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The Co-CreationConnection

by C.K. Prahalad and Venkatram Ramaswamy

Companies spent the 20th century managing efficiencies.

They must spend the 21st century managing experiences.

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 oftheir experiences with goods and services — companies see value creation as a process ofcost-effectively producing goods and services. Now information and communicationstechnology, the Internet in particular, is forcing companies to think differently aboutvalue creation and to be more responsive to consumer experiences. In fact, the balanceof power in value creation is tipping in favor of consumers.

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The disconnect between what companies and con-sumers value traces back to the early-20th-centuryindustrial principles. Frederick Winslow Taylor’s scien-tific management focused on lowering unit costs of pro-duction. The value chain, a concept introduced byMichael Porter in the 1980s, gave managers an integrat-ed framework to identify and manage costs of designing,producing, marketing, delivering, and supporting goodsor services. And Michael Hammer and James Champy’sbusiness process reengineering was widely interpreted asimplicitly linking cost reduction and internal efficienciesto value creation.

During the 1990s, notions of the extended enter-prise and the boundaryless organization encouragedmanagers to broaden their search for efficiencies anddiscover ways of creating value from their supplier net-work and beyond. Starting in 1995, the Internet furtherinvigorated the corporate pursuit of efficiency, this timeexpanding it to include all the activities directly involv-ing or affecting the company–customer relationship.Still, throughout this evolution, the assumption thatinternal cost efficiency is the source of value creation hasremained unchallenged.

Consumers appreciate and expect efficiency when itimproves their experience with a product or service. Butmost of the time, managers are so preoccupied withoperating efficiently that they don’t even think aboutvalue in terms of the consumer’s experience. (See Exhibit1.) Ask yourself: Do you as a consumer of a digital cam-era think about the complex sourcing patterns and logis-tics that the manufacturer has to deal with, or are youthinking about the fun you will have when you bringthe camera to the beach to record your children’s firstocean swim?

Because companies have historically controlled allbusiness activities involved in the creation of the thingsthey sell, it is their view of value that is dominant.Indeed, the consumer typically has little or no influenceon value created until the point of exchange when own-ership of the product is typically transferred to the con-sumer from the firm. This is true whether the consumeris a company or an individual.

Now consumers are challenging this corporate logicof value creation. Spurred by the consumer-centric cul-ture of the Internet — with its emphasis on interactivi-ty, speed, individuality, and openness — the consumer’sinfluence on value creation has never been greater, andit is spreading to all points in the value chain. (See “TheFive Powers of the Connected Consumer,” page 7.)

nd therein lies a fundamentalchallenge for business. Companieshave grown used to viewing con-sumers as passive target marketsfor what they create. But, interest-ingly, markets are not passive;they are now becoming more likeforums, largely because of the

Internet. In the “market as a forum,” consumers active-ly define value the way they see value — as experiences— and push companies to see it the same way. Today’scompanies know just how dramatically 40 million con-sumers networking with each other and challenging thestatus quo online, in categories as different as music andmortgages, are shaking up the business world.

In this environment, we believe companies need toembrace a new approach to value creation, one in whichthe basis for value shifts from products to experiences;

C.K. Prahalad (cprahalad@aol.com) is theHarvey C. Fruehauf Professorof Business Administration atthe University of MichiganBusiness School, Ann Arbor.He is also the founder andchairman of Praja Inc., a pio-neer company in interactiveevent experiences.

Venkatram Ramaswamy (venkatr@umich.edu) is profes-sor of marketing, the MichaelR. and Mary Kay HallmanFellow of Electronic Business,and the director of theCommunity for BusinessInnovation at the University ofMichigan Business School.

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consumer influence is spread across the value chain (inresearch and development, design, manufacturing, logis-tics, service, and points in between); conflicts betweencompanies and consumers are more visible and resolvedmore productively; and companies don’t dictate howvalue is created.

In short, companies must learn to co-create valuewith their customers.

