strategy and co-creation thinking
TRANSCRIPT
Strategy and co-creation thinking
Venkat Ramaswamy and Kerimcan Ozcan
Company capabilities and structures always reflect a theory, usually implicit, of
competition and value creation. During the last two decades or so, companies have
tried all manner of strategies to reduce their costs by putting their customers to work
– pumping gas, using self-checkout scanners at the grocery store or self-check-in kiosks at
the airport. Yet, in all these examples of customer involvement, the firm is still in charge of the
overall orchestration of the experience. Sometimes customers find these strategies valuable,
but other times they do not. Even mass customization and experiential marketing, which are
supposed to personalize the customer experience, are still primarily aimed at creating value
from economies of scale in the supply chain, and most examples of offerings barely touch on
the customers’ potential to add value by shaping their own experiences.
In more andmore firms, however, strategy making has become a joint process of co-creative
discovery, as enterprises devise and develop new opportunities together with customers,
partners and other stakeholders.
Co-creation thinking
Consider the example of Local Motors, a custom auto company based in Chandler, Arizona
that designs and build cars working together with skilled amateurs, customers and other
partners. The Local Motors business model employs a new view of how to leverage global
resources for the design, development, manufacturing, delivery and post-delivery of
automobiles. It has parceled out some elements of its value creation system to a portfolio of
partners, while acting as a nodal enterprise in the ecosystem by providing the intellectual
leadership and linking together of engagement platforms for open design and development,
while controlling core elements of manufacturing, delivery and post-delivery activities. By
integrating these functions, the firm can create value together with its stakeholders through
the global use of resources, knowledge and skills all along the activity chain.
The strategic architecture of the Local Motors enterprise includes, for example, an
automotive product design platform for a community of over 5,000 amateur designers
worldwide who participate in its periodic contests for a new car model. Once a winning
design is chosen, it uses an open supply chain platform in which any supplier of
components, parts, or sub-assemblies can participate, with Local Motors fabricating only
the composite frames in a local micro-factory in which the car is built. A buyer of the car can
choose a custom car skin and personalize accessories from an online website, where the
conventional ‘‘after-market’’ is now an open ‘‘in-market’’ through which any supplier can offer
accessories for a particular automobile. Then there is the micro-factory with a car-building
platform where the customer can be lead builder, with Local Motors providing the training,
tools and support, as he or she builds the car over two three-day weekends.
While Local Motors relies on an open and social network of global resources, it must also rely
on an enterprise network of partners like Dassault Systemes, one of the global enterprise
DOI 10.1108/SL-07-2013-0053 VOL. 41 NO. 6 2013, pp. 5-10, Q Emerald Group Publishing Limited, ISSN 1087-8572 j STRATEGY & LEADERSHIP j PAGE 5
Venkat Ramaswamy, the
co-author with
C.K. Prahalad of The Future
of Competition: Co-creating
Unique Value with
Customers (Harvard
Business Press, 2004) and
co-author with Francis
Gouillart of The Power of
Co-Creation (Free Press,
2010), is a Hallman Fellow
and Professor of Marketing
at the Ross School of
Business, University of
Michigan (venkatr@umich.
edu). Kerimcan Ozcan is an
assistant professor of
marketing at the
International University of
Japan ([email protected]).
They are co-authors of The
Co-Creation Paradigm
(Stanford University Press,
2014).
leaders in design tools and a key partner and stakeholder in Local Motors’ capability
ecosystem. Dassault Systemes offers platforms for enabling better design engagement
through 3D visualization, simulation and prototyping tools.
Thus, Local Motors leverages capabilities in the web of communities in which the company
participates. The Local Motors example suggests how new engagement models can be
designed all across the value chain of enterprise activities using platforms of stakeholder
engagements as the very basis of enterprise value creation.
An interesting partnership developed in fall 2012 when BMW teamed up with Local Motors to
put on the BMW ‘‘Urban Driving Experience Challenge’’ through the Local Forge platform.
Conducted by Local Motors through its design community, it aimed to stimulate new ideas in
developing a city car for the year 2025. It was not a new vehicle design competition. Rather,
BMW sought to find newways that BMW’s Ultimate Driving Machine could ‘‘benefit an area, a
community, a city and the world at large.’’ According to Local Motors, the competition gave
its crowdsourcing community ‘‘the opportunity to identify and design premium vehicle
features and functions that enhance the urban driving experience of the future.’’
