1-Co-Creation of Value – Towards an Expanded Paradigm of Value Creation

|| Co-Creation of Value – Towards an Expanded Paradigm of Value Creation Towards an Expanded Paradigm of Value Creation || Marketing Review St. Gallen 6 | 2009 11 In the late 1990s, C. K. Prahalad and I began discussing the impor-tance of co-opting customer competence when developing new products and services, and even experiences. In a Harvard Busi- ness Review article in 2000, we noted that, thanks largely to the Internet, the active, engaged customer was dramatically transform- ing the industrial system as we know it. We went on to emphasize how companies had to learn to “co-create” value with customers. In 2004, C. K. Prahalad and I wrote a book defining the implica- tions of the shift in modern society towards the centrality of indi- viduals and their human experiences. This book was titled The Future of Competition, and it was recognized by BusinessWeek as one of the top 10 books of 2004. In many ways, The Future of Competition anticipated the digital and consumer universe we know today. In just three years, a galaxy of new businesses capital- ized on the so-called “Web 2.0” evolution, with Time magazine designating “You” as the Person of the Year in 2006. The conventional firm-centric view of value creation has expanded beyond the activities of the firm towards one whose locus is now a function of interactions anywhere in the system – the underpinning of the new source of value (the “WHERE” of value creation) as shown on the right side of Figure 1. Beyond Activities to Interactions Consider Nike whose Nike+ “experience” kit consists of a wireless device that transmits speed and distance information from a sensor- equipped Nike running shoe to an iPod Touch or special wrist- band. Then, through a website (nikeplus.com) runners can track their progress, set personal goals and challenge friends to races. With over 1 million runners and over 130 million miles uploaded as of June 2009, Nike+ has been a runaway success. For Nike, its market share has increased by as much as ten share points, not to mention increased revenues through the Nike+ ecosystem, in part- nership with Apple and others. As shown on the left side of Figure 2, the “strategic capital” of Nike has also increased – the accumu- lated knowledge and insights it gains from continuous interactions with runners through Nike+, which enables Nike to engage better with the running community at large. Nike+ also reduces the risks and costs for Nike, through word-of-mouth marketing and exper- imentation with new value propositions. And as shown on the right side of Figure 2, Nike+ enables runners to have new valuable expe- riences, while reducing risks and costs to individuals using the sys- tem as well. In short, Nike+ has expanded the value creation pie in “win more – win more” fashion. Co-Creation of Value – Towards an Expanded Paradigm of Value Creation Co-creation is the process by which products, services, and experiences are developed jointly by companies and their stakeholders, opening up a whole new world of value. Firms must stop thinking of individuals as mere passive recipients of value, to whom they have traditionally delivered goods, services, and experiences. Instead, firms must seek to engage people as active co-creators of value everywhere in the system. VENKAT RAMASWAMY || WERTSCHÖPFUNG WERTSCHÖPFUNG || 12 Marketing Review St. Gallen 6 | 2009 From the company’s standpoint, not only has Nike redefined how it interacts with customers, it has also enabled a full system of inter- actions. Nike no longer attempts to control the value system, but has instead opened up to multiple types of co-creators, leveraging the skills and talents of millions of people willing to contribute their knowledge. As a result, the “value system” of Nike is now open and co-creative. The global resources of the community of customers – from users to enthusiasts to trainers and coaches – and the extended network of partnering firms and suppliers –Apple, Google, and fitness centers – are a collective competence base for Nike. In other words, Nike has also expanded the source of competence – the “WHO” of value crea- tion (see Figure 1). From one perspective, every one of the people and organizations contributing is a potential (and often actual) buyer or advocate for Nike shoes, clothing, accessories, and equipment. From another perspective, they have (or can) become even more: a part of the Nike co-creation system in which they generate new sources of mutual value. Co-creators enjoy new, differentiated experiences and better economics, while the company is able to generate new strategic capital for itself and dramatically improve its economic model. Beyond Business and Management Processes to Engagement Platforms The Nike+ example also illustrates the shift beyond products and services to human experience