CUSTOMER-DRIVEN INNOVATIONTo be a marketplace leader, let your customers drive

Kevin C. Desouza, Yukika Awazu, Sanjeev Jha,Caroline Dombrowski, Sridhar Papagari, Peter Baloh, and

Jeffrey Y, Kim

OVERVIEW: Invomng customers in the innovationprocess entails a hast of new concerns, concepts andmanagerial decisions. Transitioning from older modelsoJ no or low customer involvement requires attention tothe different types of customer innovation, organiza-tional mission and o^-ganizational structure. This articleprovides a typology- for customer innovation, describeshow to involve customers in the innovation process, andoffers guidelines fo^- shifting organizational structureand emphasis toward customer-driven innovation inorder to enable continual, sustainable innovation.

KEY CONCEPTS: innovation, customers, knowledgemanagement.

Organizations in today's competitive marketplace areincreasingly recognizing the need to innovate in partner-ship with their customers. They are changing their inno-vation strategies from "innovating /or customers" to"innovating with customers" and involving thosecustomers in a process of "knowledge co-creation'" (1.2).As these customers become increasingly connected witha t1rm and with other customers, they are becomingpartners in product/service innovation. Consider thefollowing examples.

Smart organizations have begun to consciously tap intotheir "lead users," who possess knowledge that can helpan organization better plan for the development of newproducts and the improvement of existing products (3).Some companies, including the software producer SPSS,have begun to host customer workshops, bringing in thesuper-users of their products and learning from them.Other organizations have product research centers wherethey monitor subjeds as they interact with products andservices. Some software development firms purchaseadd-ons, scripts and other artifacts created by theircustomers while using their products, and then introducethose artifacts in future versions of the products andservices.

Organizations gain in various ways by letting theircustomers connect with each other and by facilitating the

process using innovative communication technologies.Consider, for example, the Wiki (a software that allowsusers to create, remove and edit content on Web pages)introduced recently by eBay. By encouraging customersto develop shared product reviews and recommendationson its Wiki, eBay: I) attracts the attention of customers toits portal, 2) provides an experience of ownership andcontrol among its customers, and 3) taps into theirinsights and ideas.

In such ways, customer innovation has become anessential strategy for organizational survival. Innova-tions can come from how organizations interact withcustomers: 1) by identifying, analyzing and communi-cating with them, 2) incorporating them into theirexisting innovation process through transfomiation oftheir business processes, and 3) encouraging customersto engage in improving existing products and services.

In this paper, we introduce various types of customerinnovation and discuss ways of establishing an organiza-tional innovation program that takes into account thestrategic value of these different types. The second halfof the paper shows how to manage customer innovationin a complete innovation program.

Identifying the Customer

Innovation in how customers are identified is an imple-mentation of new customer segmentation (4). Segmenta-tion calls for separation, categorization and classificationof objects, and should be done before analyzing data andinfomiation about customers. By using segmentation,organizations can classify and categorize customersbased on certain features that will allow them to identifytarget markets. These features, if managed appropriately,will improve service and products. For example, by seg-menting customers based on demographic data (such asdisposable income) and analyzing their tendencies (suchas willingness to purchase products), organizations canposition products better and improve marketingcampaigns, among other aspects.

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NPower Seattle is an example of successflil customercategorization. The nonprofit organization, which assistsother nonprofits with technology-related projects,upgrades and strategies, has found that customer seg-mentation greatly assists its relationships. Whileacknowledging that the characterizations it creates arecaricatures, the firm has found it highly beneficial toassess customers as "technology constrained," "technol-ogy optimists" and "technology investors."

Each of these categories has different needs for, and per-ceptions of, technology. For instance, technology-constrained customers tend to be frustrated with thelimitations of technology and perceive it as a burden anda cost, and consequently seek to limit their investment in

technology. On the other hand, technology optimists arewilling to invest in new technologies, but want a partnerto assist them in choosing and adjusting to these tech-nologies. Thus, by categorizing customers in this way,NPower Seattle can tailor offerings to customers basedon their perceived needs and likely intentions aroundtechnology.

