Co-opting Customer Competence

by C.K. Prahalad and Venkatram Ramaswamy

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.")

^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.