Although it is only human to feel threatened by aloss of control, it makes little sense for companies not tobe open and engaged with consumers. By partneringwith them in the value creation process, companies canbetter balance the objectives of value creation, managingthe bottom line (cost and investments) and the top line(growth and revenues). Furthermore, co-creation is be-coming a competitive imperative. Information illumi-nating what consumers value is voluminous, and it flowsfreely in information networks. If your company doesnot capture this intelligence to create more fulfillingexperiences for consumers, your competitors will.

The Art of Co-CreationHow do companies co-create valuable experiences withconsumers?

The traditional company-centric view says: (1) theconsumer is outside the domain of the value chain; (2)the enterprise controls where, when, and how value isadded in the value chain; (3) value is created in a seriesof activities controlled by the enterprise before the pointof purchase; (4) there is a single point of exchange wherevalue is extracted from the customer for the enterprise.

The consumer-centric view says: (1) the consumeris an integral part of the system for value creation; (2)the consumer can influence where, when, and how value

is generated; (3) the consumer need not respect industryboundaries in the search for value; (4) the consumer cancompete with companies for value extraction; (5) thereare multiple points of exchange where the consumer andthe company can co-create value.

In the customer-centric mass production and mar-keting of automobiles, for example, suppliers provideraw materials, components, subcomponents, and sys-tems to manufacturers, who create value by assemblingthese inputs into vehicles. Consumers actively decidewhat vehicle to buy, but companies decide what theirchoices will be. Cars are sold by dealers acting as inter-mediaries for the automakers. For companies reliant onthis scenario, value creation is defined solely by extract-ing profit from end consumers.

The Saturn Corporation, billing itself as “a different

Exhibit 1: Value Creation: How Companies and Consumers Think

The Point of Exchange

How Companies Think How Consumers Think

HopesDreamsDesires

AspirationsPeace of Mind

FamilyLifestyle

Work StyleCompromises

NeedsChats

Stage of LifeConsumer Reports

ActivitiesCommunities

Word of MouthExpectations

CRMCall CentersERPChoiceboardsEnterprise NetworksProduct VarietyPlantsPricingLogisticsProduct

ManufacturingEngineeringTechnologyScienceR&DPlatforms

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kind of car company,” has spurned the industry’s tradi-tional ways. In 1985, when the General MotorsCorporation launched Saturn, it didn’t just start a newcar company, it created a “community.” Saturn workswith its customers in the design, manufacturing, andsales processes, and it engages Saturn owners to helpcontinuously innovate and improve its cars.

Consumers think about the place of a car in theirlife — how it fits their budget, their desire for comfort,their need for peace of mind, their aesthetics.Companies think about their competitive strategy andtheir operations — engineering, differentiation, logis-tics, pricing, and, above all, revenue and profit.Although these views of value do clash, they’re not irrec-oncilable. Saturn is a company trying to merge thesetwo ways of looking at value.

In the pages that follow, we present a framework —a new value creation paradigm — to suggest how com-panies can better understand the consumer’s view ofvalue and productively work with them to co-createmore satisfying value for both sides.

Elements of ExchangeThe point of exchange is often the place where the con-flict between the traditional company view of value andthe consumer view of value is most exposed. Althoughcompanies are not inclined to interact with consumersat all points in the value chain, opportunities forexchanges between the company and the consumer nei-ther begin nor end when a consumer purchases some-thing from a company. Indeed, the point of exchangeneed not be restricted to where the company and theconsumer trade money for finished goods or services.

If experience is the critical source of value for con-

sumers, we need to identify the factors that determineexperience. We call these the elements of exchange, andthey are:

• How transactions are managed.• How choices are determined.• How the consumption experience is staged.• How price and performance relate.By examining the four basic elements that consti-

tute an exchange, companies can explore how currentmanagement approaches may positively or negativelyaffect customer experiences, and discover better ways tocreate value.