Analyzing Customer Information

Dramatic advances in information and communicationtechnologies (ICTs) have influenced the way organiza-tions analyze customer information. Today, becauseinfonnation can be collected and analyzed in real time,organizations have an abundance of customer informa-

Kevin Desouza is on the faculty of the InformationSchool at the University of Washington, Seattle. He is afounding faculty member of the Institute for Innovationin Management (I^M) and is an affiliate faculty memberof the Center for American Politics and Public Policy,both at the University of Washington. His most recentbook is Agile Information Systems (ButterworthHeinemann, 2006). In addition, he has published over100 articles in practitioner and academic journals.Desouza has advised international corporations andgovernment organizations on strategic managementissues ranging from knowledge management to competi-tive intelligence and crisis management.kdesouza@u.washington.edu

Yukika Awazu is an inaugural Henry E. Rauch DoctoralFellow at Elkin B. McCallum Graduate School ofBusiness at Bentley College, Waltham, Massachusetts.Her most recent position was president of the EngagedEnterprise, a global research and strategy consultingorganization. She has co-authored Engaged KnowledgeManagement (Palgrave Macmillan, 2005) and herarticles have appeared in business and academicjournals such as Business Strategy Review, HRMagazine, European Management Journal, InternationalJournal of Infonnation Management, and Communica-tions of the ACM. She received her M.A. in economicsand M.B.A. degrees from the University of Illinois atChicago, yawazu@bentley.edu

Sanjeev Jha is a doctoral student at the College ofBusiness Administration. University of Illinois atChicago. He has published in Communications of theACM, Information Resources Management Journal andIEE Engineering Management. He has co-authoredpapers presented at Academy of Management and otherconferences. Prior to joining the doctoral program, hewas deputy manager (marketing) in Gas Authority ofIndia Limited (GAIL), where he was responsible formarketing natural gas to industrial customers in NorthGujarat, India. sjha2@.u ic.edu

Caroline Dombrowski is an MLIS student at the Univer-sity of Washington, Seattle. As a research assistant forthe Institute for innovation in Information Management,she has contributed to scholarly and practitioner articleson the topic of innovation. She received an M.Phil, fromthe University of Cambridge, United Kingdom, in phi-losophy. cd]@u.washington.edu

Sridhar Papagari is a doctoral candidate in managementinformation systems (MIS) at the College of BusinessAdministration, University of Illinois at Chicago. Hismain research interests are in enterprise eHealthstrategies, post-adoption technology management, andIT-enabledinnovation. He has M. S. degrees in electricalengineering and computer science and an MIS at UIC,and a bachelor of engineering degree in electrical &electronics engineering from Osmania University,Hyderabad, India, spapagl@uic.edu

Peter Baloh is an assistant lecturer in the informationmanagement department of the Faculty of Economics atLjubljana University. Slovenia. He spent the last yeardoing research jor his Ph.D. at 6* RAE IRIS-InformaticsResearch Institute at the University of Salford, UnitedKingdom. In addition, he founded and manages the smallSlovenian consultancy and advisory firm. Catch theKnowledge. He received his M.Sc. (honors) in informa-tion management at the Faculty of Economics.Ljubljana, peter@baloh.net

Jeffrey Kim is on the faculty' of the Information School atthe University of Washington, Seattle, and an adjunctfaculty member of the Graduate School of CultureTechnology- at Korea Advanced Institute of Science andTechnology (KAIST). His research focuses on the orga-nizational changes and information technologies inknowledge-intensive firms. Currently, he is examiningthe social and technological aspects of boundary-spanning practice in the information technologyindustry. He received a Ph.D. in information andcomputer science from the University of California,Inline. jykim@u.washington.edu

Research • Technology Manajienicnt

lion. This information is constantly being collected fromfinancial institutions, credit reporting agencies, localstores, and other sources, with and without the custom-er's knowledge.

Physical devices complement and add to this increas-ingly large pool of electronic information. Collection andidentification devices, such as store cards and radio-frequency identifica:ion (RFID) tags, enable organiza-tions to collect accurate information on customerpurchases. RFID devices can be attached to products in astore to track their movement within the store. Inaddition, organizations are able to record and store suchinformation with ease because data storage media are soinexpensive.

In the health care industry, the abundance of patientclaims data, including disease information, riskbehaviors, infonnation on medical visits, and prescrip-tion history, have encouraged managed-care companiesand some employers to mine the data and develop pre-dictive models to he^p manage health care costs.