The six-decade shift in perspective on resources, opportunities and value creation
It is enlightening to review the evolution of value creation in the field of strategy, leading us to
the point of co-creation, see Exhibit 1[1]. In the 1960s, the role of managers was seen as
allocating resources to competing opportunities within the business. By the 1980s, as firms
diversified, they began to be seen as a portfolio of competencies. But implicit in this view of
the firm was that resources are limited to what the firm owns, thus the value creation process
limited aspirations to means. In other words, for business units and conglomerates, for two
decades strategy could be summarized as: aspirations ¼ resources.
A breakthrough in the thinking about value creation was developed in the 1990s. To be
successful, a diversified firm must add more value than the standalone businesses in the
portfolio can. Corporate managers had to add additional value by the way they managed the
portfolio.
At the same time, another development forced managers to rethink the very meaning of
resources. If availability of resources was a source of competitive advantage, how were
Exhibit 1 The shift in perspective on resources, opportunities, and value creation
1960s-Early1980s Late1980s-Early1990s 1990s 2000+
Unit of Analysis
Corporation as a global,competence base,
including customers and talent from anywhere in
the world
View ofResources
ResourceAllocation
ResourceLeverage
Access toCompetence(Resources)on Demand
View ofValue
Creationin Strategy
Fit:Aspirations =
Resources
Stretch:Aspirations > Resources
Co-Creation:Joint Aspirations
>Joint Resources
Standalonebusiness units
Corporation as a portfolio of competencies
Corporation as an extended network of
suppliers and partners
Value CreationProcess
Unilaterally by the Enterprise
Jointly by theEnterprise andStakeholders
View ofOpportunities
ProductSpace
Solutionsand Services
Space
IndividualExperience
Space
PAGE 6 jSTRATEGY & LEADERSHIPj VOL. 41 NO. 6 2013
smaller, resource-disadvantaged competitors able to outperform their bigger rivals? The role
of managers in creating a whole that is greater than the parts and the need to explain the
success of the smaller entrants against incumbents many times their size, led to a new
conception of resources. Three basic premises emerged:
1. Resources are more than financial and physical. The accumulated intellectual resources
(core competence) was equally critical and a new currency for managers to reckon with.
2. The concept that resources are fungible. Resources can be expanded if we creatively
leverage the resources of others through alliances and joint ventures.
3. Most important, managers had to start with the view that ‘‘strategy is about stretch’’ in
order to leverage resources – whether reusing and redeploying core competencies in
new applications across businesses or changing industry norms.
These premises upended the prevailing mental model of senior managers. The view of their
role as one of resource allocation was challenged. They had to be concerned about
corporate resource leverage. Further, it became obvious that core competence was as
important a resource as cash and physical assets, maybe more so. Leveraging internal
competence across competing opportunities, especially in identifying and developing new
businesses became a yardstick of managerial capability.
The notion of resources still remained confined to the firm however. It focused on seamless
movement of competencies across what used to be stand-alone business units. This view
demanded that learning and internalizing new knowledge from alliances and partners
become a critical component of the conception of resources and value creation. Most
important, it reintroduced the concept of entrepreneurship into the large diversified firm. The
essence of strategy and entrepreneurship was about doing more with less. Value creation in
strategy shifted to: aspirations . resources. Why be limited by the internal competencies of
the firm when one could have access to greater competencies through a well-developed
global resource base? Thus, value creation evolved from resource allocation to resource
leverage:
B Internally across business units, thereby reducing capital intensity, speeding up new
business development, reducing risks and costs.
B Externally across suppliers on a global basis, to reduce investment intensity and costs,
enhance quality and facilitate rapid response time. This expanded the notion of the firm as
a locus of resources (competencies and investment capacity) to the extended enterprise
(a key network of global suppliers).
