Customer Driven Innovation

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CUSTOMER-DRIVEN INNOVATION
Tobeamarketplaceleader, let your customersdrive
KevinC. Desouza, YukikaAwazu, SanjeevJ ha,
CarolineDombrowski, Sridhar Papagari, Peter Baloh, and
J effreyY. Kim
OVERVIEW: Involving customers in the innovation
process entails a host of newconcerns, concepts and
managerial decisions. Transitioningfromolder models
of noor lowcustomer involvement requiresattentionto
the different types of customer innovation, organiza-
tional missionandorganizational structure. Thisarticle
provides a typologyfor customer innovation, describes
howtoinvolvecustomersintheinnovationprocess, and
offers guidelines for shifting organizational structure
and emphasis toward customer-driven innovation in
order toenablecontinual, sustainableinnovation.
KEY CONCEPTS: innovation, customers, knowledge
management.
Organizations in todays competitive marketplace are
increasinglyrecognizingtheneedtoinnovateinpartner-
shipwiththeir customers. Theyarechangingtheir inno-
vation strategies frominnovating for customers to
innovating with customers and involving those
customersinaprocessof knowledgeco-creation(1,2).
Asthesecustomersbecomeincreasinglyconnectedwith
a firmand with other customers, they are becoming
partners in product/service innovation. Consider the
followingexamples.
Smart organizationshavebeguntoconsciously tapinto
their leadusers, whopossessknowledgethat canhelp
anorganizationbetter planfor thedevelopment of new
products andtheimprovement of existingproducts (3).
Somecompanies, includingthesoftwareproducerSPSS,
havebeguntohost customer workshops, bringinginthe
super-users of their products and learning fromthem.
Otherorganizationshaveproductresearchcenterswhere
theymonitor subjectsastheyinteract withproductsand
services. Some software development firms purchase
add-ons, scripts and other artifacts created by their
customerswhileusingtheir products, andthenintroduce
those artifacts in future versions of the products and
services.
Organizations gain in various ways by letting their
customersconnectwitheachotherandbyfacilitatingthe
process using innovative communication technologies.
Consider, for example, theWiki (asoftwarethat allows
userstocreate, removeandedit content onWebpages)
introducedrecentlybyeBay. Byencouragingcustomers
todevelopsharedproductreviewsandrecommendations
onitsWiki, eBay: 1)attractstheattentionof customersto
its portal, 2) provides an experienceof ownership and
control among its customers, and 3) taps into their
insightsandideas.
In such ways, customer innovation has become an
essential strategy for organizational survival. Innova-
tions can come fromhow organizations interact with
customers: 1) by identifying, analyzing and communi-
cating with them, 2) incorporating them into their
existing innovation process through transformation of
their business processes, and3) encouragingcustomers
toengageinimprovingexistingproductsandservices.
In this paper, we introduce various types of customer
innovationanddiscusswaysof establishinganorganiza-
tional innovation programthat takes into account the
strategic valueof thesedifferent types. Thesecondhalf
of thepaper showshowtomanagecustomer innovation
inacompleteinnovationprogram.
IdentifyingtheCustomer
Innovationinhowcustomersareidentifiedisanimple-
mentationof newcustomersegmentation(4). Segmenta-
tioncallsforseparation, categorizationandclassification
of objects, andshouldbedonebeforeanalyzingdataand
information about customers. By using segmentation,
organizations can classify and categorize customers
basedoncertainfeaturesthatwill allowthemtoidentify
targetmarkets. Thesefeatures, if managedappropriately,
will improveserviceandproducts. For example, byseg-
mentingcustomersbasedondemographicdata(suchas
disposableincome) andanalyzingtheir tendencies(such
as willingness to purchaseproducts), organizations can
position products better and improve marketing
campaigns, amongother aspects.
MayJ une2008 35
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NPower Seattle is an example of successful customer
categorization. Thenonprofitorganization, whichassists
other nonprofits with technology-related projects,
upgrades and strategies, has found that customer seg-
mentation greatly assists its relationships. While
acknowledging that the characterizations it creates are
caricatures, the firmhas found it highly beneficial to
assesscustomersastechnologyconstrained,technol-
ogyoptimists andtechnologyinvestors.
Eachof thesecategorieshasdifferentneedsfor, andper-
ceptions of, technology. For instance, technology-
constrained customers tend to be frustrated with the
limitationsof technologyandperceiveitasaburdenand
acost, andconsequentlyseektolimittheir investmentin
technology. Ontheother hand, technologyoptimistsare
willingtoinvest innewtechnologies, but want apartner
to assist themin choosing and adjusting to thesetech-
nologies. Thus, by categorizing customers in this way,
NPower Seattlecantailor offerings to customers based
on their perceived needs and likely intentions around
technology.