Not only does more customer information exist, butinteractions around customer infonnation have becomemore frequent. For example, almost all organizationshave begun to exploi: the hiternet and its variants to shareinformation. The end result is that customer informationis available in a larger volume and a finer granularity thanever before. Moreover, the tools used to analyzecustomer information continue to become increasinglysophisticated, feasible and economical. Today, relevantknowledge is extracicd by processing these vast quanti-ties of information through such techniques as statisticalanalysis and, more recently, data mining.

The TGI Friday's restaurant chain, for example, usedinformation about its customers to redefine its foodofferings (5). After observing that customers wereseeking more healthy food options, the restaurantschanged their menus, letting customers replace Frenchfries with baked potatoes or green vegetables, forinstance. Data mining analysis on its point-of-sale datauncovered further patterns and combinations in howtheir patrons customized the standard offerings, leadingto the creation of die: menu items and low-calorie meals.

Customer involvenent in information gathering isminimal, since most of the data needed to generate infor-mation are readily available. Thus, credit card companiesdo not need to involve their customers in order to analyzepurchasing behavior because they receive such data andinfonnation regularly and can process both easily.

Communicating with Customers

Organizations may increase the type of channels (e.g.,telephone, email, chat rooms, discussion fonims) that

Customer innovationiias become an

essentiai strategyfer organizational

snrvivai.customers can access in order to communicate more effi-ciently. Customer Relationship Management (CRM)systems track interactions with customers and improvethe delivery of products and services.

Organizations have also embraced the Internet for trans-mitting product documentation, troubleshooting guides,repair manuals, and other forms of support information.While customers can resolve their queries and problemson-line by using chat rooms, email and structuredreasoning systems, most computer manufacturers havegone a step further and added interactive Web-basedprograms to handle customer support queries and todebug their purchases.

Companies like Barnes & Noble allow customers topurchase a product on-line and return it at a local store ifthey are not satisfied. Some electronics stores, likeCircuit City, allow customers to order on-line and pickup from their local store. Best Buy, another electronicsstore, allows customers to use in-store kiosks tocustomize products and answer questions, therebyproviding the same flexibility as if purchasing on theInternet.

Banking firm Washington Mutual has developed inno-vative communication strategics with customers bydefining customer "touchpoints," that is, every interac-tion with customers has been named and defined so thatboth management and employees can analyze ways toinnovate those interactions. Sample touchpoints includean ATM, during a phone call to a call center, andin-person inquiries at a bank.

One innovation that resulted from this model was thedevelopment of a new IT interface that gives bank repre-sentatives access to histories of interactions with a par-ticular customer, including priority information like thecustomer's risk profile. These new interfaces aggregateuseful information and have dramatically improved thequality of customer interaction as well as increasing theamount of practical information at bank representatives'fingertips.

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Business Process—Customer Interactions

Customers used to not be involved with businessprocesses, their role limited to consumption of the finalproducts and services and possibly giving their feedbackto a company. This has changed, however. For example,most airline companies now allow passengers to booktheir tickets, choose their seats, print a receipt, and checkin on-line.

One of the outcomes of increased integration ofcustomers into a company's supply chain process is the"disintermediation" of certain players in the industry.Thus, on-line booking for air travel resulted in disinter-mediation of travel agents, and hence increased the effi-ciency and effectiveness of the ticketing process. Asimilar change in business processes in the automobileand securities industries, among others, enabled by theInternet, has led to customers dealing directly with, andhence communicating more, with the companies them-selves.

One example of both customer segmentation and inte-gration into the value chain is the auto insurancecompany. Progressive, which targeted the under-servedsegment of high-risk customers (6). To serve thesecustomers efficiently and effectively, it developed"Claims Workbench," a software platfonn installed inlaptops with wireless modems, that allows claims repre-sentatives to perform up to 20 separate transactions in thefield. When an accident is reported, Progressive dis-patches its representative to the incident location wherethey eomplete all paperwork on the spot, thus minimiz-ing the incidence of fraud. The representatives canconduct damage assessments by checking parts listsinstalled in the software applieation. Using theImmediate Responsible Vehicles (IRVs). the reps cansend the claim to the claims centers and settle it quickly,thereby saving money and improving customer service.