The LEGO discovery
Around the turn of the century, customers emerged as a source of competence. Consider
the case of the LEGO enterprise. As Jørgen Vig Knudstorp, CEO of LEGO, commented, ‘‘At
LEGO, we stumbled across the phenomenon of customer co-creation, which is now
becoming a major innovation practice.’’ LEGO’s Mindstorms robotics line allows individuals
to create robots using the familiar LEGO bricks. Mindstorms 1.0 was released in 1998,
featuring a microcomputer and snap-on infrared sensors. Using their PCs as a sandbox,
users could write computer code and snap together blocks of code to build their robot – just
like they would do with the studded LEGO bricks. To LEGO’s surprise, Mindstorms rekindled
‘‘ In more and more firms, strategy making has become a jointprocess of co-creative discovery, as enterprises devise anddevelop new opportunities together with customers, partnersand other stakeholders. ’’
VOL. 41 NO. 6 2013 jSTRATEGY & LEADERSHIPj PAGE 7
the child in thousands of adults, who made up over half of Mindstorms users. Independent
web sites sprang up, allowing enthusiasts to share instructions on how to build robots
ranging from sorting machines to intruder alarms to land rovers. Over time, Mindstorms fans
began to experiment with advanced programming design software made available by other
firms such as National Semiconductor (NSC). To sustain the interest of these enthusiasts
using its software, NSC then reciprocated by showcasing their work at robotics conferences
and meetups. An entire ecosystem of capabilities was born.
Further opening up its design, LEGO invited enthusiasts to take part in the programming of
the user interface of Mindstorms. In the fall of 2006, LEGO introduced Mindstorms 2.0 NXT,
which features programmable ‘‘intelligent bricks’’ and new capabilities for motion and touch,
as well as a range of new sensors, gyroscopes and accelerometers. NXT includes a
programming interface called LabView, which was co-developed with a select group of
LEGO enthusiasts, some of whom have advanced degrees in robotics. For the launch,
LEGO selected several robotics buffs from a large pool of applicants, gave them access to
inside information and encouraged them to write about their impressions of NXT. LEGO also
set up a message board allowing users to discuss their experiences with the new product
generation and encouraged them to share pictures of their creative inventions. At that point,
LEGO was no longer solely engaging a community of fans in designing, developing and
marketing Mindstorms NXT. It was now encouraging the community to evolve beyond the
firm’s control, doing much more than act as an extension of the firm’s development
resources. The Mindstorms community, in creative conjunction with employees of LEGO,
represented a whole new competence base.
The traditional LEGO brick has benefited from digitization to enable customers to unleash
their own creative imagination in expanded ways through joint value creation based on
individualized experiences. Using LEGO Digital Designer software, customers can now
design and build any model they can imagine. They simply download the software, free of
charge and can then start designing from scratch or choose one of a number of starter
models. They can then upload their designs to the LEGO Factory Gallery, where designs can
be stored and shared with other users. Designers can choose to have their own products
manufactured for a fee. Customer-designed products feature the customer designer’s
picture on the box, and LEGO may also choose a few of the most popular customer designs
for mass-production. All custom products are based on LEGO’s standard bricks and other
decorative pieces. The company also works closely with individual retail stores and
develops unique offerings with them.
Within the LEGO Factory, the company sponsors an online community that attempts to
engage individuals from its player base of over 400 million people through message boards
and a web site called My LEGO Network. The dialogue created through these forums allows
enthusiasts to exchange ideas. The company’s core audience is children, but a large group
of adult ‘‘super-users’’ – known as AFOL, Adult Fans Of LEGO – also participate in the
generation of product ideas, or the invention of new products, such as LEGO Architecture, a
good example of a fan-created enterprise on the LEGO platform that is also transforming the
souvenir industry. LEGO has become the supply chain for super-fans turned architects,
producing the bricks for them which they turn into products distributed globally through this
community. LEGO’s co-creation products include robotics and product-service offerings as
engagement platforms, platforms of engagement involving traditional building kits,
customized sets and figures, customized products designed by customers through
LEGO’s online tools and even virtual worlds like LEGO Universe, an online game where
‘‘ New engagement models can be designed all across the valuechain of enterprise activities using platforms of stakeholderengagements as the very basis of enterprise value creation. ’’
PAGE 8 jSTRATEGY & LEADERSHIPj VOL. 41 NO. 6 2013
players can create customized characters. Throughout, as Jørgen Vig Knudstorp, CEO of
LEGO, notes, ‘‘We gained a better appreciation of technique and touch, and a mind-set that
is crucial for successful co-creation. As we have learned, co-creation is not about just
‘following rules,’ but personal engagement is essential.’’
