strategy+business is published by PwC Strategy& Inc.
 
or, sign in with:
strategy and business
Published: April 9, 2002

 
 

The Co-Creation Connection

• Price-Performance. The traditional psychology of price setting, largely based on cost structures, is becoming increasingly irrelevant. Further, the relationship between price and performance is no longer implicit and controlled by companies; it is explicit and debated by consumers.

Independent consumer-feedback Web sites, such as Epinions.com, PlanetFeedback.com, and BizRate.com, allow people to share price information recommendations, reviews, and comparative price information for thousands of products. Search engines like Google are also powerful tools consumers can use to collect and compare price and performance data.

Global television and the Internet make it easier for people to see the kinds of products companies sell in different regions and countries and compare them to what’s offered in their own market. That is altering consumer desires and raising consumer expectations, especially in developing countries. Consumers in emerging-market countries (e.g., India, Brazil, and Indonesia) with annual incomes sufficient to purchase cars, refrigerators, branded clothing, and other mainstays of comfortable living expect these products to be affordably priced and to meet global quality standards and local cultural requirements.

The new challenge for companies accustomed to producing lower-priced, and often inferior, goods for these markets is to raise the consumer experience bar and make a profit. For example, Hyundai in India is successfully selling its Santro sedan for the equivalent of about $8,000. The Santro’s driving performance is comparable to that of a compact car sold in the U.S. for about $11,000, and it has comfort features, such as spacious seating and headroom, that are highly valued by consumers in India.

Even the world’s 4 billion poorest consumers, who earn less than $1,500 a year, are aspiring to a better life and demanding more goods and services. This situation represents a huge opportunity for companies to change their mind-sets and their business models (e.g., “the poor can’t afford or have no use for consumer products,” or “we can’t make money in this market”). In 1995, Unilever PLC’s subsidiary in India, Hindustan Lever Ltd. (HLL), drastically altered the management of its value chain so it could sell a detergent, called Wheel, to the poor. HLL decentralized its production, marketing, and distribution and quickly established sales channels through thousands of small storefronts. HLL adjusted the cost structure of its detergent business so it could sell Wheel at a very low price point and still make money. Today, Wheel has gross margins and a return on capital as good as, or better than, HLL’s higher-end cleaning products, and Unilever has used this business model to create a new detergent market in Brazil.

Patients at India’s Aravind Eye Hospital, the world’s largest eye-care facility, pay about $10 for cataract surgery, compared to $1,600 for equivalent care in the United States. The hospital, which operates on more than 200,000 patients per year, gives 60 percent of its care at no cost and still is highly profitable. Between 1998 and 1999, Aravind’s total income was Rs. 230.6 million (about $5.2 million), with a profit of Rs. 110.1 million (about $2.5 million), and return on capital of more than 200 percent on surgery and its lens manufacturing arm. Like Unilever, Aravind is testing this business model in other regions.

Building Blocks for Co-Creation
Businesses operate in a networked environment in which it is possible both to learn continuously about what people want and need, and to interact with them in ongoing exchanges of value. But companies need to be much more aware of where these opportunities to interact with consumers exist.

We suggest there are four building blocks for co-creating value. Dialogue at every stage of the value chain encourages not just knowledge sharing, but, even more importantly, understanding between companies and customers. It also gives consumers more opportunity to interject their view of value into the creation process. In short, access challenges the notion that ownership is the only way for the consumer to experience value. By focusing on access to value at multiple points of exchange, as opposed to simply ownership of products, companies can broaden their view of the business opportunities creating good experiences. Risk reduction assumes that if consumers become co-creators of value with companies, they will demand more information about potential risks of goods and services; but they may also have to bear more responsibility for handling those risks. Transparency of information is required to create the trust between institutions and individuals.

 
 
 
Follow Us 
Facebook Twitter LinkedIn Google Plus YouTube RSS strategy+business Digital and Mobile products App Store

 

Resources

  1. J. Philip Lathrop, Gary D. Ahlquist, and David G. Knott, “Health Care’s New Electronic Marketplace,” s+b, Second Quarter 2000 Click here.
  2. C.K. Prahalad and Stuart L. Hart, “The Fortune at the Bottom of the Pyramid,” s+b, First Quarter 2002 Click here.
  3. C.K. Prahalad and Venkatram Ramaswamy, “Co-Opting Customer Competence,” Harvard Business Review, January–February 2000 Click here.
  4. Neil Strauss, “Behind the Grammys, Revolt in the Industry,” New York Times, February 24, 2002