• Transactions. Companies have been quick tospot emerging technologies that reduce transaction costsby having consumers perform functions formerly han-dled by employees (i.e., customer self-service). Gas sta-tions’ transitioning from full-service to self-service wasan easy win for gasoline retailers and consumers. Com-panies asked customers to fill their own tanks and paythrough devices on the pump. And what drivers lost inattendant service they happily traded for the conven-ience of self-service and, sometimes, better prices.

But most customer self-service scenarios aren’t thissmooth. Managers are usually so preoccupied with thecost advantages of self-service that they misjudge its con-sequences on the customer experience. Or worse, theydon’t consider the consequences at all. Anyone who hasbeen foiled by automated multiple-choice customerservice over the phone, or who has been left on hold lis-tening to bad music, knows the limitations of call cen-ters. When hospitals, laboratories, and pharmacies puthealth records, diagnoses, and prescription informationonline to cut costs, are they taking into account con-sumer concern about privacy?

In a market forum, consumers define value as experiences and push

companies to see value the same way.

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On the Web — the ultimate self-service technology— corporate indifference to the consumer experienceoccurs constantly. Witness the number of abandoned“shopping carts”; perhaps shoppers who stop short ofpurchasing find the interfaces confusing or don’t feelsecure using a credit card online. For the consumer whodoesn’t believe a company will not sell his or her per-sonal data to someone else, giving profile information inexchange for the convenience of “one-click” purchasingor instant recognition on a password-protected Web sitemay not be worth the risk. Companies also have greatlyunderestimated how differently older and younger peo-ple view issues like privacy and security online.

The key issue in automating transactions is con-sumer heterogeneity. Customers differ in their skills,their propensity for problem solving, and their willing-ness to spend time to learn a new system, as well as theirwillingness to trust it. This is true whether it involves theWeb or any other system that is unfamiliar.

Self-service works best when it’s applied by compa-nies that manage their costs and the customer experi-ence with equal care. Southwest Airlines Companyworks hard to make sure its standards for being prompt,accurate, and friendly are the same whether the cus-tomer exchange is made through an automated channelor handled by an employee. Similarly, Lands’ End Inc.has invested in self-service technology and superior agenttraining so that the consumer experience on its Web siteis as good as its catalog operation consumer experience.

• Choice. Elaborately structured distribution andcommunications channels allow companies to control aconsumer’s choices. But when companies don’t offer thesame choices across channels, they risk antagonizing thecustomer. One clothing retailer trying to optimize

inventory management and pricing by channel charged$48 for a shirt online and marked the same shirt downto $24.99 in a retail store. Over time, consumers willrecognize such differences, and they might accept them,but only if an explicit policy exists that says online andin-store pricing (or styles and colors) may differ.

Information technology has opened a whole newopportunity for manufacturers to cost-effectively offercustomized products faster and cheaper. In the comput-er industry, companies like the Dell ComputerCorporation have an impressive competitive advantagein build-to-order PCs. Now BMW is offering a “cus-tom” car, delivered in 12 days. For the Z3 roadster, theautomaker offers a choice of 26 wheel designs and 123console options.

Mass customization allows companies like Dell andBMW to offer variety, but who decides what can be cus-tomized? Customization ultimately is a matter of whatcan be built and delivered to suit the efficient operationof a company’s value chain. Even in the most sophisti-cated mass-customization schemes, the customer choos-es from a menu dictated by the company.

hanks to the Web, companies canbecome much more astute aboutwhat consumers like and don’t like,and that knowledge will greatlyimprove companies’ ability to beinnovative and to anticipate con-sumer needs. On the Web, consumer-to-consumer recommendations, new

ideas, critiques, musings, and more are having a power-ful influence on choice. About.com (owned by PrimediaInc.), one of the most popular consumer word-of-

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Before the Internet liberated informa-tion, companies could do everything— choose materials used in products,design production processes, craftmarketing messages, control saleschannels — with no interference.Now, consumers exercise their influ-ence in every part of the business sys-tem. Nevertheless, companies shouldwelcome, not resist, the consumerpowers detailed below.

