This book is a result of an interesting personal journey. C.K. Prahalad had authored two books: The Future of Competition (with Professor Venkat Ramaswamy) and The Fortune at the Bottom of the Pyramid in 2004. While at a superficial level they appeared to be unrelated, they presented a unified message. They touched on three critical aspects of innovation and value creation. First, value will increasingly be cocreated with consumers—be they rich consumers in the West or very poor consumers in Bangladesh and India. Second, no single firm has the knowledge, skills, and resources it needs to cocreate value with consumers. Every firm has to learn to access resources from multiple sources. Third, the emerging markets can be a source of innovation.

While researching these issues, it became obvious that there is yet another major change in the focus and processes of innovation afoot. It was the rapid acceleration in “outsourcing” of information technology–related work. C.K. Prahalad’s experience in cuttingedge software start-ups, including Praja, Inc., sensitized him to the implications of this trend. Does this mean that the patterns of innovation will morph further? It was an obvious question.

At this juncture, Professor Krishnan joined the research effort. The two of us had worked before on developing a point of view about the role of information technology in strategy. We noticed the emergence of newer business models, fragmentation of traditional organizational structures, centrality of information technology that enabled business processes, collaboration between then-unknown small, specialized Indian firms and considerably larger global firms, and increasingly complex demands on the managerial systems of established firms. These patterns were intriguing. We also recognized through our consulting and research engagements the significant gap that exists between strategic intent and “capacity to act” in organizations.

Four years of concerted effort by both of us to understand the phenomena resulted in this book. Needless to say, it builds on our previous work but presents a new and we believe a unique perspective on the essence of innovation. This book represents the critical operational link in the evolving approach to innovation and value creation. The focus is on building organizational capabilities that allow a firm to create the capacity for continuous innovation.

This book is about the nature of innovation—the locus, sources, and the processes of innovation and strategy in the new competitive context. More importantly, we focus on the often hidden link—business processes and analytics—that mediate between innovations, business models, and day-to-day operations. Successful innovations seamlessly connect concepts and ideas to their operational manifestations. We do not present a “charismatic leader” approach to innovation. Neither do we focus on big breakthroughs. We believe that the changing dynamic of markets driven by ubiquitous connectivity, technology, and industry convergence (as in computing, communications, consumer electronics, and content), and consumer activism and involvement will create a need for continuous change—not just episodic big breakthroughs.

Development of new features and functionality, new channels, new levels of ease of use, new businesses, and new pricing models are as critical as the hope for a big breakthrough. Given this focus, we will discuss the technology and social infrastructure requirements to deliver an ongoing innovation advantage. The unifying theme of this book is that for successful management of innovations, managers must think differently about innovation and act differently to mobilize the organization. The new game is about more efficiency and more innovation. The managerial agenda in this book is about building this new strategic capital—a new approach to innovation and creating value.

We start with the nature of the transformation of business. We recognize that the nature of the relationships between consumers and the firm has changed radically. Starting over a hundred years ago, firms assumed undifferentiated consumers (for example, the consumers who bought the Ford company’s Model T). Since then, we have moved through various levels of marketplace segmentation of consumer groups. We have finally reached the point where the confluence of connectivity, digitization, and the convergence of industry and technology boundaries are creating a new dynamic between consumers and the firm. Traditionally, we have assumed that the firm creates value and exchanges it with its consumers. This firm and product-centric view of value is being rapidly replaced by a personalized experience and a cocreation view of value.

iGoogle, for example, is about cocreation of value and personalization of experience. Google provides the platform. Individual consumers decide how to use it (personalize it) to suit their particular needs—that is, for fun or learning. So too is skin care personalized by the Ponds Institute at Unilever. The Ponds Institute measures your skin conditions and seeks your views about how you want to look and feel. The company allows you to suggest your personal skin-care budget, to which the company responds by developing a recipe of products for you. It is your personal portfolio. You cocreated it.

