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Co-opting Customer Competence

The changing dynamics of business in recent years have led manufacturers to draw on the competencies of their supply-chain partners—suppliers and distributors alike—as a source of competitive edge. But, as University of Michigan Professors C.K. Prahalad and Venkatram Ramaswamy explain in this excerpt from their article in the Harvard Business Review, the growing practice and study of competence as a source of competitive advantage has largely overlooked one key player: the customer.

Business competition 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 1960s and 1970s; everyone and anyone can be part of the action.

The shift away from formal, defined roles is already occurring in business-to-business relationships. Major business discontinuities such as deregulation, 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 between 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 P&G. 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. (See the exhibit "The Evolution and Transformation of Customers.")

Thanks largely to the Internet, consumers have been increasingly engaging themselves in an active and explicit dialogue with manufacturers of products 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 knowledge of other customers. Consumers can now initiate the dialogue; they have moved out of the audience and onto the stage.

Customers are fundamentally changing the dynamics of the marketplace. The market has become a forum in which consumers play an active role in creating and competing for value. The distinguishing feature of this new marketplace is that consumers become a new source of competence for the corporation. The competence that customers bring is a function of the knowledge and skills they possess, their willingness to learn and experiment, and their ability to engage in an active dialogue.

The concept of competence as a source of competitive advantage originated in studies of the diversified firm.1 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 opportunities and find new ways to deploy the company's intellectual assets. Managers eventually came to realize that the corporation could also draw on the competencies of its supply-chain partners. During the last decade, managers have extended the search for competencies even further; they now draw on a broad network of suppliers and distributors. Over time, then, the unit of strategic analysis has moved from the single company, to a family of businesses, and finally to what people call the "extended enterprise," which consists of a central firm supported by a constellation of suppliers. But the recognition that consumers are a source of competence forces managers to cast an even wider net: competence now is a function of the collective knowledge available to the whole system—an enhanced network of traditional suppliers, manufacturers, partners, investors, and customers. (See the exhibit "The Shifting Locus of Core Competencies.")

The Shifting Locus of Core Competencies
   The company   Family/network of companies Enhanced network
Unit of analysis The company The extended enterprise—the company, its suppliers, and its partners The whole system—the company, its suppliers, its partners, and its customers
Resources What is available within the company Access to other companies' competencies and investments Access to other companies' competencies and investments as well as customers' competencies and investments of time and effort
Basis for access to competence Internal company-specific processes Privileged access to companies within the network Infrastructure for active ongoing dialogue with diverse customers
Value added of managers Nurture and build competencies Manage collaborative partnerships Harness customer competence, manage personalized experiences, and shape customer expectations
Value Creation Autonomous Collaborate with partner companies Collaborate with partner companies and with active customers
Sources of managerial tension Business-unit autonomy versus leveraging core competencies Partner is both collaborator and competitor for value Customer is both collaborator and competitor for value

1. See Gary Hamel and C.K. Prahalad, "The Core Competence of the Corporation, " Harvard Business Review, May-June, 1990.

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Excerpted from the article "Co-opting Customer Competence" in the Harvard Business Review, January-February 2000.

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C.K. Prahalad is the Harvey C. Fruehauf Professor of Business Administration at the University of Michigan Business School in Ann Arbor. He and Gary Hamel coauthored the McKinsey Award-winning HBR article "The Core Competence of the Corporation" (May-June 1990).

Venkatram Ramaswamy is an associate professor of marketing at the University of Michigan Business School.

The Evolution and Transformation of Customers
  Customers are stepping out of their 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 a Passive Audience Customers as Active Players
  Persuading predetermined groups of buyers Transacting with individual buyers Lifetime bonds with individual customers Customers as cocreators of value
Time Frame 1970s; early 1980's Late 1980's and early 1990's 1990's Beyond 2000
Nature of business exchange and role of customer Customers are seen as passive buyers with predetermined role of consumption. Customers are part of the enhanced network; they cocreate and extract business value. They are collaborators, codevelopers, and competitors.
Managerial mind-set The customer is an average statistic; groups of buyers are predetermined by the company. The customer is an individual statistic in a transaction. The customer is a person; cultivate trust and relationships. The customer is not only an individual but also part of an emergent social and cultural fabric.
Company's interaction with customers, and development of products and services Traditional market research and inquiries; products and services are created without much feedback. Shift from selling to helping customers via help desks, call centers, and customer service programs; identify problems from customers, then redesign products and services based on that feedback. Providing for customers through observation of users; identify solutions from lead users, and reconfigure products and services based on deep understanding of customers. Customers are codevelopers of personalized experiences. Companies and lead customers have joint roles in education, shaping expectations, and cocreating market acceptance for products and services.
Purpose and flow of communication Gain access to and target predetermined buyers. One way communication. Database marketing; two-way communication. Relationship marketing; two-way communication and access. Active dialogue with customers to shape expectations and create buzz. Multilevel access and communication