Leadership Insight > C. K. Prahalad

C. K. Prahalad Talks About Business Models Driving the New Age of Innovation

By Elizabeth M. Ferrarini

The rise of consumer demand, the power of the individual, and the universal dependence on global networks could eventually alter the way the entire world does business. Think about it! Today's consumers don't have to buy a car at their local car dealership. They can source the Web to get the best deal on their dream car. By doing a small amount of online research, software developers in countries outside of the U.S. can easily connect with hiring executives at emerging U.S. technology companies. Even Asian organic tea growers looking to expand their markets in the West can easily search the Web for upscale teahouses in major U.S. cities.

How companies come to grips with the implications of this type of change will be critical for their survival and growth. That conclusion comes from C. K. Prahalad, the Paul and Ruth McCracken Distinguished University Professor of Strategy at the University of Michigan's Ross School of Business. His international best-selling books, Competing for the Future and The Fortune at the Bottom of the Pyramid, have changed the way many CEOs think about business strategy.

The premise of Prahalad's latest book, The New Age of Innovation, can best be summed up by the book's subtitle -- Driving Co-created Value Through Global Networks. The book examines two complementary points of view that need to be in place for innovation to happen. Companies must co-create value with each customer individually (represented by N=1), and they must access global resources (represented by R=G). Adopting these points of view also requires companies to create new business models and new IT infrastructures to support changing business processes.

The BTM Institute recently sat down with C. K. Prahalad to talk about how IT can bridge the gap between the bottom of the pyramid market and established companies, how people around the world can help drive innovation, and where opportunities exist for worldwide entrepreneurs. Here's what he had to say:

Initially, the bottom of the pyramid consisted of people living on less than $per day. Who would think that these people would comprise such a big market? We've crossed this hurdle. Just take look at the cell phone business. These companies would not have been able to sell three billion cell phones if they didn't go after people at the bottom of the pyramid. These companies have even created new business models, such as the prepaid telephone card. The market opportunity is well established.

We've also established opportunities for micro producers to connect to global opportunities. Even subsistent farmers with two or three acres of land producing wheat or soybeans can become micro producers. If you use technology to connect all of these farmers, that intermediated aggregation can further connect these farmers to both regional and national global markets. This is one bottom of the pyramid examples of how the new information communications technology architecture can turn these farmers into micro producers.

Now how do you create micro innovators or millions of innovators, who can, because of the spread of technology and connectivity, participate in micro innovation? Let's assume, I have a technical problem that my employer, a large multinational company such as Procter & Gamble, wants solved. It could be a chemistry problem or an engineering problem. I can go online and put my problem query on an open innovation marketplace, such as InnoCentive. The thousands of people who see my query can decide if they can provide me with an answer. If their solution has merit and I want to use it, then I pay the problem solver through InnoCentive. Otherwise, I didn't loose anything. But when you think about it, suddenly you're getting thousands of people around the world thinking about your problem, whether it is the design of a new product or advice on how to approach a new market – you have just tapped into a wealth of knowledge.

Nokia has even reached out to people living in the slums for help with the design of cell phones by asking what looks and functions are appropriate for them. Nokia did this instead of going to researchers in its labs and having them try to figure out what poor people in India or in South Africa need. Poor people have come up with some creative innovations in design because they understand the problems they have.

Q. How can you bring sustaining wealth to the bottom of the pyramid?

Once people become micro consumers, micro producers, and micro innovators, they can also have the opportunity to become micro investors. Imagine if every family living on $2 per day had access to a formal banking system or a formal financial services system. Say each family invests or deposits $100. This small investment by the 250 million families living in India alone would yield the extraordinary sum of $25 billion. Technology can help access markets, create markets of consumers and producers, and allow people to be expressive and innovative. As a net consequence, they'll become investors and savers around the world. We can do this with technology today.

Of course, a social revolution will follow this change in the character of the people at the bottom of the pyramid. It will provide a more equitable and harmonious society. We have the challenge of making this inclusive growth possible; technology will help us dramatically accomplish this.

Q. What do you feel is the true disconnect between the bottom of the pyramid market and the economic drivers of Global 2000 organizations? How can we bridge that gap?

A disconnect occurs because large companies have a certain cost structure. If you want to look at opportunities at he bottom of the pyramid, they have to alter the cost structure dramatically without sacrificing a world-class quality level. They have to provide products and services at a fraction of the cost. Most companies will rethink their cost structures rather than abandon the opportunities. Companies recognize that if you want to approach the bottom of the pyramid market and you're willing to alter your cost structure, then you can provide a source of innovation for the rest of the operation.

I expect to see a change in hearts and mind and thus a change in the way we approach these markets. We know how to do it. The question is this: Do we perceive the market to be large enough and attractive enough for us to shift our current cost structures, and, in turn, rethink how we do business?

Q. Where do you feel the strongest opportunities exist in the energy industry?

The entire energy industry works on a large grid based supply of energy. Plenty of opportunities exist for rural areas to use highly distributed energy sources based on new technologies or to use new alternative energy sources, such as a combination of wind and solar combination. Some day these areas would connect to a local grid, not a national or regional grid. To this end, the highly centralized, vertically integrated company, which in the single plant produces multiple megawatts of energy, may or may not be the model as we move forward. How do we get highly decentralized energy sources exploiting the local resource base? The combination of sun and water for hydroelectricity might be an interesting source of thinking about energy. These innovations can come from a highly decentralized space.

Q. Where do you see opportunities in technology?

One thing is very clear. If you want to crack into the bottom of the pyramid market, you must tackle straightforward challenges - primarily with logistics and distribution. If you want to get low-cost, highly repeatable, and scalable operations, you have to use technology to do so. It doesn't matter if the applications are for accessing soybeans or tracking a store's inventory. It doesn't matter what industry it is. It doesn't matter if you're accessing a large number of people with variable and volatile demand structures in difficult places around the world. You have to use technology. It provides the backbone to the real infrastructure, on that is even more important than roads. Technology is critical for the bottom of the pyramid.

Q. With all the shifts that have taken place on a global scale, where do you believe the most valuable opportunities exist for entrepreneurs in the future?

Entrepreneurs have more opportunities waiting for them than ever before. Funding is also available. We've seen many examples of small, highly specialized Indian companies doing great things in analytics. Some of these Indian companies work with some of the world's best companies. I see a symbiotic relationship between entrepreneurial-driven companies comprised of 30 highly educated people with PhD's in statistics and mathematics working in a symbiotic relationship with some of the world's largest companies. R = G is well alive. By definition, R = G assumes it is a paradise for young entrepreneurs, both entrepreneurs who want to work in global markets with highly specialized skills as well as young entrepreneurs who want to do things at the bottom of the pyramid with the poor.

Q. Are there more opportunities today for entrepreneurs outside the U.S.?

Other places in the world have become better at promoting entrepreneurship. The U.S. is still a good place for entrepreneurship, as well as for innovation. Many people outside of the U.S. have learned to play the entrepreneurial game, so the world has become a more level playing field. In the early 1990's, the San Francisco Bay area dominated IT. Today, Bangalore, India, has captured a leadership position in IT. Whether they come from Israel, Eastern Europe, or China, entrepreneurs can have a play and find plenty of opportunities. Because more and more countries have these opportunities, we're going to have more entrepreneurs and more innovation -- all of which is good for the world.

Elizabeth M. Ferrarini is a writer from Boston, Massachusetts. Reach her at elizabethferrarini@yahoo.com.