Dell Computer Corporation's "direct mode" model wasinvented by Michael Dell, who recognized two trends inthe marketplace: 1) that standardization of PC compo-nents allowed Dell to outsource the manufacturingprocess (except assembly), and 2) the sophistication ofcustomer knowledge about, and comfort with, PC tech-nology. Because of these factors, Dell decided to designa value chain that allows direct interaction and givescustomers more choices and the ability to customize theirorders. The direet model provides not only technical andcost advantages resulting from lower inventory costs, butalso a significant advantage in terms of customerknowledge management. Because Dell can directlyinteract with customers, it has a better chance of discov-ering customer needs.

Strategic innovations by ICTs can scale-up existingbusiness models that do not allow competitors to catchup quickly. For example, Enterprise-Rent-A-Car

focused on the car replacement market—an underservedand ignored service the firm could offer. Enterprisedeveloped Automated Rental Management Systems(ARMS), an internet-based software application thatconnects Enterprise, insurance companies and auto-repair shops, to manage the entire rental car cycle andprocess. When an Enterprise customer has an accidentand calls an insurance company with a claim, theinsurance claims agent logs on to ARMS and automati-cally replaces the customer's rental reservation. Tradi-tionally, this process took a tedious paper-based, manual,and human process that involved half a dozen phone callsto different rental office locations. The system is alsoconnected to auto-repair shops, which can send repairupdates to both insurance companies and customers.

ARMS also tracks the collection of the repaired car andthe return of the rental car, and automatically generatesan electronic invoice for the insurance company. Thegreat thing here is that it reduces human involvement;Enterprise eliminated, on average, 8.5 phone calls perrental transaction. This is about 85 million phone calls,and, since 1993, about seven million hours of employeetime (5 minutes per call). By late 2002, ARMS was beingused by 22 of the 25 largest insurance companies in theUnited States.

Customer Interactions with Products and Services

As products become more sophisticated, only rarely willevery customer use the technology in the same way. Thisis because most products now have options for modifi-cation, personalization or customization. Understandinghow users engage in these customizations can yieldinsights on possible enhancements and innovations, asoccurs with software organizations that regularly tap intotheir lead users to discover new routines, methods andenhancements (7).

One aspect of managing knowledge to support thecustomer requires personalizing the shopping experi-ence. Organizations ean use transaction data andcustomer infomiation, especially for those purchasesconducted on the Internet or through other electronicmedia like personal digital assistants (PDAs) or mobilephones. For frequent travelers, entering their preferencesinto a ticketing system for every trip is time-consumingand annoying. In the past, they would have gone to atravel agent who knew their preferences and made thearrangements accordingly. These travel agents wereknowledgeable, not only about the various destinations,but also about preferences: window seat, nonsmoking,make and model of rental car, and so on. Today, elee-tronic customer reservation systems can handle many ofthese details.

ICTs have also made experimenting with product andservice offerings popular. Customers often try a productor service before committing to a purchase: on-line

Research • Technology Management |

vendors provide trial software, music samples, no-risktrial periods for services, and the like. In light of thisculture of sampling, it has become more difficult to lockcustomers into a purchase without providing a taste ofwhat they can expect. This requires the organization tomake such knowledge available in easily digestibleformats, to devise mechanisms that allow the customer asense of the expected product benefits without releasingthe entire product for free, and to ensure that informationis openly shared with and received from the customer.

When purchasing a book, for example, readers want asynopsis, the author's credentials, the reviews, price, andother information to inform their decision. One of thereasons why companies like Amazon continue to be suc-cessful is the highly sophisticated ways such informationis presented to a potential buyer via the Internet. Thus,publishers allow readers to read a few pages of a book,and on-line music vendors provide song samples for theircustomers.

As another example, Google has "Google labs" on itsWeb site, whieh lets users try Google's beta products andservices. Users can download them free and play withthem, after which they can give their feedback directly todevelopers by send ng email or by joining communitydiscussions. Once the products "graduate" from labs,they become available for all Google users. Experimen-tation is the requirement of this constant knowledgeexchange; knowledge must flow freely from thecustomer to the organization and vice versa.