1. Information Access. With accessto unprecedented amounts of infor-mation, consumers have knowledgeto make much more informed deci-sions. This is causing companiesacross industries to cede control overvalue creation and develop new waysof doing business. Consider healthcare. More than 70 million Americanshave reportedly used the Internet tolearn about diseases and treatmentoptions and investigate how to getinvolved in clinical drug trials.Consumers now question their physi-

cians more aggressively and partici-pate more fully in choosing treat-ments. This is dramatically alteringtraditional pharmaceutical salespractices. In the U.S., it is driving con-sumer-centric “defined-contribution”health-care reform wherein compa-nies give employees information andask them to assume more responsi-bility for selecting and managing theirown health-care benefits.

2. Global View. The Internet is thefirst single source of information thatgives consumers the ability, 24 hoursa day, to see what is happeningaround the world. That is changingthe rules for how companies com-pete. For example, multinationals aremore exposed to consumer scrutinyof product price and performanceacross geographies, which meansthose businesses have less latitude tovary the price or quality of productssold in multiple regions. But it alsomeans companies have more infor-

mation to sharpen global strategies.New competitors and potential part-ners for large companies are alsoemerging in the global marketplace.Even poor artisans in Rajasthan,India, can sell high-quality table linenon the Web for $10 and deliver it tobuyers in the U.S. in about a week,and for one-tenth the cost of compa-rable linen in the United States.

3. Networking. Consumers natu-rally coalesce around common skills,interests, and experiences. TheInternet amplifies this by encouragingan unparalleled ease and openness ofcommunication among perfectstrangers. Indeed, “communities ofinterest,” where individuals confabu-late and commiserate without geo-graphic constraints and with fewsocial barriers, exist all over the Web.People participating in a chat areamay know nothing more about thosethey’re chatting with than the interestthey share. The power of consumer

The Five Powers of the Connected Consumer

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mouth sites, is host to discussions about more than50,000 subjects, from allergies to zebras. Content,organized by topic, is kept fresh and credible with athorough oversight system run jointly by About.comand its community members. Sites like About.com aretrying to establish businesses promoting consumer-to-consumer communication, but thousands of Web sitesexist that buzz with conversations about what con-sumers value and don’t value. Companies need to listen,learn, and absorb this valuable intelligence.

Even in the world of drugs for treating life-threat-ening diseases, consumer advocacy in online supportgroups seems to be as influential as company marketing.For example, when Novartis AG began clinical trials ofa promising leukemia drug, word spread so fast that thecompany was overwhelmed with demand from patientsseeking participation.

• Consumption Experience. Companies like theStarbucks Corporation and Walt Disney Company are

highly attuned to human behaviors, preferences, andtastes because experiences are the essence of what theysell. But the fact is, companies that manufacture prod-ucts bear just as much responsibility as restaurants andentertainment companies for enhancing or diminishingthe value of consumer experience. For example, mostantibiotics are prescribed to be taken several times a dayfor two to three weeks. If you forget to take the pills, themedicine is ineffective, and many people don’t remem-ber to complete the full cycle. The pharmaceutical com-pany Pfizer Inc. saw this behavior as an opportunity tomake it easier for people to take medicine the way it wasprescribed. It introduced an antibiotic called Zithromaxthat typically requires an initial dosage of two pills fol-lowed by a daily single pill for only four days. Then Pfizer marketed Zithromax in a blister pack called the Z-pak, which clearly reminds users of their daily dosagerequirement and how much they have left to take. Pfizereffectively became the patient’s partner in making it as

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easy as possible for the medicine to do its curative work.Zithromax now dominates its market. Consumers

like Zithromax’s shorter cycle and the convenientreminders to take their pill. Doctors, too, applaud thesefeatures, because they make the drug more effective.With the Z-pak, Pfizer has creatively incorporated theconsumption variable into the manufacture and designof the product to increase its value.