As we will argue in this book, these are not isolated examples. This focus on unique personal experiences is increasingly permeating industries as diverse as toys, financial services, travel and hospitality, retailing, and entertainment. The message ought to be clear: Even if a company is dealing with a hundred million consumers, each manager must focus on one consumer experience at a time. The firm can provide the platform around which customers can cocreate their own experiences. Consider Starbucks. You decide whether you want to pick up your favorite coffee and run, stay and read the newspaper, have a meeting, or do your homework. A Starbucks storefront, in this sense, is a platform for experience. We are moving to a world in which value is determined by one consumer-cocreated experience at a time. We will call this phenomenon N= 1. This phenomenon extends beyond Google or Starbucks, as we will show in this book. It is one of the two emerging pillars of innovation in all businesses.

Similarly, during the industrial revolution many a large firm was vertically integrated (for example, IBM, Ford, Kodak, Philips, and Siemens). It was only around the mid-1980s that firms started to source critical components from suppliers. Now, most have moved to global supply chains, accessing specialist and low-cost producers. As a result, access to resources is increasingly becoming multivendor and global. This trend toward access to resources from multiple sources (either local or global), and not just from the firm and its subsidiaries, we designate R = G. This is the second pillar of innovation in all businesses.

The key is that the supply of products, services, and competencies is multi-institutional. The firms should build capacities to access the global network of resources to cocreate unique experiences with customers. It is not necessary for firms to own all the resource bases they need. Capacity to access these networks of resources is sufficient. The world defined by N = 1 and R = G is the exact opposite of where we started a hundred years ago. Our approaches to managing have undergone significant change over the years. Yet the legacy of our past still lingers. In this book, we will start with the two pillars of the next generation of innovations—N = 1 and R = G—and develop the nature of changes that are critical to win in that competitive space.

The intellectual underpinnings of the N = 1 and R = G concepts were established in the book The Future of Competition, which outlined clearly the new concept of value creation and the rationale for cocreating personalized experiences with customers. Even in emerging markets, and among very poor consumers, the need for differentiated and personalized experiences is quite pronounced. Many of the solutions to poverty that treat the poor as one undifferentiated mass have failed, while approaches that recognize their unique circumstances and needs by creating locally responsive and personalized solutions have worked.

For example, in India, self-help groups (SHGs), which are voluntary organizations consisting of about 12 to 15 women in a village, are able to obtain loans from large banks that are developing microfinancing mechanisms to make such loans possible. The loans are given to the groups, not to individuals. The group then decides, based on discussion among their members, who among them and what projects need to be financed on a priority basis. Because the self-help groups have intimate knowledge of the local circumstances—of individuals (their financial standings, their behaviors, and character) as well as the community—their decisions are as local as they can get. The groups cocreate their own experiences. They also implicitly supervise how the money is being spent. It is no surprise that the repayment rates tend to be extremely high—as high as 99.5 percent.

The ICICI Bank, as the microfinance institution, provides global standards. Global standards and local responsiveness are increasingly seen as the solutions to building inclusive markets and adding the next 4 billion consumers. This was the substance of the book The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits.

We view innovation as shaping consumer expectations as well as responding continually to the changing demands, behaviors, and experiences of consumers. We must do this by accessing the best talent and the resources available anywhere in the world. These two ideas must be connected—the resources of many to satisfy the needs of one. We suggest that this is possible only if we pay attention to the glue that enables ideas to be transformed into operations. We will focus on business processes and analytics as the glue. However, business processes must be connected to the skills, attitudes, and orientations of managers. The social architecture—organization structure, performance measurement, training, skills, and values of the organization—must reflect the new competitive imperatives. So must the technical architecture of the firm—its information technology backbone. We may describe this view of innovation as the New Age of Innovation.

Reprinted by permission of McGraw-Hill Education India Pvt Ltd. Excerpted from The New Age of Innovation: Driving Co-Created Value Through Global Networks by C.K. Prahalad and M.S. Krishnan, Rs. 695.00: Copyright © 2008; All Rights Reserved.