C.K. Prahalad: The New Age of Innovation

A new book from the Bottom of the Pyramid guru lays out the new landscape of business, driven by consumer co-creation and service customization
Despite the press attention lavished on companies such as Apple and Google, modern business is not all about Web 2.0, cutting-edge consumer tech. The latest voices reminding us of this—and that innovation is a topic with a broad scope—are those of authors and University of Michigan professors C.K. Prahalad and M.S. Krishnan.

The pair's book, The New Age of Innovation: Driving Co-Created Value Through Global Networks (McGraw Hill Books, which, like BusinessWeek, is a unit of The McGraw Hill Companies), revolves around two ideas, laid out on the first page of the first chapter. N=1 states that "value is based on unique, personalized experiences of consumers." That is, even companies serving 100 million consumers need to focus on individuals. R=G, meanwhile, argues that since no company can hope to satisfy the varied expectations of so many consumers, it must diversify how it operates. "All firms will access resources from a wide variety of other big and small firms—a global ecosystem," write Prahalad and Krishnan. In other words, companies' internal focus should be on gaining access to resources, not necessarily owning them.

The next 250 or so pages attempt to hammer home the details of this shift from impersonal to customized, vertical to horizontal, with a wealth of examples from an array of industries. In fact, one of the book's strengths is that while it names companies that seem to have seen success with at least one of the two ideas—Apple (AAPL), Facebook, Google (GOOG), and MySpace (NWS)—it also includes examples of more established companies across diverse industries that make the headlines less frequently.

Examples of Success

UPS (UPS), for instance, has evolved from requiring customers to drop off parcels at a central collection point to picking up packages from clients at specified times. "This," write Prahalad and Krishnan, demonstrates "a significant transformation from a business process focus on the firm to a business process focus on each unique customer experience." In other words, no company can afford to think its business can plod on as usual. The ability to rethink a firm's fundamentals and implement appropriate changes will provide the driver of success within the N=1, R=G world.

Executives at Madras Cements, a division of India's Ramco Group, decided against deploying sophisticated—and expensive—GPS technology to track the movement of its trucks and goods. Instead, drivers were issued $30 cell phones and instructed to communicate their whereabouts via SMS text messages. The company designed an infrastructure that could process these raw data and give regular, timely insights into driver performance, helping executives identify areas of improvement for both individuals and the company at large. To date, the simple, innovative solution has led to recurring annual savings of more than $4 million.

Unforeseen Consequences

Some of the themes touched on in the book will be familiar to fans of Prahalad, widely admired as a management expert and for previous books including the popular title The Fortune at the Bottom of the Pyramid (Wharton School Publishing, 2006). In fact, he introduced the co-creation theme in The Future of Competition: Co-Creating Unique Value with Customers (Harvard Business Press, 2004), and some of the same examples are wheeled out again here. But Prahalad and Krishnan clearly believe there are still lessons to be learned, even arguing that no company to date has mastered both N=1 and R=G.

They also include examples of failures and mistakes. In one powerful example that is undercut by the company in question oddly not being named (an anomaly), the authors discuss the example of a "major auto supplier" in the U.S shifting the sourcing of various parts to China. Unexpectedly, what seemed like a clear-cut business decision had a negative impact on many levels: The logistics of air-freighting parts from China wiped out any cost benefits, while the resulting lack of flexibility and longer lead times meant that the company's internal design process also had to be entirely rethought. The example provides a salient reminder of the importance of stepping back and thinking about the big picture, to consider the existence of less codified processes and systems, and to identify and preempt the potential consequences of any decision.

Sometimes The New Age of Innovation veers into the academic speak and formulaic structures so beloved of college professors, and there's a fair amount of management jargon that can be grating at times. But, in the main, this is a fairly breezy and informal read that provides a timely snapshot of a rapidly transforming business landscape. As the authors make clear, this transformation is neither optional nor reversible. This book provides a valuable primer for those wishing to stay on for the ride.

Helen Walters is the editor for BusinessWeek.com's Innovation and Design Channel .

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