• Price-Performance. The traditional psychologyof price setting, largely based on cost structures, isbecoming increasingly irrelevant. Further, the relation-ship between price and performance is no longer implic-it and controlled by companies; it is explicit and debatedby consumers.

Independent consumer-feedback Web sites, such asEpinions.com, PlanetFeedback.com, and BizRate.com,allow people to share price information recommenda-tions, reviews, and comparative price information forthousands of products. Search engines like Google are

also powerful tools consumers can use to collect andcompare price and performance data.

Global television and the Internet make it easier forpeople to see the kinds of products companies sell in dif-ferent regions and countries and compare them towhat’s offered in their own market. That is altering consumer desires and raising consumer expectations,especially in developing countries. Consumers in emerg-ing-market countries (e.g., India, Brazil, and Indonesia)with annual incomes sufficient to purchase cars, refrig-erators, branded clothing, and other mainstays of com-fortable living expect these products to be affordablypriced and to meet global quality standards and localcultural requirements.

The new challenge for companies accustomed toproducing lower-priced, and often inferior, goods forthese markets is to raise the consumer experience barand make a profit. For example, Hyundai in India is suc-cessfully selling its Santro sedan for the equivalent of

networks is that they’re independentand based on real consumer experi-ences, not what the company tellsthem they will experience.

Such networking among con-sumers turns traditional company-controlled marketing and advertisingupside down. For example, ratherthan attempt to shut down unofficialHobbit fan sites, New Line Cinema co-opted them, to help spread word ofmouth and create buzz about itsmovie The Lord of the Rings. GordonPaddison, senior vice president ofworldwide interactive marketing,reached out to the more than 400 fansites before the movie was released tocommunicate with the early influ-encers and give them insider tips.

Consumer education and feedbacksites are struggling to prove them-selves as viable businesses. But thisdoes not diminish their utility asplaces where consumers can com-pare and share information, and

places where companies can learnwhat consumers are thinking.

4. Experimentation. Consumersuse the Internet to experiment withand develop products, especially digi-tal ones. The German research com-pany Fraunhofer Institute forExperimental Software Engineeringreleased MP3 as a freely availablecompression standard that accelerat-ed the transmission of digital audio.

The collective competence of soft-ware users has enabled the codevel-opment of popular products, such asthe Apache Web server software andthe Linux operating system.

The ability of consumers to experi-ment with each other goes beyondsoftware and digital products. Cookscan share recipes. Gardening enthu-siasts can share tips on growingorganic vegetables. Homeowners canshare stories about their homeimprovement projects. The list goeson. Companies that choose the path

of co-creation can tap into con-sumers’ creativity for the develop-ment of products and services.

5. Activism. As people learn, theybecome more discriminating in theirchoices about what they buy, and asthey network, they become embold-ened to speak out. Now consumersprovide unsolicited feedback to com-panies and to each other. There arehundreds of “sounding-off sites” onthe Web that target specific compa-nies and brands. AOL Watch, forexample, publishes complaints fromformer and current AOL customers.The Web has also become an influen-tial tool for social groups focused onsuch issues as child labor and envi-ronmental protection to get corporateattention and promote reform.Although activism might seem men-acing to companies, it also opens thedoor to competitive opportunity.

— C.K.P and V.R.

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about $8,000. The Santro’s driving performance is com-parable to that of a compact car sold in the U.S. forabout $11,000, and it has comfort features, such as spa-cious seating and headroom, that are highly valued byconsumers in India.