environments (the “WHY” of value creation). In the words of Nike’s Olander, “In the past, the product was the end point of the consumer experience. Now it’s the starting point” (Gregory 2007; see also Greene 2008). The environments of human experiences embody interactions of individuals with each other and with the company and its network partners’ products and artifacts, places and spaces where interactions take place (whether online or offline), and interactions with the company and network partners’ business processes. Designing for human experience environments goes well beyond classic product and service design, not only in terms of the complexity of the different types of inter- actions among individuals, communities, and the firm’s enhanced network, but also in terms of a deep understanding of the inter- action experiences that actually generate value for those involved. This requires going beyond business processes to “engagement plat- forms” that enable and support “two-sided” interactions on a large scale, in continuous fashion (the “HOW” of value creation). Nike+ is an example of such an engagement platform. There are many examples of firms that have opened up their internal processes from marketing to product development to even designing the entire business network with customers and stake- holders (Ramaswamy/Gouillart 2010). Consider, for example, Crushpad, a San Jose based firm, which is transforming the wine business by using technology to engage consumers in co-creation of the offering itself. Crushpad started its operation with the slo- gan: “Make your own wine!” and its value chain is laid out on their website (crushpadwine.com). Consumers can engage, as much or as little as they wish, at any point in the wine making process: from creating a wine making plan; to growing and monitoring the grapes; to picking, crushing, and fermenting the grapes; to aging the wine; and finally, to packaging the bottles. At each of these stages, Crushpad provides consumers with the tools and educa- tion. This flexibility is the essence of co-creation: true co-creation enables consumers to engage with the company at whatever stage of the process, and whatever level of involvement, they desire. Crushpad is at the center of a network of suppliers, employees, customers, and customer communities. Each of the parties in the network allows for multiple types of interactions, which in turn create value. First, Crushpad allows customers to interact with the vineyards that grow and supply their grapes, and to design various aspects of its wine-producing experience directly with employees or through its website. Consumers can also interact with the prod- uct itself in creating the wine, or with other products provided by Crushpad: party planning services, labeling and packaging advice, and advice on how customers can launch and sell their unique wines. Finally, Crushpad allows customers to communicate and create value with other customers by allowing customers to develop their own websites, by enabling community interaction through connecting with wine enthusiasts and blogs, by providing a wine wiki, and by sponsoring community events. Revenues come from all of these value added services and inter- actions, above and beyond the traditional product of the wine itself. Further, increased word-of-mouth communication about the brand decreases marketing costs and helps channel the power of the community to generate new ideas. Co-creation is not just a win-win situation: the emphasis on continuous improvement, communication, and learning allows customers and firms to “win more – win more” by efficiently creating unique value. Engagement platforms, however, transcend the company’s offer- ings as such. In other words, while products and services can them- selves become engagement platforms, especially as technology becomes embedded in offerings, any firm can engage customers and stakeholders in a dialogue about their offerings and generate new strategic capital through other external engagement platforms. Let us take another example to illustrate this. In a bid to revitalize the Starbucks experience and mitigate busi- ness risks that it faced from unbridled expansion, Howard Schultz, who returned as CEO of Starbucks in January 2008, launched My StarbucksIdea.com in March 2008. In the process of its rapid expansion, it had not only paid less attention to the Starbucks expe- rience, but had to contend with rising customer and market risks from an erosion of its loyal customer base, market development by competitors who had caught on to espresso drinks, from Dunkin’ Donuts to McDonald’s at the low end, other fast rising premium coffee shop chains like Peet’s Coffee and Caribou coffee, and the hordes of local coffeehouses that had begun to upgrade the cus- tomer experience. In a memo he had circulated the previous year within the Starbucks organization, Schultz