The Transformation of Business

From Chapter 1 of The New Age of Innovation, by C.K. Prahalad and M.S. Krishnan

Plus: C.K. Prahalad: The New Age of Innovation

Video: C. K. Prahalad on Innovation, Part 1

Video: C. K. Prahalad on Innovation, Part 2

There is a fundamental transformation of business underway. Forged by digitization, ubiquitous connectivity, and globalization, this transformation will radically alter the very nature of the firm and how it creates value. No industry is immune to this trend. It will impact traditional industries such as education, insurance, health care, automobiles, and footwear, as well as emerging industries such as video games, search engines, and social networks. Coming to terms with the implications of this change is critical for survival and growth.

This transformation, as we will examine in this book, is built on two basic pillars:

1. Value is based on unique, personalized experiences of consumers. Firms have to learn to focus on one consumer and her experience at a time, even if they serve 100 million consumers. The focus is on the centrality of the individual. We will designate this pillar as N = 1 (one consumer experience at a time).

2. No firm is big enough in scope and size to satisfy the experiences of one consumer at a time. All firms will access resources from a wide variety of other big and small firms—a global ecosystem. The focus is on access to resources, not ownership of resources. We will designate this pillar as R = G (resources from multiple vendors and often from around the globe).

This view of value creation is 180 degrees different from the model that started the industrial revolution. The Model T from Ford, the icon of the industrial revolution, was built on two premises that are the opposites of N = 1 and R = G. Consumers were treated as an undifferentiated group, and hence the famous dictum "Any color is OK as long as it is black." All resources had to be within the firm to capture value. Ford was one of the most vertically integrated firms, and its River Rouge plant in Dearborn, Michigan, was the model. While no business today operates along the lines of the original Ford model, we must recognize that model as the precursor of modern business models. Most businesses today are variants of that model. That model served us well. It will not as we move forward.

Let us consider a very traditional business: specialized tutoring of children in high school.

Little has changed in this relationship for decades. Students attend classes at predetermined times. Typical lessons are broken into periods of one hour, each devoted to a particular subject, such as language, mathematics, and history.

Students around the world get homework assignments, which they do on their own, with their parents, with study groups, or with their girlfriend or boyfriend, if they're lucky. Periodic tests and quizzes provide feedback to the teachers and the students about how well they are doing. This system assumes that one learning process will suit all students. Any debate about individualized attention rapidly turns into a discussion of class size and cost.

Now, consider an alternative called TutorVista, a small startup. Here, each student chooses the time when he wants to be tutored. He also chooses the subjects in which he will receive help. He prioritizes his needs. He can also determine how many hours and how intense the tutoring has to be on any topic. He can also choose his teacher! His tutor may be geographically located in India or some other remote location. The tutor will begin the orientation with specific tests to evaluate the student's understanding of the subject and then develop a specific course of study oriented for that student. The lessons are personalized for that student.

All the tutors are independent, well-educated men and women who do this as a part-time activity. To qualify as TutorVista tutors, all potential candidates have to go through a training program briefing them in effective practices in providing remote personalized education. This process, including accent training for teachers, can take from 60 to 100 hours.

Initial results show that U.S. students participating in this system have dramatically improved their understanding of the subjects and their performance in them. It is also not expensive. Students can take as much tutoring as they want for $99 per month. The affordability is only one reason for the success of the approach so far. More important, TutorVista provides personalized instruction that meets the unique study needs of individual students in online formats that suit the always-on mindset of today's student generation (N = 1). Tutors cocreate a "learning plan" with each of their students, and by executing that plan, they cocreate value through improved grades and better retention.

TutorVista had access to 600 tutors at the time of this writing. These tutors are geographically dispersed, and each one is an independent contractor but is bound by the common standards of behavior, ethics, and quality imposed by TutorVista. The tutors can choose to work as much as they want. Resources are accessed as needed from a global resource pool (R = G). TutorVista focuses on screening tutors for credentials and providing them with basic training, developing scheduling algorithms, and creating instructional methods. Digitization of the platform for a student and tutor to interact and ubiquitous connectivity ensures that remote tutoring is a reality. TutorVista currently has over 10,000 paying students, and it is expanding its tutor base of over 5,000 tutors to countries outside India, including the United States.

We acknowledge that TutorVista is a start-up with a short history and its programs have yet to be rigorously evaluated. However, this experiment represents how even in a tradition-bound field such as secondary education, the power of technology and analytics can be focused on the needs of single individuals through global resources (N = 1 and R = G). If a tradition-bound institution such as secondary education can be transformed, what about other industries? Is there a TutorVista inside your corporation that fundamentally challenges the current business model?