Even the world’s 4 billion poorest consumers, whoearn less than $1,500 a year, are aspiring to a better lifeand demanding more goods and services. This situationrepresents a huge opportunity for companies to changetheir mind-sets and their business models (e.g., “thepoor can’t afford or have no use for consumer products,”or “we can’t make money in this market”). In 1995,Unilever PLC’s subsidiary in India, Hindustan LeverLtd. (HLL), drastically altered the management of itsvalue chain so it could sell a detergent, called Wheel, tothe poor. HLL decentralized its production, marketing,and distribution and quickly established sales channelsthrough thousands of small storefronts. HLL adjustedthe cost structure of its detergent business so it could sellWheel at a very low price point and still make money.Today, Wheel has gross margins and a return on capitalas good as, or better than, HLL’s higher-end cleaningproducts, and Unilever has used this business model tocreate a new detergent market in Brazil.

Patients at India’s Aravind Eye Hospital, the world’slargest eye-care facility, pay about $10 for cataract sur-gery, compared to $1,600 for equivalent care in theUnited States. The hospital, which operates on morethan 200,000 patients per year, gives 60 percent of itscare at no cost and still is highly profitable. Between1998 and 1999, Aravind’s total income was Rs. 230.6million (about $5.2 million), with a profit of Rs. 110.1million (about $2.5 million), and return on capital ofmore than 200 percent on surgery and its lens manufac-

turing arm. Like Unilever, Aravind is testing this busi-ness model in other regions.

Building Blocks for Co-CreationBusinesses operate in a networked environment inwhich it is possible both to learn continuously aboutwhat people want and need, and to interact with themin ongoing exchanges of value. But companies need tobe much more aware of where these opportunities tointeract with consumers exist.

We suggest there are four building blocks for co-creating value. Dialogue at every stage of the value chainencourages not just knowledge sharing, but, even moreimportantly, understanding between companies andcustomers. It also gives consumers more opportunity tointerject their view of value into the creation process. Inshort, access challenges the notion that ownership is theonly way for the consumer to experience value. Byfocusing on access to value at multiple points ofexchange, as opposed to simply ownership of products,companies can broaden their view of the businessopportunities creating good experiences. Risk reductionassumes that if consumers become co-creators of valuewith companies, they will demand more informationabout potential risks of goods and services; but they mayalso have to bear more responsibility for handling thoserisks. Transparency of information is required to createthe trust between institutions and individuals.

1. Dialogue. Dialogue is creating shared meaning.In dialogues, people listen and learn from each other; inthe most productive dialogues, people communicateand debate as equals. Dialogue helps companies tounderstand the emotional, social, and cultural contextsthat shape consumer experiences and provides knowl-

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edge companies can use to innovate. Dialogue with con-sumers is central to Harley-Davidson Inc.’s being able toco-create a multigenerational “way of life.” Building aforum for dialogue was how, early on, America OnlineInc. created a community — a group of enthusiastswhose shared interests bonded them to the service at thesame time that it gave the company insights into serviceimprovements. Dialogue was what kept a loyal commu-nity of Macintosh users together when Apple ComputerInc.’s product development began to wane. And it is dia-logue that is helping the personal-computer manufac-turer to recover with the introduction of the new iMac.

ialogue involves more than listeningand reacting. It requires deep engage-ment, lively interactivity, empatheticunderstanding, and a willingness byboth parties to act, especially whenthey’re at odds. What is happening inthe music industry today is theantithesis of dialogue. If the record

labels were listening, they would hear that consumersdon’t object to paying for music. They just want to cre-ate their own musical experiences once they’ve paid forit. People have been packaging their own music for years(in the 1970s, parents of Napster and MP3 player fansmade custom cassette tapes by copying songs from long-playing records). Why, with even better technologyavailable today to duplicate and mix their own music,would consumers want anything else?

While recording companies fight the battle against“illegal downloading” and resist changing their businessmodels, music sales are declining and sales of blank CDsare soaring. “If the industry doesn’t change the way wedo business, we’re going to be bankrupt,” Val Azzoli,cochairman of Atlantic Records, told the New YorkTimes in February 2002. The Sony Corporation showsjust what’s at stake. Its music sales are currently about$4.6 billion, compared to about $40 billion in salesfrom consumer electronics, including CD burners andMP3 players.