While every major shift in connecting value creation resources and opportunities has come
with a new set of managerial requirements and social and technical infrastructure
challenges, the role of the firm and the customer and other nontraditional stakeholders like
consumer communities remained distinct until the turn of the millennium. The relationship
between the consumer and the firm – a stand-alone consumer has been the dominant
organizing principle in both management and economic theory – has given way to firms
having to deal with consumer communities that are well organized. The relationship can be
bilateral and multilateral at the same time. Consumers want to influence how they will be
served and therefore want to be involved in the activities typically thought of as internal to the
firm. These entail qualitative differences in access to resources and the value creation
process. The process of value creation shifts away from a firm and product centric approach
to a stakeholding individual and experience-based perspective. Global resource leverage
using engagement platforms is enabling the transformation to this new value creation
perspective, oriented towards co-creation of experience-based value – value that is unique
to individuals, personally and collectively.
The sources of competence available to managers has expanded yet again to include the
collective intelligence in the whole global system – with the ability to rapidly source and
access talent, expertise, knowledge and skills from anywhere and anytime in the world, as
we saw through the Local Motors and LEGO examples. In this new view, strategy has
become: joint aspirations . joint resources. The managerial changes from this shift toward
embracing all stakeholding individuals as co-creators are summarized in Exhibit 2.
Building new capabilities
Not surprisingly many of the most strategically creative and effective companies are putting
information technologies to good use as a platform for strategy innovation. Advances in
information access and connectivity through the application of network technology, most
visibly the internet and wireless technologies, exponentially increase a corporation’s ability
Exhibit 2 Strategic need and managerial manifestation of co-creation thinking
Strategic need Managerial manifestation
Accelerating value creationOpportunities and growth
Using interactions as the locus of value creationAccumulation of environment, individual, and interactiondataExperiential learning, real-time insights, rapid knowledgeNew strategic capital and rapid discovery of new valuecreation opportunitiesDeeper collaboration with multiple enterprises andstakeholders
Reducing investment and capitalintensity
Access to competence and capabilities incommunity-based ecosystemUsing network resources to scale up and down quicklyConvert fixed costs to variable ones
Reducing resource and skill intensity Leveraging open and social resources, as well asmulti-enterprise networks
Reducing risks and operating costs Involvement of multiple stakeholders in execution andformulation of enterprise initiativesFocus on efficiency in interactions and experience-basedvalue creationIncrease speed to actualization of value
VOL. 41 NO. 6 2013 jSTRATEGY & LEADERSHIPj PAGE 9
to utilize the skills, interests and knowledge of customers as resources. IT innovations have
also given individual consumers unprecedented power and freedom to ‘‘customize’’ their
own lives, creating what they want, when they want it, for themselves.
Thus in the world of co-creation, we suggest that a line manager should be considered to be
any employee, at any level, who has the ability to directly influence the consumer experience
and facilitate co-creation. To do this, companies need to build IT infrastructures that are more
flexible than the current norm so that line managers throughout the organization can access
and activate the right resources and knowledge at the right time.
In the future, IT systems must also be more ‘‘event-based’’ so that all line managers are
constantly tuned into context-rich customer information. The quality and design of the IT
infrastructure is critically important because it is a central mechanism for aligning information
flows with the social infrastructure of a company and its strategic and operational objectives.
This includes the social networks that comprise the informal internal structure, the skills of
individual managers and relationships that reach outside the company.
The ideas we have described here are a part of the continuing evolution of strategy; there is
much that can be challenged and developed further. We believe that conceiving and
executing strategy in the age of co-creation cannot succeed if it remains a top down, insular
process. The new watchwords for strategy should be ‘‘engage and discover’’ not
‘‘command and cascade.’’ And discovery needs to be continuous, involving not just
customer and employees but all stakeholders who can have an impact on the value the
company delivers.
We believe that as companies experiment, they are best guided by new underlying
principles of competition that are here to stay:
B The shift from firm-controlled value creation to experience-based networks.
B The view of customer talent and knowledge as resources.
B The centrality of individual co-creation experiences as the basis of joint value creation.
Within corporations, the challenge is to push managers out of their comfort zones and into
the zone of new opportunities. Co-creation has arrived and it is the future of strategy and
innovation.
Note
1. This article is based on earlier work by C.K. Prahalad and Venkat Ramaswamy and research for the
forthcoming book, The Co-Creation Paradigm (Stanford University Press, 2014).
Corresponding author
Venkat Ramaswamy can be contacted at: [email protected]
‘‘ Local Motors leverages capabilities in the web of communitiesin which the company participates. ’’
PAGE 10 jSTRATEGY & LEADERSHIPj VOL. 41 NO. 6 2013
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