Co-opting Customer Competence by C.K. Prahalad and Venkatram Ramaswamy NY Harvard Business Review Reprint Roor08In the new economy, companies must incorporate customer experience into their business models - in ways hitherto untapped. Here are the challenges in doing that. Co-opting Customer Competence by CK. Prahalad and Venkatram Ramaswamy usiNess CoMrETrtroN used to be a lot like traditional theater: On stage, the actors had clearly defined roles, and the customers paid for their tickets, sat back, and watched passively. In business, companies, distributors, and suppliers understood and adhered to their well-defined roles in a corporate relationship. Now the scene has changed, and business competition seems more like the experimental theater of the r960s and 19705; everyone and anyone can be part of the action. ‘The shift away from formal, defined rolesis already occurring in business-to-business relationships. Major business discontinuities such as deregula- tion, globalization, technological convergence, and the rapid evolution of the Internet have blurred the roles that companies play in their dealings with other businesses. Consider the relationship be- ‘tween Ford and its main suppliers. Far from being passive providers of materials and parts, Ford's suppliers have become close collaborators in the development of new vehicles. At the same time, however, they compete for value by negotiating the prices for the parts and the materials they supply. Some suppliers are starting to compete directly. For example, Markham, Ontario-based auto-parts giant Magna International has the ambition and the potential -to assemble automobiles itself. ‘The story's the same for distributors. For example, Wal-Mart does more than just distribute Procter & Gamble’s goods. It shares daily sales information and works with P&G in product warehousing and replenishment to ensure that consumers can always find the goods they want at low prices. In some product categories, however, Wal-Mart competes head-to-head with PAG. For instance, Wal-Mart last year rolled out its own brand of detergent, Sam's ‘American Choice, which competes nationally with P&G's popular Tide brand. ‘The changing dynamics of business has been the focus of managerial debate the past few years. Practitioners and scholars talk about companies “competing as a family.” They talk about alliances, networks, and collaboration among companies. But managers and researchers have largely ignored the consumer, the agent that is most dramatically transforming the industrial system as we know it. CCopyrisht © 1999 by the President and Fellows of Harvard College. Al ght served 7o-opting Customer Competence 7 (See the exhibit “The Evolution and Transforma- tion of Customers.” ‘Thanks largely to the Internet, consumers have been increasingly engaging themselves in an active and explicit dialogue with manufacturers of prod- ucts and services. What's more, that dialogue is no longer being controlled by corporations. Individual consumers can address and learn about businesses either on their own or through the collective knowl- edge of other customers, Consumers ean now initi- ate the dialogue; they have moved out of the audi- ence and onto the stage. Customers are fundamentally changing the dy- namics of che marketplace. The market has become Customers asa a forum in which consumers play an active role in creating and competing for value. The distinguish- ing feature of this new marketplace is that con- sumers become a new source of competence for the corporation. The competence that customers bring isa function of the knowledge and skills they pos- sess, cheir willingness to learn and experiment, and their ability to engage in an active dialogue. The concept of competence as a source of com: petitive advantage originated in studies of the di versified firm.' Managers started to conceive of the company as a collection of competencies rather than as a portfolio of business units. In this way, ‘managers were able to identify new business oppor- The Evolution and Transformation of Customers Customers are stepping out oftheir traditional roles to become cocreators as well as consumers of value.This table maps their evolution through three stages and along several key dimensions. customers as Passive Audience + tive layers — poorer a 7 ersuading predeter-Tansacing with Utetine bonds with Customers as “mined groups of buyers individual Buyers Indiial customers cqcrestor of valve “Timeframe 1970s cay 3980s = Late 19808 and eary 19808 19808 Beyond 2000 Nature of business exchange androle Steastomer E t The cusomecisan average Sati: orouRs The eustomeris an | Managerial wings | indicus satin * customers are sen as pessve buyers with a predetermined rol of consumption. ‘Costomers ave par ofthe ‘enhanced network they ‘cocreate and exact business volue Tey are colsborstors, codevelopers, ‘ond competitors ‘The customer isa peson” The customer isnot only cultivate tust and aninivigual Bu io pact bre gested wehout much feedback dnd series based on service programsdentiy problems fom customers, than redesign products ftbuyers are predeter__avansacton relationships. fan emergent social and ined bye company © eutral fab Companys ‘Teaitoral manet Shit fom seling to helping Proving forcustomers Customers are codevelopes Interaction with | rexenrchandinguties’customers via hei desk, though obseration of of peionalzed experiences, customers and Products and services cllcenter,and customer Suet solutions Companies and lead from lead users and ecnfigue product and services based on ‘deep understancing customers have jit roles hat smorket acceptance fo say communication. Feedback of easomers. products and services. Purpose and flow of Gain accesso and Database marketing: Relationship marketing: Active dialogue with ‘communication “frget predetermined twoway communist. _tworway communication customers shape _F Ups of buyers. One ad access. © expecavons and create ‘buzz Muove! access {and communication | | 80 HARVARD BUSINESS REVIEW January-February 2000