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By CIOinsight

Expert Voices: C.K. Prahalad & Venkat Ramaswamy on CRM

Thanks to the rapid spread of cell phones and other mobile devices, Web sites and media channels, consumers now have access to more information at greater speed and lower cost than ever before. But the information technology explosion has not necessarily resulted in better consumer experiences.

In their upcoming book, The Future of Competition: Co-Creating Unique Value with Customers (Harvard Business School Press), University of Michigan Business School professors C.K. Prahalad (above left) and Venkat Ramaswamy (above right) say globalization and ubiquitous connectivity are forcing companies to re-examine how they deliver value to customers. The ability to reach out and touch customers anywhere, anytime means that companies must deliver not just competitive products but also unique, real-time customer experiences on-the-fly, shaped by the customer "context"—that is, the precise physical location of a customer at any given time, the exact minute he or she needs the service and the type of mobile device over which that experience must be received.

Increasingly in the 21st century, Prahalad and Ramaswamy say, delivering a superior customer experience will be the differentiator between successful companies and also-rans. "The problem with CRM," Prahalad told CIO Insight editors during an interview at the magazine's Manhattan offices, "is it assumes that a company knows what to do to create value for customers. But this is not right. This decision cannot be unilateral. It has to be collaborative. You have to engage consumers, not view them as targets to be had, which is what today's CRM is all about—how to target a single consumer." What companies need to do instead, Prahalad and Ramaswamy say, is to figure out ways to engage customers as equal problem-solvers, so they can create value that is unique to the customer. "The product is no longer the basis of value," Ramaswamy says. "The experience is."

But to meet the challenge, companies will need to build more flexible, dynamic information backbones to capture and deliver the real-time insights required to deliver on-demand customer value and service that's meaningful to individuals within the context of their day and location—and without breaking the bank. An edited transcript of the interview follows.

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CIO Insight: You say that in the 21st-century information economy, the role of the customer will change dramatically. How?

Prahalad: The most basic change ahead is a shift in the role of the consumer—from isolated to connected, from unaware to informed, from passive to active. There is now ubiquitous connectivity thanks to wireless mobility and the Internet. You're getting customers who are networked, engaged activists and global in perspective in all industries. And it's happening at the same time as companies are searching for innovative and creative new ways to use new forms of information technology to engage customers and add value to the bottom line. And all the while, competition intensifies and profit margins shrink.

At the same time, there's more technology in the hands of the corporation. A wide variety of information technologies, such as GPS and wireless data transmission and the Internet, are being used, increasingly, by companies to create value, whether in pharmaceuticals or personal care products or computing and communications. It doesn't matter which industry; industry boundaries and technology boundaries are blurring.

What this means, fundamentally, is that the nature of the relationship between the company and the consumer is changing, because how and where they interface is dramatically changing. Partly, it's because of ubiquitous connectivity, partly because consumers want to engage very differently with companies than suppliers do. It's not happening in all the activities of the company, but it is happening at that point of company-customer interaction.

Increasingly, consumers engage in the processes of both defining and creating value. It's not simply the company telling its customers, "Here's the product, take it or leave it." Now to build customer loyalty, for example, companies are using information technology to let customers inject their view of value into the menu of what companies have to offer rather than accept the company's menu.

Company Think
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Source: The Future of Competition: Co-creating Unique Value with Customers by C.K. Prahalad and Venkat Ramaswamy

Some companies seem to understand this desire. On a basic level, consider the video rental business, an $8 billion business in the U.S. in 2002. When I visit the local rental store, I may not find my first, second or even third choices. Once I do pick one or two videos, I must watch them within the company-allowed time frame. If I find two hot releases, then I must return them together. If I want to watch both, then I must reorganize my life around the rentals or pay a late fee.

By contrast, Netflix has developed a video rental system designed around consumer-think. As a Netflix customer, I pay a flat monthly fee of $20 to choose from the film's inventory of more than 15,000 DVD titles. At the Netflix Web site, I can explore all available titles by genre, director, actor, top picks of critics and so on, and order films. The first three DVDs arrive in my home mailbox; I can keep the movies as long as I want and when I'm done, I simply seal them in the prepaid envelope provided by Netflix and pop it into the nearest mailbox. It's up to me how quickly I watch the films. The experience is mine, not the company's.

