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C.K. Prahalad heralds a new era of innovation

Article  in  Strategy and Leadership · November 2008

DOI: 10.1108/10878570810918304

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Interview
C.K. Prahalad heralds a new era of
innovation
Robert J. Allio

C.K. Prahalad is the co-author, with M.S. Krishnan, of

the landmark book The New Age of Innovation (Harvard
Business Press, 2008). He offers his view of the future
of business as value is shifting from products to
co-created personalized experiences. In this interview
with Strategy & Leadership Contributing Editor Robert
J. Allio, Prahalad explains how managers can meet this
new challenge by accessing resources from multiple
outside sources, either local or global. Contributing
Editor Brian Leavy, who reviewed The New Age of
Innovation for this issue of S&L, helped develop
questions for the interview. As Professor Leavy’s
review explains, ‘‘Increasingly, companies will have to
learn how to mobilize the resources of many to satisfy the needs of one,’’ and C.K.
Prahalad aims to help them in that endeavor.
Strategy & Leadership: Your new way of looking at the innovation model is that value in
today’s environment will be determined by one customer-created experience at a time,
defined as N ¼ 1. And to compete successfully in this environment, firms must access
resources from multiple outside sources, either local or global, defined as R ¼ G. What are
the driving forces for this change in the competitive landscape?
C.K. Prahalad: We can identify four key drivers of change. First, connectivity. Over 6 billion
people now have access to the Internet, creating access to information that is
unprecedented in human history. Second, digitization is driving cost of products down
dramatically. As a result, high technology is no longer the province of the rich. Everyone has
cell phones, for example. Third, the convergence of technologies and industry
boundaries – digital technologies, health, insurance, food products and many others.
Fourth, social networking.
Businesses have moved away from being product- and firm-centric, business models in
which the firm creates value in the form of a product or service.
Firms like Google, Apple, Starbucks, eBay, and others co-create personalized experiences.
As a consumer I can take part in creating my own unique experience. So value is shifting
from products to co-created personalized experiences. Hence we argue that N ¼ 1.
S&L: Isn’t the N ¼ 1 condition equivalent to mass customization?
Prahalad: No. Mass customization assumes that I have created many components, and that
you can pick and choose from those components to create the module you want. The
assumption is that the firm still decides which components to offer and thus controls what
modules can be assembled and whether they can be connected to other systems. But N ¼ 1

DOI 10.1108/10878570810918304 VOL. 36 NO. 6 2008, pp. 11-14, Q Emerald Group Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 11
 ‘‘ Value is shifting from products to co-created personalized
experiences. ’’

says that I am integral part of the transaction! For example, 5-10 thousand people are writing
programs for Facebook. That is not mass customization – it is co-creation of value.
S&L: Doesn’t this simply represent a shift from firm-centric to customer-centric?
Prahalad: No, it is not customer-centric – it is co-created. We need two joint problem
solvers—the consumer and the company. Together they create value, and at same time they
create partnership value.
S&L: But can we extrapolate to the situation in which N is very large, say 100 million?
Prahalad: Google serves more than 100 million consumers, but the experience is different for
each.
S&L: Does the model work for other older or more capital-intensive industries?
Prahalad: Let’s take tires. Everyone assumes it’s a B-to-B business. So current competitors
sell tires to the fleet (B-to-B). Mostly they compete on price, since all have approximately the
same quality. But suppose I am an innovator who doesn’t want to just sell you tires. I want to
sell on the basis of usage. I will charge you by the km/mile, and I will tell you how to get better
usage by monitoring tire pressure, rotations and quality of driving. I will help you improve
usage, reduce cost, and reduce down time for repairs and maintenance. This is a different
model – it yields a unique solution for each person, each company, and each fleet. And I can
help each driver to become a better, safer driver from data that I collect with the permission
of the driver. Because of this model the cost goes down.
As a result, I change an arms-length transaction based on price from a B-to-B transaction to
more detailed and specific relationship with the customer and with the fleet. So we convert
transactions into relationships. Switching costs from the first stage, only selling a tire, to final
stage are negligible for fleet owner. We now go from C to B to C.
S&L: This example seems plausible for large multinational firms. But will the model work for
regional or midsize firms?
Prahalad: Absolutely. Everyone can get access to technology, so even a small company can
get the information it needs. And social networks are a fact of life. Communications networks
are becoming very inexpensive. The model may not apply or apply fully to some businesses,
but it should be the default relationship.
S&L: Doesn’t R ¼ G imply outsourcing to the point at which I have only a virtual corporation?
Should I not own some R as a source of competitive advantage?
Prahalad: In order to serve effectively one consumer at a time, we may have to access
resources from a large number of vendors. Apple, for example, produces no content – they
rely on large number of suppliers. At same time, they don’t even produce the iPod. To create
personalized experience, you need resources from multiple vendors, both large and small
companies. Hence our assertion that in the limit, R ¼ G, although the essential principle is
the centrality of the customer.
I don’t like the term outsourcing. The boundaries of a firm today are not clear-cut. And we
need to continue search for best talent and resources. Think in terms of nodal companies –
those that provide the standards for service, technology, etc. These will retain power of
influence over companies. Think in terms of interdependence.
S&L: Yet at the same time, you contend that we must protect and leverage our legacy assets,
as opposed to adapting or modifying them.

