repayment rates tend to be extremely high – as high as 99.5%.
There are no differentiating factors at work anymore, as raw material, technology and capital is freely available. The real constraining factor was talent, but not anymore as now it is becoming possible to hire globally. So the real differentiating factor is the ability to be flexible to change. We need resilient, flexible growing processes. But it is not enough to have processes; we also need the databases and the analytics to focus on the behavior and needs of every individual. ICT comes handy here.
Needless to say, all the investment in ICT architecture is useless without focusing on the skills, behaviors, mindsets and training of managers & employees. It is known that one of the biggest impediments to make people change is not necessarily technology, it is the mindset. People have to genuinely believe that one person at a time - one experience at a time, is the way the world is going.
The focus should be on building organizational capabilities that allow a firm to create the capacity for continuous innovation. Successful innovations seamlessly connect concepts and ideas to their operations manifestations.
Companies who do not make the transition to this new world may risk their very existence. As supplies catch up with demand, consumer will start saying ‘I want to have influence on what happens’. Globally, variations based on customer preferences, biases and behavior will be the order of the day.