Do these changes apply across industries?

Prahalad: This applies across industry and across companies, and there aren't any exceptions, actually. Let me give you one example. There's a medication called Lotronex. It's the only medication that's available to people with irritable bowel syndrome, yet when people first started taking it, some of them died and many had awful side effects. The Food and Drug Administration pulled the drug from the market in 2000. Normally, that would have been the end of the story for the company, for the FDA and for the patients. But instead, the patients decided to use the Internet and the wireless Web to organize themselves. Today, thanks to the wireless Internet, it's possible to create dynamic customer communities, what we call thematic communities—and these patients actively lobbied the FDA. They said they knew the drug was dangerous, but said they had no choice: Any alternative was worse.

So the patients got the FDA to reconsider Lotronex. Meanwhile, they appealed to the drug's manufacturer, GlaxoSmithKline, and then went to the community of activist patients and pharmacists, and together, the company, the FDA, doctors and patients came to a new compact on how the drug can be dispensed: Everybody should get further training and understand the risks very clearly. So now this drug is back on the market. The company won because patients co-created with it, and did so with the help of these online thematic communities.

If these patients had not done this, this drug wouldn't have seen the light of day. The patients won, too, because now they have a solution for the problem, which they would not have had otherwise. And this is just one example of co-creation of value that's starting to happen in today's marketplace between consumers and companies.

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This is Net-powered word-of-mouth?

Prahalad: Thanks to the Internet and mobility, we now have thematic communities and word-of-mouth that's more rapid than ever—beyond what people had anticipated years ago. And many companies still don't fully understand how this will manifest itself in the marketplace.

The problem with CRM, for example, is people assume that a company knows what to do to create value for customers. But I say no, this decision cannot be unilateral; it has to be collaborative. Consumers will not be seen as targets any longer, which is what CRM is about—how to target a single consumer with a database. Key now is how to engage them as equal problem-solvers so that we get value that is unique. And once you've come to this conclusion, the amazing thing is the opportunity for value creation to expand exponentially because now we have more people telling us what they want. We don't have to second-guess and we don't have to do shock demand forecasting by SKU. If you deliver experiences, you're going to be producing on demand. That's the idea.

Isn't that more costly?

Prahalad: Actually, it is cheaper. Think of why that's so. First, you reduce the risks. Second, you access competence on demand. That means you build a network and only activate suppliers on demand. You don't keep any inventories of any kind. You're sort of inventory-less, if you will. You're taking Dell one step further. And third? You're always getting ideas for product development and ideas for new experience creation from your consumers.

Now, co-creating experiences is not the same thing as co-designing a product. I don't want you to design a car, but I want to create for you the experience of owning and using a car that is unique to you. It's hard for people coming from a customization background to understand this, perhaps. We're not talking about customizing products. We are talking about customizing experiences or creating unique experiences for individuals, even if they all have the same silly product. The difference is if that product is energized by information technologies, the experience can be personalized.

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How does this get delivered?

Prahalad: Take General Motors' OnStar navigation system. Here's a company that delivers an experience on demand, using technology convergence. It's all about delivering value based on customer context. Say I'm a single parent living in Pike's Peak. In winter, wouldn't it be nice if, before I take the kids to school, somebody would call me and say there is going to be a blizzard, and tell me not to take a particular route? Or if I do, asks me to keep OnStar turned on and, if it's okay with me, let OnStar tell me what to do and what not to do?

Now that might be a unique experience for me, but Venkat may have an entirely different need. Say he's driving from Ann Arbor to Chicago. He wants to stop and have dinner, and he prefers Italian food. OnStar can tell him the best way to get that. Furthermore, that is Venkat's need for an experience at the moment, not mine. My need was for safety information. In other words, what we're saying is that customer experiences are driven by events, and it's all very contextual, and it is not uniform for all of us—but that with mobility and technology convergence, companies can help to deliver those different types of experiences to their customers on demand. In this case, customers and companies co-create that value by giving each other information about what customer value means at the moment.