2. Access. Ownership is the traditional way to lookat the transfer of value from the company to the customer. But you don’t need to own something toexperience its value. Indeed, access without ownership isdesirable for consumers and can be very profitable forbusinesses. Thinking in terms of access expands a com-pany’s view of potential markets.

Over the past decade, numerous companies serving

European and U.S. cities have begun to offer a novelservice for people who want more than just a rental car;they want the convenience of having a car they don’town at their disposal all the time. For example, inSwitzerland, people who join Mobility CarSharingreceive a personal access device that unlocks a dedicatedpool of cars, which are rented on a pay-as-you-drivebasis, making the service ideal for running short errands,visiting friends in the suburbs in the evening, and thelike. What do Mobility CarSharing and similar compa-nies sell? A new urban lifestyle that is not only econom-ical and convenient, but also reduces pollution andparking problems.

In the music industry, consumers are not fightingfor all music to be free; they just want more freedom tochoose how they access music once they’ve paid a fairprice. This is a classic instance of the consumer beingshut out of the value creation process.

The successful coupling of access with dialogue inthe computer community’s Open Source movement hashad a significant influence on traditional players in theindustry as they see its benefits. For example, to promotethe use of Linux, the open source operating system,IBM is putting $40 million of its software tools in thepublic domain. More important, in 2001, IBM madethe largest commitment of any computer maker — about20 percent of its R&D budget ($1 billion) — to Linuxand Apache Web servers.

3. Risk Reduction. The obligations and responsibil-ities of the firm and consumers for risk management willalways be debated. But it is safe to assume that as con-sumers become more involved in co-creating experi-ences with companies, they may be willing to take onmore responsibility for managing risk exposures, if com-panies are willing to reveal more information about therisks associated with the products and services they pro-duce. One key issue in the Firestone-Ford tire case cen-tered on the amount of knowledge Ford and Firestonehad about risks associated with the combination of vehi-cle, tire pressure, and driving conditions. How muchshould Firestone and Ford have shared with consumers?

In a world where good information is widely avail-able, consumers, within the limits of their technicalknowledge, should be able to make more informedchoices about risks. Companies can be a part of thatprocess by being both forthcoming in the discussions ofrisk with the general public, and by disseminatingappropriate methods for assessing personal risk and soci-etal risk. Labeling is one way of explicitly passing on to

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the consumer more responsibility for risk. But that isnot enough. Companies will need to be more willing toengage in open dialogues with concerned people.Companies should not approach their communicationsdefensively. On the contrary, proactive risk communica-tion and management offers new opportunities for firmsto differentiate themselves.

4. Transparency. In the wake of the Enron debacle,shareholders are demanding more transparent, or thor-ough, financial disclosure; but transparency is also nec-essary for consumers of goods and services to becomeco-creators of value. When companies make vital busi-ness-process information visible to consumers, compa-nies, in effect, relinquish control of the value creationprocess before the traditional point of exchange.

The Federal Express Corporation has high levels oftransparency in its logistics system. Customers can logon to its Web site and check the progress of packages inreal time using the same information that FedExemployees use; large corporate customers can alsoreroute packages themselves. Individuals have choicesthey wouldn’t have if FedEx controlled all the informa-tion, and that improves the customer experience.

This same type of information transparency has cre-ated a revolution in the trading of securities. Globalagency brokers like Instinet Group Inc. build trans-parency into their trading systems so that customers canmonitor in real time how much the fund manager’s trad-ing is costing them.