Innovation in Products and Services

Innovation in the form of fmal products and services is animplementation oC knowledge from the customer.defined as the insights, ideas, thoughts, and informationthe organization receives from its customers. Theseinsights can be about current products and services,customer trends anc future needs, and ideas for productinnovations. Ideas for successful product innovations aremost likely to come from end users and customers of theproducts and not t'rom within the organization. Anorganization must therefore actively seek out suchknowledge in order to be better prepared to implementproduct enhancements and innovations.

Sometimes, through this form of innovation, customerscan change their business models or processes and offerdifferent services. For instance, NPower Seattle wasaware of an Earned Income Tax Credit that was under-utilized, and worked with early technology adopters(who had shown eagerness to use new forms of teehnol-ogy to change their services) to allow them to offer a newservice, making it easier to collect that money. As itsdireetor, Jamie Green, stated, "Seventy-five million isleft unclaimed by Iow-ineome Washington families. Inone of our grants, we articulated that we wanted to work

with early adopters and pragmatists and see $2 millionadditional dollars coming back to the community."

As this quote demonstrates, the measure of success insuch cases will usually depend on the success of the cus-tomer's new offerings. In these instances, changingcustomer business practices is a service provided by anoutside organization.

It is also important to design, manufacture and sell aproduct that customers want, rather than trying toconvince them to buy something created elsewhere.That's why listening to customers is so important for suc-cessful innovations. For example, Hewlett-Packardmodified its Laser Jet V printer design by addinghandles, after observing that more than 30 percent of itscustomers, most often women, routinely moved printersand did not want to break their fingernails {8).

These types of customer innovation raise a range ofcritical issues (see Table 1) that organizations mustconsider as they utilize customer innovation. The devel-opment of organizational processes around customerinnovation demands a new lens through which to assessboth innovative processes and organizational mission.Our next section presents such a framework.

Managing a Customer Innovation Program

Organizations take ideas from eustomers, process them,incorporate them into finished products, and then deliverthem to eustomers. The organization's value is normallytied to the internal and external value generated. Theideal organization will recognize and appreciate thecustomer dimension in every interaction and build it intoits internal innovation process.

Successful customer innovation programs are based onsystematic interactions among three key entities: theorganization, products and services, and customers.These three entities interact with each other in a series ofinnovation stages: the idea generation and developmentstage; the design, testing and refinement stage; and thecommercialization stage (see illustration, page 41).

Organizations must integrate their customer innovationprogram with the various types of innovation (see Table2). The typology of customer innovation given previ-ously may have seemed daunting in aspects and possi-bilities for innovation management. Each type ofcustomer innovation fits within the management modeloutlined below, which will provide a eomplete innova-tion program with an emphasis on customer-generatedand customer-focused innovation. First, we give anoverview of the innovation process, and then we providethree areas of focus for projects or organizations toconsider with respect to customer innovation and orga-nizational strategy. The three areas ean be consideredindicators of customer involvement and metrics for orga-nizational efforts around cu.stomer innovation.

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Tabte 1.—CHticul fssues, Concerns and Checkpoints

Type of Customer Innovation Critical Issue Checkpoints

Customer .segmenniiioii

Customer analysis

Customer communication

Customer interaclion withorganization

Customer interaction withproducts and services

Products and servicesoutputs

Customers and categories are dynamic.Staff must be trained and understand purpose.Right types of information must guide

segmentation to avoid discrimination.

Information overload, particularly fromautomated systems.

Systems must be integrated (i.e,, from alltypes of customer interactions).

Privacy and security of customer data must beprotected.

Complex problems and valuable clientsrequire in-person interaction.

High-quality communication must beparamount.

Many channels and options for communicationmust exist for "anytime, anywhere" service.

Investment must be made in infrastructure foragility in adapting to environment.

Risks with established relationships whenevercommunication channels changed.

Copycats may rapidly duplicate ideas.

Customers and technicians need a commonlanguage.

Novice and expert customers need to behandled differently.

Channels of communication need to be variedand flexible.

Requires rich, human-to-human interaction.

"Sticky" or tacit knowledge ean be difficultto articulate.

Feasibility must be carefully analyzed andcustomer needs, not specific products,should be identified.

Are types of customer information prioritized?Are there customer protection guidelines?

Can analyses be traced back to specificcustomers?

Are all systems connected?

Tf outsourced, does customer service stillunderstand customers?

Can the organization's structure morph?

