Advice from Management Guru C. K. Prahalad: “Never Try to Manipulate a Customer”
Traditional corporate strategies have become obsolete for those companies that want to succeed in the twenty-first century. Three out of every four companies currently face the threat of extinction within less than a decade, according to a recent report by Bain & Company, the consulting firm. The report analyzes data from the past 10 years for Fortune 500 companies, and concludes that the only solution for companies is to leverage their resources as much as possible and re-invent themselves.
The same view is shared by C.K. Prahalad, who says that one way to survive is “to discover how to convert the [world’s] poor into consumers and introduce them to the global market.” Prahalad believes that great companies have overlooked a market that comprises about 70% of the world’s population because companies have clung to the erroneous notion that a shortage of wealth is synonymous with low profitability.
Prahalad is widely recognized as one of the world’s 10 most influential management gurus. A professor at the University of Michigan’s Ross School of Business, Prahalad is an advisor to a number of companies, including AT&T, Citigroup, Colgate, Palmolive, Motorola and Whirlpool. Along with Gary Hamel, Prahalad is co-author of Competing for the Future, widely considered one of the most significant works of the 1990s. Prahalad recently visited Spain, where he participated in Expomanagement, a forum for executives organized by HSM, and gave an interview to Universia-Knowledge@Wharton.
“The Line of Oblivion”
In Prahalad’s opinion, the Internet, emerging markets and access to the world’s poor combine to create an authentic revolution in the global economy. New competitors are always appearing on the scene, and it doesn’t take long for them to win out against the multinationals. Prahalad believes that global corporations must stake their futures on finding new markets. About four billion people around the world have little disposable wealth; about 70% of the global population is poor. But big companies “have always said that this is not their market.” They have focused on the remaining 30%, says Prahalad. “The next step is to discover how to make poor people into consumers and introduce them to the global market.” The unfounded notion still exists that it is unprofitable to sell to people who have little wealth. Yet companies such as India’s Tata Motors have shown that they can build a high-quality car and sell it to low-income people for less than $3,000.
Prahalad notes that new technologies have changed the traditional rules of the game. “One of the major errors people make when they draw up their strategy is to think like a local company. That’s because your competitor can be a global company.” Tata will be able to export the cheap components of its automobiles, which will have an impact on the big Western automakers. The key to addressing this challenge is to “learn from emerging markets and develop a balanced business model of products that are [both] affordable and have acceptable quality.” For example, he notes that companies in Brazil, China and India now offer products and services that are low-cost but high quality. That way, they are winning customers in a wide range of the world’s poor. Companies such as Tata, Mittal Steel and Lenovo have shown that this segment of the population is very appealing and can be very profitable.
Prahalad summarizes his theory of the “oblivion curve” this way: “We are all used to thinking in one way. For example, we believe that poor people are not a market because they don’t have money to spend. But if we devise a new business model, such as [selling] tickets that are pre-paid [by customers] through cellular phone service, we can convert those sorts of people into effective consumers. This new model has opened the cellular phone model to three billion people. We have to be aware of the limitations involved in looking at opportunities and threats through our [usual] ‘management lenses.’ What concerns me is that we recognize these tendencies and we change them. That is the ‘line of oblivion’ – it’s about learning to forget the old ways of doing things.”
Outsourcing Because of a Shortage of Talent
Prahalad would invest his own money only in the sort of company that contemplates positioning itself in emerging markets. Although the low cost of labor and components can provide an advantage for a company, he prefers to take a longer term view. Another challenge facing European companies is “hiring well-qualified workers because the population is aging. The United States has learned how to attract highly educated immigrants, but Europe has done the opposite, especially in Spain.” U.S. companies probably have more skill at getting around the shortage of talent. Facing the future, if European companies don’t solve this shortage of qualified young people, they will be forced to outsource their production to emerging nations that, generally speaking, enjoy educational systems of high quality that effectively prepare future generations of workers.
Those companies that focus their efforts on “green” products and services will have a better long-term future because “they will become very profitable if they learn how to find the right balance between price and sustainability. People are prepared to pay a little bit more to get an ecologically sound product” although this surcharge must be moderate and in line with the market. It is the customer who now has power over the company and not the opposite, as was the case years ago, he asserts.
The Internet is partially responsible for these changes, along with other newly developed technologies. Prahalad uses the term “co-creation,” a concept that has become known as “shared creation” in Spanish. This refers to the direct involvement of consumers in the development of products. “The challenge is to create unique experiences for the consumer. As managers, we must re-think the relationship between the firm and our customer, who is no longer a passive subject who merely consumes what you offer him. Now he also participates in the creation of products and services. Take Google, for example. As a consumer, I decide what ‘my page’ must contain and I personalize it. The [Google] search engine provides me with a platform for creating my own experience. The same thing happens with eBay, Starbucks and iPod. Along that line, Bridgestone has stopped selling tires for cars and begun to offer a contract based on usage; the price changes according to the number of kilometers traveled, the type of vehicle, and the driving style of the user,” he notes.
The success of any strategy can be measured in part by whether it succeeds in anticipating the needs of your customers; whether it “includes the user community in the process of creating new products and services, as in the video-game industry. This is the first time that the human race has been connected together, thanks to the advance of new technologies ranging from the Blackberry to cellular phones to television.” All of these devices are also converging with one another; there are cell phones that take photos and televisions that can be used to send e-mail. “This connectivity makes it easier for customers to be closely connected to the company and to work together,” notes Prahalad. “It is the customer who now decides what can be done and what cannot be done.” It is the customer who “defines where the value of the product is; not the company that does so, as in the past.”
Beyond enabling customers to participate in product development, and constantly updating [products or services] to customers’ fast-changing tastes and needs, Prahalad argues that “corporate strategy has to go beyond fulfilling the expectations” that customers reveal through this interactivity. Innovation means creating new things. But if you want to sell something that did not exist in the past, you have to generate a need for it in today’s marketplace. The problem is that “the customer often doesn’t know how many things a product can do;” he doesn’t buy the product because he doesn’t know how to take full advantage of it. So Prahalad provides this advice: “Show customers all the benefits that they can derive from using your products.”
The Example of Amazon
Amazon is a leading example of a company that follows this business model. The U.S.-based web portal compiles information about the products that its customers buy. Later, Amazon makes personalized offers to each customer based on his or her tastes. Prahalad warns, however, that there is a danger with this kind of approach. “Never try to manipulate a customer.” If a customer realizes that he is being deceived, these sorts of new technologies will quickly become your company’s worst enemy. That’s because, thanks to the Internet, half of the world’s population can be buzzing about any dishonest deal within mere minutes.