This megatrend holds massive implications for the creation of value and profit in any business. It challenges established managerial practices in talent management, product development, manufacturing, pricing, logistics, marketing, and brand management. More important, it will lead to radical changes in the technical architecture of the firm—that is, its information technology backbone—and how it is designed. It will also challenge the managerial processes, skills, and attitudes of managers.

Coming to terms with the implications of this transformation is both urgent and inevitable for the survival of business. This book raises the awareness of the underlying transformation and develops a blueprint for companies to transform themselves toward the N = 1 and R = G model of value creation. This book is for CEOs, senior executives, and managers at every level who face an imperative to understand that to form strategy and execute it, they must focus on their knowledge of business processes, information technology, and data analysis. To win in the competitive landscape defined by creating one consumer experience at a time, decision makers must develop a whole new mindset for understanding their global supply, logistics, and communications networks. These are the competitive battlefields of twenty-first-century business. We explore these enormous opportunities in the pages ahead, and we also develop a point of view on how to build the social (skills and attitudes of managers) and the technical (information technology) capabilities needed to compete in this emerging value creation space.

To illustrate the thrust of our arguments, consider yet another traditional industry, such as truck tires. Vendors sell their products competing largely on the basis of price, durability, and brand awareness. The dealer and distributor structure is well known. The industry practice is to sell the product to original equipment manufacturers (OEMs) and hope that owners will use the same type of tires when they are ready to replace them. The business model has remained the same in the industry for decades. This is a traditional business model that is firm-centric and product focused. Should this industry remain this way, or can it become a "high-tech—high-touch business"?

Consider an alternative in which the manufacturers do not sell tires but charge for services. They contract with fleet owners to charge per mile of usage. The pricing contract will be based on the type of use, influenced by general factors such as the type of loads (for example, heavy loads), typical route structures (for example, through cities or across long distances), and individual characteristics of fleet owners, such as the training of drivers and therefore the quality of driving, the maintenance of correct tire pressure, and the quality of servicing, such as tire rotation. The tire as a product still exists and is at the core of the business. However, the revenue is based on tire usage, not on a one-time tire sale.

The retail business shifts from a transaction base (selling a tire) to an ongoing relationship (continuous and ongoing measurements of usage and ability to provide feedback on better usage specific to a user) with the consumer. The revenue model now depends on accurate measurements of tire usage on a periodic basis and on parameters of wear and tear that are transparent to the fleet owner and the company, resulting in the ability of the tire company to offer specific advice.

This model has other advantages. The firm gets detailed data on how individual drivers actually drive their vehicles—from the size and weight of their loads, the speeds at which they drive, and the patterns of braking they follow to a host of other characteristics that can help in the product development process.

The company need not focus solely on tire usage. It can focus on driver safety as well. It can help a specific driver improve her skills. Say, for instance, a particular driver has driven only 20,000 miles on a set of tires, but the tires show rough usage. Now assume that we have installed sensors that measure tire performance in real time and relay the data to a central data center. The company can, in real time, alert drivers to be careful, slow down, or check the tire pressure, or in some cases go to the next service station and change the tire. Is this a commodity business with few opportunities for differentiation, or is this a highly differentiated, service-oriented business that cocreates a unique driving experience for a specific driver and improves her skills as well? Will this radically change the meaning of value in this business? Will this approach change the nature of relationships between the firm and its consumers?

Well, Goodyear already has a mileage-based service for its fleet customers. Bridgestone is piloting an early version of this model in Europe where the physical measurements are still taken manually and sent via the Internet to the data center. Moving from this phase to remote measurement via well-placed sensors is just a step away. Note the three distinct transformations taking place:

1. The firm is moving from selling a product to selling a service. The product is an integral part of the service. But the value is based on service.

2. The firm is moving from a transactional relationship with a customer to a service relationship with a customer. When strategy focuses on better fleet management—including lower costs, improved safety and skills of drivers, and improved understanding of truck dynamics—the core value proposition shifts from the physical product (tire) to services and solutions (better overall costs) to superior experiences (for individual drivers).

3. When the manufacturer is selling a tire (just the physical product) to the fleet owners, this type of business would be described as a business-to-business (B2B) organization. However, when that company is providing feedback that improves individual driver safety and skills, it looks more like a business-to-consumer (B2C) organization. In the new competitive arena of one customer at a time and global networks of resources, B2B and B2C definitions converge.
- BusinessWeek June 12, 2008