Has groundwork for change been laid withestablished suppliers, vendors, customers, ete?

Are customers segmented by need andexpertise?

Do technicians interact regularly withcustomers?

Are there protocols for eliciting knowledge fromcustomers?

Are there metrics to evaluate the marketabilityof ideas?

Idea generation and development

The first stage of the innovation process is idea genera-tion and development. Consider this quote from an inno-vation officer at a builder of computer games:

We are a very fast-paced and dynamic industry. In the gamingindustry we are known lo work 24/7. One of the challenges we have isgetting at the right .sources of ideas, information and innovations. Weare now hiring 17- and 18-year-old kids and giving them salaries topiety games and to tell us how to come up with new ideas. Some daywhen you have kids, you will know that they are not the easiest sourcesto manage . . . sources management is the most chaiienging andcomplex activity.

Understanding the sources of ideas is critical for innova-tion. Today,, companies are finding novel ways to engagein idea generation with their customers. Creating arenaswhere customers feel comfortable and encouraged toprovide feedback is a key component of collectingcustomer-generated ideas. In the gaming industry,customer ideas are solicited via constant feedback

through Web sites., discussion groups, blogs, and soforth. In addition, customers innovate by building add-ins, scripts and the like, to accompany the games. As ourinterviewee noted:

For the most part our sources are our customers—the gamers. Theyhave become so tech savvy that all we do is provide the architecturefor a game, and then they can customize it as needed to play variousversions of the game. So. what we are trying to do is bring the sourcesthat we are interested in into the organizations. We do hire highschool students, in particular those that post to gaming listservs. etc.Rather than trying to get information from these sources via yourtraditional techniques such as swveys. etc., we bring them info themanifold of the organization and then get information from them. Byfar. we pay most attention to our customer sources.

An organization needs to collect as many ideas aspossible from appropriate customers, which means thatcustomer segmentation can play an important role, ideasfrom novices arc different from the ideas from super-users, as Table I illustrates. Ideas provided by thoseaverage users are normally more creative than the ideas

Research • Technology Management I

Commercialization

CustomerInteraction

Product &ServiceOutputs

Product &Service

CustomerIdea

Generation

CustomerCommunication

CustomerInformation

CustomerDefinition

OrganizationBusiness Process

Design, Testing, andRefinement

The customer innovation program is based on systematic interactions among the organization, product.s amiservices, and cu::tomers.

of experts (9), but are more difficult to implement thanthe ideas from professionals. Experts may be limited intheir imagination by their expertise. Therefore, customerinformation analysis is critical to understanding howradical the idea is and how difficuh it is to implement.

Organizations need to do the right kind of segmentationand have the right communication tools to get the rightkinds of ideas from the right sources, who may resideanywhere. To access these global customers, the organi-zation needs to have ICTs that can reach them virtually

Table 2.—Three Stages of Customer Innovation

Idea Ciicneration und Developnii'niDesign. Testing and

Rcfint'inenl

Interacting entities Organization and customer

Type oj customerinnovation

Challenges

Checkpoints

Customer defmition, customerinfonnation analysis, customercommunication

Segmentation, information overload.privacy and security issues

Are you sub-segmenting?

Do you understand the risk of privacyand security associated withcustomer information analysis?

Organization and products andservices

Business process

System and process transformation

Do you know your existingsy.stem and capabilities?

Products and services, customers

Products and services, customerinteraction

Segmentalion, knowledgetransfer, communication tools

Do you knovt- for whom youdevelop cusiomizabk* products?

Do you have engineers who canunderstand users' feedback?

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and communicate with them in their local languages andin real time.

Design, testing and refinement

This is the stage in which organizations need to incorpo-rate what they learn from customers into the design ofnew products and services. First, ideas need to befiltered, screened and tested before actual implementa-tion; the organization needs to create an environmentwhere those ideas can be discussed by others. Forexample, ideas from novice users may need to be filteredby engineers who know how to implement them. Assem-bling cross-functional teams can be important forcreating an environment where the ideas can be trans-lated into new products and services. It would thereforebe beneficial to include the various types of people whonormally engage in customer interactions. For example,the sales force is the group closest to customers and thuspossesses a great deal of customer information. It is alsoimportant for organizations to include that knowledge inthe R & D process (10). In addition, ICTs can connectdistributed team members and provide them with aplatform to interact with other members and exchangeopinions.

