In the 31 Aug 06 edition of strategy+business, Michael Schrage wrote an excellent article about using the power of Web 2.0 type thinking to involve customers in innovation processes. Read it here.
His basic point needs little elaboration: Involving customers in the innovation process can add value to new product designs. He is arguing for more than just “market research” – a process that can so easily be manipulated to achieve the results you’re looking for. Like many of us who believe that interactive technologies are causing a shift in values and institutional power, he is arguing that we need to extend an invitation to customers to actively assist in the whole process of innovation, especially when considering new features and functionality on existing products and services.
We don’t do nearly enough of this. If we did, I am certain we’d get more customer loyalty, too.
What portion of your cell phone’s myriad features do you use? Market research shows that most mobile phone owners use less than 20 percent. The innovation that matters isn’t what the innovator offers; it’s what the customer adopts. And as organizations recognize this, they’re starting to use their customers as a source of innovative introspection.
In industry after industry, a shared model for innovation adoption is emerging. The most valuable “platforms” — the tools and technologies used internally to discover, design, and test new products and services — can be creatively and cost-effectively sold or lent to customers, clients, and prospects. Customers get a chance to “try before they buy.” They can adopt and test new ideas and technologies before investing in them. And the purveyors of new technologies rapidly gain insights into the potential value of their wares — insights that might otherwise take years to gather.
One company that understands this is the networking giant Cisco Systems Inc. Over the years, Cisco’s architects and engineers have developed scads of internal tools that allow them to design, configure, optimize, and compare alternative network infrastructures. They often run sophisticated simulations, for example, to determine the number of routers and switches to recommend to customers, or to show prospects how a proposed implementation might work.
How did Cisco come to share this inside information? In the past, Cisco’s engineers and architects felt, often correctly, that most customers and prospects simply wouldn’t understand their internal, informally assembled aids. However, Cisco had several highly sophisticated customers who weren’t satisfied with “solutions”; they wanted to see and understand the thought process behind the company’s proposals. Were these architectures really the best or most cost-effective that Cisco had to offer? So Cisco began showing these customers its in-house simulations. And the customers, in turn, expressed a desire to adapt these design, configuration, and optimization models for their own use.
Cisco’s marketers and innovators had not expected this. But they swiftly grasped the implications. With some thought and polish, they repackaged these tools as customer design interaction platforms. Instead of simply “selling” customers on a complete design, they now conduct collaborative meetings in which prospects literally see and play out the architectural implications of their network priorities.
“We’ve found that when we share our tools with customers rather than just demonstrate how much we’ve improved our technologies, we learn a lot more,” Randy Pond, Cisco senior vice president of operations, processes, and systems, told a Cisco CIO customer workshop in 2004. “Several of you have become true partners in design with us.”
There are conversion costs to changing improvised internal work tools into products accessible by external nonspecialists. But the challenge forces a valuable cultural change: Technological innovators become far more aware of and empathetic to customer needs and constraints.
Cisco’s example may not be typical, but neither is it rare. Procter & Gamble has begun to share some of its computer modeling and market research techniques with Wal-Mart, Tesco, and other distribution channels. This includes the celebrated P&G “moment of truth” research, which tracks consumer attitudes at two critical times: when the product is chosen and when it is used. To be sure, many of P&G’s biggest distributors are also rivals that offer their own private labels, so there are risks to sharing this type of proprietary innovation platform with them. But the rewards are even greater: They include ongoing close ties with retailers, who often share their own innovative tools for analyzing (for example) how store layout, shelf space, and signage influence purchase decisions. Together, these manufacturers and retailers can develop a relationship that transcends any particular innovation tool or technique.
The world’s top investment banks, meanwhile, profitably peddle tens of billions of dollars’ worth of complex financial instruments, such as synthetic securities and derivatives, every year. Even sophisticated customers, such as Fortune 1000 companies and hedge funds, are often understandably reluctant to take a chance on new financial instruments. So the banks now give their customers the same computerized “wind tunnel” and “stress testing” algorithms that their own quantitative analysts have used to design the products in the first place.
“In the early days, we would run simulation after simulation demonstrating that our instruments would help them better hedge their risks,” acknowledges one former Goldman Sachs and Salomon Brothers executive. “But, frankly, they didn’t fully trust either us or our simulations. It wasn’t until we started giving them the simulation tools we used ourselves that they took us seriously.”
These free simulators proved to be the most profitable innovation that the Goldman Sachs derivatives group launched. Soon, clients began asking for custom derivatives and other tailored instruments. “Without the simulators, customers would never have known what to ask for, and we would never have thought to ask,” recalls the bank executive. Yet, despite its success, this innovation appeared nowhere in the bank’s R&D budget or prospectus. It was only a tacit, not an explicit, locus of value creation.
Of course, many companies resist the idea of bringing in customers as innovation partners. Eric von Hippel, head of the Innovation and Entrepreneurship Group at the Massachusetts Institute of Technology Sloan School of Management, hypothesizes that internal innovators frequently view customer innovators as rivals who might undermine their creative role.
Professor von Hippel recalls a chemical company that devised a software program to calculate which forms of plastic were most appropriate for packaging such different foods as strawberries, fresh meats, and frozen vegetables. “I told them that they should share that program with a few of their customers to see how they used it,” he recalls. “They immediately said no. I think they were afraid that it would put their customers in a better position in negotiating with them.”
But in practice, companies that externalize internal tools typically acquire greater external influence. Moreover, the ongoing digitalization and virtualization of design-and-test innovation tools ensures that a wealth of externalization options will grow. The business goal, however, is not to make a profit by selling internal techniques; it’s to alter the innovation ecosystem, making it easier, safer, and more advantageous for suppliers and customers to take a chance on one another’s work — and to learn far more about each other, and themselves, in the bargain.
To externalize innovation, organizations must add value to tools they’ve already designed, developed, and deployed. To do this, companies need to audit the very tools they most take for granted and see how — or whether — they should be externalized. That kind of introspection may be the most customer-oriented innovation a company can make.