In June 2001, Eli Lilly and Company launched anew e-business research venture called InnoCentiveLLC. It brings together, via its Web site, companies andresearchers from around the world seeking solutions toscientific problems. Significant cash incentives are

awarded to researchers who offer the solution judged“best” by the company that posted the problem.InnoCentive represents a bold open source approach toinnovation for industries that in the past have beenclosed and private.

umerset Houseboats, the world’slargest houseboat manufacturer,based in rural Kentucky, shows howall the pieces of a co-creation model— dialogue, access, risk reduction,and transparency — can fit together.Imagine interactively codesigning thelayout and configuration of your

dream boat, negotiating specs and prices, connectingwith the factory to participate in your boat’s construc-tion, and monitoring its progress in real time. Nowimagine a personal Web page where you can reviewdrawings; access architectural, aesthetic, and structuralexpertise; and consult a customer representative. Youcan see pictures and read the biographies of the peoplewho are crafting your boat. You can critique design ele-ments and fully furnish your boat before it is delivered.You can have dialogues with other Sumerset customersand a wider community of avid sailors.

What is co-created in this process is not just a boat,a physical artifact, but also experiences. Even beforeowners set sail, they begin to form an emotional attach-ment to their boat while building their stake in the out-come of the value creation process.

The company also benefits. Sumerset and its sup-pliers learn more about the end consumer and accessnew ideas for design, engineering, and manufacturing.Everyone from design engineers to carpenters gains a

The world’s largest houseboat makershows how the pieces of the co-creation

model — dialogue, access, risk reduction,and transparency — fit together.

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deeper understanding of consumer desires and thepotential value trade-offs. This reduces investment riskfor the company as well as the risk the consumer won’tbe satisfied.

A Quiet RevolutionAs the noise from debates about the old economy andthe New Economy dies down, it is easier to detect a qui-eter revolution — fomented by a shift in how value isperceived and created. Movement toward a market envi-ronment in which companies and consumers co-createexperiences is gaining momentum, but as with anychange in deep-seated assumptions about competitionand strategy, the adjustments for companies will becomplicated and trying.

First, companies must embrace the notion that con-sumers can become partners in the co-creation of expe-riences. Only by letting go of the company-centric viewof value creation, once and for all, can companies pro-ceed with the difficult and long-term work of makinglasting reforms to the business system. Managers mustmake a major transformation in the way they conceiveof the tasks of value creation, and therefore change howfirms are organized. Management disciplines and therelationships between disciplines need to be reexamined— market research, product development, logistics,branding, pricing, and accounting, among others.

Companies are getting more used to competing onthe basis of their adaptability and how fast they innovateand apply knowledge, and they are rising to the chal-lenge of keeping down the costs of experimentation asthey test new ideas. But business competition is a lotmore unpredictable when innovation and flexibility,rather than efficiency, are the main drivers of value.

Firms also need new and different IT strategies andapplications that incorporate the principles of a morebalanced system of value creation, and a system moresensitive to the consumer’s perception of value. A newinformation architecture that allows a company tomaintain a consistent brand identity and quality of cus-tomer experience across channels, for example, is anessential strategic asset. Likewise, IT vendors need towork with companies to come up with replacements fortoday’s company-centric business software systems.

Companies can and will make the adjustments tothrive in a world where value is co-created in experi-ences. But it will take time, courage, and stamina tocompete in a different value creation space. If companiesrise to the challenge, they are sure to discover an excit-ing new era of business creativity and opportunity. +

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Resources

J. Philip Lathrop, Gary D. Ahlquist, and David G. Knott, “Health Care’sNew Electronic Marketplace,” s+b, Second Quarter 2000 www.strategy-business.com/press/article/?art=19291&pg=0

C.K. Prahalad and Stuart L. Hart, “The Fortune at the Bottom of thePyramid,” s+b, First Quarter 2002 www.strategy-business.com/press/article/?art=229761&pg=0

C.K. Prahalad and Venkatram Ramaswamy, “Co-Opting CustomerCompetence,” Harvard Business Review, January–February 2000 www.hbsp.harvard.edu/hbsp

Neil Strauss, “Behind the Grammys, Revolt in the Industry,” New York Times, February 24, 2002