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PAGE 12 STRATEGY & LEADERSHIP VOL. 36 NO. 6 2008
 Prahalad: I refer to all the databases, such as our history of relationships with customers and
vendors. The key is that in building our new architecture, we must make sure that we exploit
existing assets as much as possible.
S&L: Let’s talk about cost. At the limit, when N ¼ 1, R ¼ G, don’t the costs of managing this
complex system rise dramatically?
Prahalad: Cost of managing parts may go up, but the total system costs should come down.
For example, the cost of access to Google is essentially zero. We’ve historically debated
cost versus quality, differentiation versus cost. Now we debate efficiency versus innovation.
This is a false polarization.
I believe that with a good analytics, cost and innovation both will improve. If you deeply
understand and are willing to invest in new social architecture, skill building, performance
metrics, and IT architecture, you will change the value proposition. Note that R ¼ G also
applies to talent – you don’t need all the talent in your own company.
S&L: I concur that in this brave new world, we’ll need new systems and skills. How does a
manager acquire or develop these resources?
Prahalad: Managers must start from a point of view. How will a new value proposition change
my specs? How can we coordinate many, many suppliers? Can we audit our capabilities?
What’s the quality of skills – in our managers, call center operators, etc. Is there a systematic
way to fill the gap? Moving forward begins with adopting a point of view, establishing the
ideal specs, auditing where we are, then asking what steps in the short term we need to take.
Then we can move forward and experiment.
S&L: So the process of transformation need not be revolutionary, it can take the form of
stage-managed evolution. Still, all of this sounds rather utopian. I may be an enlightened
leader, but am I not hobbled by an organization that’s loathe to change? What must I do to
overcome this resistance, this attachment to a legacy mindset?
Prahalad: Yes, there are obstacles to progress. What underlies the resistance to change?
There are three reasons for much of the opposition. First, the logic of what we are trying to do
is not always obvious. Second, if change occurs, the accumulated intellectual experience of
the players gets devalued and change therefore is personally threatening. So we need a
safety net. Third, we must provide hand-holding for managers while they are learning. Even
though our managers’ prior performance has been OK, they now need new skills.
S&L: What kind of hand-holding would work?
Prahalad: Managers must have an overarching logic, they need to communicate their
strategic intent, and they must understand that different people will have different levels of
discomfort. To apply N ¼ 1, we must give them an appropriate safety net, help them
transform their skills with training and practical experience. If you do this, the resistance to
change will go down. I’m not naive, but all you need is to convert 30-40 percent of managers
to believers. And we can de-risk change by taking small steps.
S&L: Until we reach the tipping point. You predict that we’ll reach the N ¼ 1, R ¼ G state by
2015 or 2020. What’s the basis for this bold forecast?
Prahalad: Consider 2020 – who will be the managers? The 25-year-olds who are today 13!
What will have been their life experience? Social networks, personalization, connectivity, etc.
They’re technologically savvy. They want to compete. But they also want to co-create, and

‘‘ We need two joint problem solvers – the consumer and the

company. Together they create value, and at same time they
create partnership value. ’’

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VOL. 36 NO. 6 2008 STRATEGY & LEADERSHIP PAGE 13
 they are collaborative by nature. They are trained at multi-tasking. These will also be the new
target consumers. When I look at these emerging trends, I see 2020 as a conservative
estimate. We must embrace the inevitable – it won’t go away.
S&L: So this transformation is not a choice! It’s the inescapable consequence of the driving
forces. Still, doesn’t R ¼ G and N ¼ 1 imply transparency of our business model? And do we
not then give away our competitive advantage?
Prahalad: A firm’s only protection is continuous innovation, not protecting its past.
S&L: And today’s competitive advantage is therefore transient, ephemeral?

Prahalad: Right. There are no sustainable advantages. There is only advantage for the
moment. Firms must continuously innovate if they want to survive!

Corresponding author
Robert J. Allio, a Contributing Editor of Strategy & Leadership, is one of the publication’s
founders (rallio@mac.com). As an interviewer for S&L he has questioned thought leaders
such as T. Boone Pickens, Gary Hamel and Jay W. Lorsch.

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