Ramaswamy: There's been a lot of talk about the commoditization of information technology. Now everyone has the same information technology. The differentiator now is not the product but the personalized experience. The value to the customer is in the personalized service—which is sensitive to real-time location and need. The value to the company is it's delivering a unique value or service to people that customers can't get elsewhere and are willing to pay for.

What are the implications for IT?

Ramaswamy: Today's CRM is all about what the company wants. But in this new world, value is co-created by both the customer and the company, and part of the "how" of doing this is that a dialogue between customer and company needs to be captured, not just profile data.

Prahalad: There are phenomenal implications for IT in this, in how you create the experience and deliver it quickly. For most companies, their technical infrastructure will have to change from a system that's driven by transactions—I give the company money and it gives me something in exchange—to event-driven or experience-driven IT. They must deliver to customers a service or experience that customers want on-the-fly, specific to where the customer is at a given moment. When companies build these new infrastructures, they will need to develop the level of granularity and the level of assimilation that customers want in their engagement with the company at any given time. These event-sensitive IT infrastructures that we need to build won't be only about business analytics—measuring what just happened. These will need to be built differently, around dynamic events.

Experience cannot happen without events. I must be here or I must talk to you or I must eat breakfast. With no event, there is no experience. What this means is companies will be able to leverage specific events in customers' lives within the context of where it happens, which is as important as when it happens—and that will determine what companies can offer in terms of value. My getting a heart problem at 9 o'clock in the morning has a different meaning than if I got it at 2 o'clock at night. And then where I have my heart problem also matters. If I get it in Ann Arbor, where I know all the doctors, it's very different from getting it in New York City or in, say, Costa Rica.

And there's also the question of how engaged I am at the moment, how urgently I think I need something from the company. Now obviously, if I'm having a heart attack, I'm totally engaged with the hospital that's providing me a service. If I'm suffering from tennis elbow, I may not be so totally engaged with that hospital; in fact, I might not reach out to it at all.

The challenge is, how do you get line managers focused on the customer in this new and more dynamic context? They must experience the business like the customer does, in real time. That will mean, at its very basic IT level, real-time alert systems. Traditional archival information, which has been an IT problem for a long time, won't help me now. If a customer is having a problem today but you as a manager won't know that for another week, it's not going to help anyone. So how do you build IT systems that are capable of continuous resource reconfiguration, rapid application development and real-time device alerts? That will be the challenge facing CIOs and IT leadership teams in the coming decade.

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Should companies scrap their CRM?

Prahalad: CRM investments did only one thing, and that was to pull everything together into one database. Okay, that cleaned up the underlying legacy systems and put everything in a file structure that looks good. But now everybody competes the same way because the information infrastructure determines how you compete, your theory of competition.

Once we move to an event-based, experience-based view of thinking about IT, then you have to construct your own IT capabilities so that you start looking at managers as consumers—not as managers who use IT. You need to create for them the same visceral understanding of experience. You have to start by saying, "How do managers want to get consumer information to co-create?" Companies need to look at all the touchpoints where value can be created, as Disney might, using a sensor-equipped Pal Mickey doll to "tell" a park goer who likes pirates that a pirate parade is about to happen around the corner. These touchpoints are where the firm and the consumers can come together, either for a conversation or for a complaint or for service. So our view of line managers is they can create value at the intersection.

We need a way of creating a mechanism for sharing that knowledge and rapidly creating new knowledge. In order to do that, we need the information backbone that understands contextual events rather than a transaction-processing view of IT. And that's basically where we are.

That's not to say we don't need CRM databases, but databases aren't enough. Up until now, people have focused on information, not on insights. So much of the thinking in IT involves crunching more information to do standard analytics, rather than to search for insights. I believe that the next big round of development is not more information-processing capabilities, but more ability to creatively combine human intuition with information.

This article was originally published on 12-01-2003