Organizations need to transform existing businessprocesses and systems to make them suitable for thecustomer-driven innovation program. For example, ifanorganization has a highly rigid organizational stnicture,it needs to embrace an open structure where employeescan contribute their opinions of the new ideas. However,this comes with pain and costs because people areusually afraid of new systems and processes. Without anexplanation of why the transformation is necessary andhow it will make the environment better, there will beresistance.

This is the case not only for internal employees but forexternal partners as well. For example, IBM and HPcould not imitate Dell's "direct model," because it waspereeived as too radical and they did not want to jeopar-dize their current operations, which were based onexisting relationships with vendors and suppliers. It isessential that organizations understand which systemand process transformation will enable them to bringcustomers and employees together into the design,testing and refinement stage. Precise knowledge of whata specific transformation can do and how it can beaccomplished will help managers bring about therequired change.

Commercialization

In the commercialization stage, organizations need to beinnovative in how they incorporate customer ideas intoproducts and services that will be acceptable tocustomers. For example, organizations may want topresent a pilot case or offer an experimental product to

Organizations need teceKect as many ideas

as possibie fromapppeppiatecustomeps.

find out how customers feel about them and then incor-porate the ideas into the modified and revised version.This strategy is common among software companies,which usually distribute new software products as betaversions so that customers can identify bugs and giveother feedback.

Organizations should also provide opportunities forcustomers to customize or personalize their products andservices. Wireless companies are leaders in this area,allowing their customers to personalize ring tones orchange the outward appearance of their phones withdifferent covers.

In this regard, it is important to recognize that knowledgecan be explicit or tacit, and organizations should havemechanisms, such as email, phones, chat rooms, Wikis,and so on, in place to capture customers' comments. Forexample, if eustomers want to give feedback on thephone, it is counterproductive to keep insisting that theyfill out long forms. It is also critical here that employeesappreciate the importance of capturing customerfeedback and be flexible enough to encourage customerparticipation.

Toward Customer-Driven Innovation

Customer-driven innovation is very different from theold customer innovation programs, which we call"customer-focused innovation" and "customer-centeredinnovation" (see Table 3). In customer-centered innova-tion programs, innovation is done with customers—organizations and customers create innovation together.In customer-focused innovation programs, innovation isdone by the organization.

In customer-driven innovation programs, the customer isthe key player—innovation is done hy customers, withminimum involvement by the organization. Customersare the primary source of ideas and the consumers of newproducts and services They can offer ideas without geo-graphic and time constraints, and the organization mustbe able to apply those ideas quiekly to the developmentof new products and services. Without the tools to

Research • Technology Management |

support such dynamic interaction, it risks losing itscustomers to competitors.

Regardless of the dangers of knowledge leaks and intel-lectual property issues, organizations need to pursuecustomer-driven innovation programs that incorporateall types of customer innovation. Focusing on each typeof customer innovation and assessing an organization'scurrent status as customer-centered, -focused, or -drivenwill enable organizations to innovate more successfully,quickly and with lower overall investment. We examinethese differences below.

The organization's roleIn a customer-drivetj innovation program, the ro!e of theorganization shifts from that of communicator andprincipal innovator toward coordination, facilitation andtransparency. The organization coordinates the innova-tion activities of customers during the entire innovationprocess, including, for example, the activities by whichcustomers contribute their ideas and give their feedbackon current products and services. The organization alsoneeds to coordinate customer activities with its existingbusiness processes and systems.

Type of innovationThe type of innovation represents the nature ofcustomers' engagement. In customer-centered innova-tion programs, the engagement can be described as "openinnovation"; that is, the innovation program is open tocustomers and they are allowed to be involved with theprocess, usually at specific points in time with specific

Customep-driveninnovation is very

diffopont fppm ttie oidcustomop innovation

ppognams.processes. In customer-focused innovation programs,customer engagement can be called "closed innovation";that is, the innovation process is seen as a black box andcustomers are not directly involved with the innovationprocess. In customer-driven innovation programs, incontrast, the customer's engagement is dynamic,providing ideas anytime and anywhere. Customers andorganizations interact frequently, sometimes in unstruc-tured ways, and organizations need to serve customers'dynamic needs.