raised concerns about Starbucks “losing its soul” and the risks to its brand that had been built around experiences of value to customers (Goldstein 2007). On MyStarbucksIdea.com, he invited everyone and anyone to help co-shape the future of Starbucks with their ideas, in ways Star- || Co-Creation of Value – Towards an Expanded Paradigm of Value Creation Towards an Expanded Paradigm of Value Creation || Marketing Review St. Gallen 6 | 2009 13 bucks might not have thought of, to check out other people’s ideas, and vote on the ones they like best. Starbucks has been proactive in laying out areas of experience on its web site, ranging from ordering, payment, and pick-up, to atmosphere and locations, to social responsibility and building community, to product-related ideas concerning drinks, merchandising, and the Starbucks card, and any other ideas to enhance the Starbucks experience. Within a month, many constructive ideas were posted. One that gained traction is to embed a customer’s regular order on the Starbucks card – for example, “a tall, nonfat, no-foam, extra-hot caramel mac- chiato with light caramel and a dash of vanilla,” which would speed up the transaction for an individual customer. From Starbucks’ per- spective, it could serve more customers faster, generating a “win- win” for both sides. Other customers called for the ability to send in orders by phone or Web, give drinks to a friend, make ice cubes out of coffee so when they melt they won’t dilute cold drinks, and something to plug the hole in lids to prevent sloshing (which Star- bucks implemented through reusable “splash sticks”). Chris Bruzzo, Starbucks’ CTO, says that they wanted to “open up a dialogue with customers and build up the muscle inside the company”. There are about 48 Idea Partners – specially trained employees who act as hosts of the discussion and take specific ideas to their internal teams, and act as advocates for customers’ sugges- tions so “customers would have a seat at the table when product decisions are being made,” as Bruzzo puts it, to “close the loop in an authentic way.” The goal is to truly adopt customer ideas into Starbucks’ business processes, including product development, store design, and customer experience. Starbucks has already demonstrated this new engagement model of co-creating the brand experience with customers, not only reducing its business risk in the process but also identifying ways of keeping its core customers more loyal. For instance, after Schultz took over as CEO, he announced that they would be cutting back on sandwiches to return the stores to a more coffeehouse-style experience. Through MyStarbucksIdea, however, customers asked that Starbucks retain the sandwiches, but they wanted more nutri- tious and healthier options (more whole grains, more fiber and protein, smaller portions, etc.). Starbucks Idea Partner Katie, a reg- istered dietician and senior nutritionist at Starbucks, engaged in dialogue with the community, internally with Starbucks, and with the company’s supply chain, finally implementing a new range of nutritious but tasty sandwiches with small ingredient changes that they found would address aroma issues so as not to interfere with the smell of coffee. Thus, not only does the community vote and decide, but members can discuss the ideas with Starbucks Idea Partners and help make them even better. Says Bruzzo, “There are advantages to having this kind of transparency because it creates more engagement, and we actually get to iterate on our solutions while we are building them” (Jarvis 2008). Ultimately, the community can not only see which ideas were the most popular but also engage with the company in dialogue as it reviews ideas, watch as the company takes action, and provide real feedback based on actual experiences. This kind of continu- ous, iterative engagement between Starbucks and its customers, as well as its customer-facing employees in stores (who have also chipped into the conversation) and the supply chain and partner base, enables the brand to be co-created and managed in ways that challenge traditional brand management orthodoxies. Companies that engage customers in co-creating brands can create a “seeing culture,” as Schultz puts it, and help employees inside the company Fig. 1 Co-Creation as Expanding Conventional Value Creation Source: Ramaswamy/Gouillart 2010 Global Network and Communities of Individuals Inside and Outside the Firm Interactions Anywhere in the System Human Experience Environments Engagement Platforms Basis of Value Creation (WHY) Means of Value Creation (HOW) Competence base of Value Creation (WHO) Opportunities for Value Creation (WHERE) WHAT Firm and its Employees Firm and its Activities Products and Services Business and Manage- ment Processes || WERTSCHÖPFUNG WERTSCHÖPFUNG || 14 Marketing Review St. Gallen 6 | 2009 “get” customer-think. It is important