It's getting harder for companies to sustain growth and create value on their own. It's time to loop customers into the act.

Managers are under intense pressure to create value. But value creation by improving operational efficiency - through such initiatives as outsourcing, business process re-engineering and workforce reduction - has limits in terms of morale and potential. Companies must couple such efficiencies with innovation and new business development. Internally generated profitable growth is at a premium. Even the best companies have struggled to create new markets or sustain a high rate of commercially successful innovations. CK Prahalad, professor of business administration, and Venkat Ramaswamy, professor of marketing, both at the Michigan Business School, contend in their new book, The Future of Competition, that companies need not (and should not) go it alone when trying to create value. Their research suggests an emerging economic model of value co-creation, in which consumers and companies routinely collaborate to create value that, to a large extent, is personalized to the individual. This excerpt explains that concept.

Variety Does Not Equal Value

A profound (but silent) transformation of our society is afoot. Our industrial system is generating more goods and services than at any point in history, delivered through an ever-growing number of channels. Superstores, boutiques, online retailers and discount stores proliferate, offering thousands of distinct products and services. This product variety is overwhelming to consumers. Am I buying the right digital camera? Am I getting the best treatment for my chronic ulcer? Am I signing up for the right service? Simultaneously, thanks to the propagation of cell phones, Web sites and media channels, consumers have increased access to more information, at greater speed and lower cost, than ever before. But who has the leisure and the proficiency needed to sort through and evaluate all these products and services? The burgeoning complexity of offerings, as well as the associated risks and rewards, confound and frustrate most time-starved consumers. Product variety has not necessarily resulted in better consumer experiences.

For senior management, the situation is no better. Advances in digitization, biotechnology and smart materials are increasing opportunities to create fundamentally new products and services and transform businesses. Major discontinuities in the competitive landscape - ubiquitous connectivity, globalization, industry deregulation and technology convergence - are blurring industry boundaries and product definitions. These discontinuities are releasing worldwide flows of information, capital, products and ideas, allowing non-traditional competitors to upend the status quo. At the same time, competition is intensifying and profit margins are shrinking. Managers can no longer focus solely on costs, product and process quality, speed, and efficiency. For profitable growth, managers must also strive for new sources of innovation and creativity.

Thus, the paradox of the 21st-century economy: Consumers have more choices that yield less satisfaction. Top management has more strategic options that yield less value. Are we on the cusp of a new industrial system with traits different from those we take for granted?

The emerging reality forces us to re-examine the traditional system of company-centric value creation that has served us so well over the past 100 years. We now need a new frame of reference for value creation. The answer, we believe, lies in a different premise cantered on co-creation of value. It begins with the changing role of the consumer in the industrial system.