Degree of control

The degree of control represents the difficulty that orga-nizations face in controlling the overall innovationprocess. In customer-driven innovation programs, it isprobably impossible for organizations to control the

Table 3.—Customer-Driven Innovation vs. Older Paradigms of Customer-Centered and Customer-/ocu.wd Innovation

Customer-DrivenInnovation

Customer-CenteredInnovation

Customer-FocusedInnovation

Central entity

Degree of customerinvolvement

Rule of organization

Type of innovation

Degree of control

Degree of coordination

Critieal innovation stage

Types of innovation tofocus on

Critical issues withinnovation types

Customer

Innovation by customers

Coordinator

Dynamic innovation

Impossible to control

Emergent coordination

Commercialization (Ideas areover-generated and developed,but difficult to commercialize)

Products and services, outputinteraction; interaction withproducts and services

"Sticky" and tacit knowledgetransfer requires high levels ofhuman interaction

Customers must be segmentedfor proper analysis

Customer and organization

Innovation with customers

Communicator

Open innovation

Difficult to control

Difficult to coordinate

Idea development (Ideas areabundant, but diftlciill todevelop)

Communication with customers:customer interaction withorganization

Investment in infrastructure

High-quality communicationneeded

Risk of copycats

Organization

Innovation /or customers

Innovator

Closed innovation

Easy to control

Easy to coordinate

Idea generation (Ideas arescarce)

Customer segmentation andcustomer analysis

Analysis must be ongoing

Systems must be integrated

Information overload possible

Mav—June 2008

process, because they do not know how many customersare involved and they cannot control when and wherecustomers contribute. In customer-centered innovation,however, organizations can control the innovationprocess, but it is difficult to do when compared tocustomer-focused innovation. In the customer-focusedinnovation process, control is the major strength andmost visible benefit, since the innovation process islimited to internal processes or to third parties who aretied by contract.

Degree of coordination

The degree of coordination represents the difficulty thatorganizations have in coordinating innovation activitiesamong stakeholders, in customer-driven innovationprograms, the degree of eoordination is emergent; forexample, various customer communities are coordinatedat local group levels. In customer-centered innovationprograms, coordination is done by organization and isquite complex, with multiple stakeholders involved.Coordination is easier in customer-focused innovationprograms, where the innovation process is structured by,and internal to, the organization.

Commercial innovation stage

This is the most important stage of the innovationprocess because it is here that the organization developsthe products and services that can dominate the market.In customer-driven innovation, where ideas comeanytime and from anywhere, there may be a surfeit ofideas, and selection and implementation become themain challenges. In customer-centered innovationprograms, idea development, screening and refmementare central. In customer-focused innovation programs,fresh ideas are scarce and the idea-generation stagebecomes the most critical eletnent.

Let the Customer Drive

Organizations must both collect and develop ideas fromcustomers quickly. They also have to eommercialize theideas rapidly. For example, Washington Mutual has ahistory of product and services innovation beginningwith being the first bank to offer free checking accounts.Deb Horvath, CIO of Washington Mutual, highlightedthis issue in an interview:

In our history, years ago, we were the first bank in our industry tohave free checking, and after we did. al! the other thanks kind of had todo the same thing. We were the first to do nojeesjor our ATMs. Wewere the first to some up with the retail experience in our branches(Occasio). Other hanks are doing ihe .same now.

Washington Mutual's continued banking successdepends on consistent innovation and rapid implementa-tion, which the organization has successfully streamlinedand encouraged in all sectors of the business.

Thus, it is not the ability of organizations to innovate, buttheir ability to innovate continuously and consistentlythat is vital. Building models for eustomer-driven inno-vation is essential to the vitality of organizational inno-vation programs. Organizations can no longer assumethat they possess all the knowledge and capabilities forinnovating /or customers. Neither is it sufficient toinnovate with customers. Customers need to drive inno-vation. Successful organizations will be those that takeadvantage of customer-driven innovation to further theirgrowth, enter new markets and be leaders in their mar-ketplace. ®

Acknowledgement

This research was funded in pan by the Institute for Inno-vation in Information Management (I^M) at The Infor-mation School, University of Washington, under theLeveraging Ideas for Organizational Innovation project.

References

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