to drive co-creative thinking into the management of human capital and (re) design of business processes, and back to points of interactions with customers. As the Starbucks example illustrates: Co-creation is, by its very nature, not about “build it and they will come”, but “build it with them, and they are already there.” Co-creation is both the means and the end, as it were, in a con- tinuous cycle. It is not just about the company conceiving prod- ucts and services in and of themselves as engagement platforms, as in the case of Nike+ and Crushpad. It is also about using engagement platforms as an organization to systematically involve customers, employees, and stakeholders in a continuous process of both dis- covery and execution of new value creation opportunities. Innovating Co-creative Engagement Platforms: Caja Navarra Caja Navarra (CAN) is a savings bank based in Pamplona, in the Navarre region of northern Spain (Aranda et al. 2008).1 Like other Spanish savings banks, a ‘caja’ (pronounced “ca-ha”) is traditionally a regional not-for-profit bank designed to support its local com- munities through social contributions, based on a dual financial and social mission, with part of its profits allocated for society’s development and well-being. Incorporated under the legal form of “private foundations with a social purpose,” they are actually full- credit institutions with freedom to act and compete operationally on par with the rest of the financial institutions in the well-developed Spanish banking system serving over 45 million people. In 2002, CEO Enrique Goñi arrived at Caja Navarra and imme- diately sought to differentiate the bank in a crowded market of over 60 savings banks. Its social investment at that time was in the model of all cajas: the bank’s board decided where the money went, in a highly political decision. Goñi went to the board with a proposal to put CAN’s social investments in the hands of customers, in effect saying, “Those who decided had to stop deciding.” In January 2004, the new initiative, dubbed “You Choose: You Decide,” allowed customers to specify their preferences among the seven initiatives of social action traditionally supported by CAN. Customers’ credit cards were personalized to show their choices, reinforcing their identification with the initiative and generating a strong emotional connection. Through “You Choose: You Decide,” bank customers revealed that their most popular project in 2006 was “emergency aid in natural disasters and crises,” with 12,099 supporting it. CAN invested €42 million (about $60 million), or 30 percent of its after-tax profits in 2006, in these social programs (the other 70 percent was reinvested in the business). Through a customer-facing engagement platform, implemented both online and at its branches, CAN let customers choose categories of investment and specific organizations and projects. In 2007, over 530,000 customers (almost 88 percent of the customer base) had chosen which social initiatives to fund (with a total of €50.25 million, or about $71 million). More than 460,000 customers had selected specific projects from a portfolio of 2,707 ■ ■ projects proposed by 2,133 organizations. (CAN’s goal by 2010 is to have over 700,000 customers deciding from over 4,000 projects.) The “You Choose: You Decide” initiative is the driving force behind the concept of CAN’s civic banking – empowering people with new rights, as Goñi puts it. As CAN’s pioneering initiative evolved, the bank positioned it as a customer right for “Respon sible Banking”: giving customers a degree of insight into and control over CAN’s social investment. In 2007, over 650,000 customers received letters explaining how much profit CAN had made from their money and how much each customer had contributed to the projects they had chosen – in cash figures. As Pablo Armendariz, CAN’s Head of Innovation, who works closely with Goñi in co- shaping the initiatives, puts it, “Everything is in on view, just like it is at CAN’s branches. We undertake to work impeccably, without hiding anything, protecting our customers’ interests at all times.” Information on profitability – whether by region, product, seg- ment, or individual customer – is usually one of the best-kept secrets at any bank. But CAN engaged in transparent banking, con- sistent with its strategic intent of social responsibility and its new perspective on the rights of customers. It provided prospective cus- tomers with an online tool to estimate how much money it will make with them, and therefore how much money the customer could direct to social projects. Besides creating a strong emotional connection with the bank (yes, a bank), CAN has in effect provided its customers with a platform to get more engaged in their society. The platform enables the rights of responsible, transparent, and innovative banking for multiple co-creators, ranging