AnalyzingCustomer Information
Dramatic advances in information and communication
technologies (ICTs) haveinfluencedtheway organiza-
tions analyze customer information. Today, because
informationcanbecollectedandanalyzedinreal time,
organizations haveanabundanceof customer informa-
Kevin Desouza is on the faculty of the Information
School at theUniversityof Washington, Seattle. Heisa
foundingfacultymember of theInstitutefor Innovation
inManagement (I
3
M) andisanaffiliatefacultymember
of theCenter for American Politics and Public Policy,
both at theUniversity of Washington. His most recent
book is Agile I nformation Systems (Butterworth
Heinemann, 2006). In addition, he has published over
100 articles in practitioner and academic journals.
Desouza has advised international corporations and
government organizations on strategic management
issuesrangingfromknowledgemanagementtocompeti-
tiveintelligenceandcrisismanagement.
kdesouza@u.washington.edu
YukikaAwazuisaninaugural HenryE. RauchDoctoral
Fellow at Elkin B. McCallumGraduate School of
Business at Bentley College, Waltham, Massachusetts.
Her most recent positionwas president of theEngaged
Enterprise, a global research and strategy consulting
organization. Shehasco-authoredEngagedKnowledge
Management (Palgrave Macmillan, 2005) and her
articles have appeared in business and academic
journals such as Business Strategy Review, HR
Magazine, EuropeanManagementJ ournal, International
J ournal of Information Management, andCommunica-
tions of theACM. Shereceivedher M.A. ineconomics
and M.B.A. degrees fromthe University of Illinois at
Chicago. yawazu@bentley.edu
Sanjeev J ha is a doctoral student at the College of
Business Administration, University of Illinois at
Chicago. He has published in Communications of the
ACM, InformationResourcesManagement J ournal and
IEE Engineering Management. He has co-authored
paperspresentedat Academyof Management andother
conferences. Prior to joiningthedoctoral program, he
was deputy manager (marketing) in Gas Authority of
India Limited (GAIL), where he was responsible for
marketingnatural gas to industrial customers inNorth
Gujarat, India. sjha2@uic.edu
CarolineDombrowski isanMLISstudentattheUniver-
sityof Washington, Seattle. As a researchassistant for
theInstitutefor InnovationinInformationManagement,
shehascontributedtoscholarlyandpractitioner articles
onthetopicof innovation. ShereceivedanM.Phil. from
theUniversity of Cambridge, United Kingdom, in phi-
losophy. cd1@u.washington.edu
Sridhar Papagari isadoctoral candidateinmanagement
information systems (MIS) at the College of Business
Administration, University of Illinois at Chicago. His
main research interests are in enterprise eHealth
strategies, post-adoption technology management, and
IT-enabledinnovation. HehasM. S. degreesinelectrical
engineeringandcomputer scienceandanMISat UIC,
and a bachelor of engineering degree in electrical &
electronics engineering fromOsmania University,
Hyderabad, India. spapag1@uic.edu
Peter Baloh is an assistant lecturer in theinformation
management department of theFacultyof Economicsat
Ljubljana University, Slovenia. He spent the last year
doingresearchfor hisPh.D. at6* RAEIRIS-Informatics
Research Institute at the University of Salford, United
Kingdom. Inaddition, hefoundedandmanagesthesmall
Slovenian consultancy and advisory firm, Catch the
Knowledge. HereceivedhisM.Sc. (honors) ininforma-
tion management at the Faculty of Economics,
Ljubljana. peter@baloh.net
J effreyKimisonthefacultyof theInformationSchool at
the University of Washington, Seattle, and an adjunct
faculty member of the Graduate School of Culture
Technologyat KoreaAdvancedInstituteof Scienceand
Technology(KAIST). Hisresearchfocusesontheorga-
nizational changes and information technologies in
knowledge-intensive firms. Currently, he is examining
the social and technological aspects of boundary-
spanning practice in the information technology
industry. He received a Ph.D. in information and
computer science fromthe University of California,
Irvine. jykim@u.washington.edu
Research TechnologyManagement 36
tion. Thisinformationisconstantlybeingcollectedfrom
financial institutions, credit reporting agencies, local
stores, andother sources, withandwithout thecustom-
ersknowledge.
Physical devices complement and add to this increas-
inglylargepool of electronicinformation. Collectionand
identification devices, such as store cards and radio-
frequency identification (RFID) tags, enable organiza-
tions to collect accurate information on customer
purchases. RFIDdevicescanbeattachedtoproductsina
store to track their movement within the store. In
addition, organizationsareabletorecordandstoresuch
informationwitheasebecausedatastoragemediaareso
inexpensive.
In the health care industry, the abundance of patient
claims data, including disease information, risk
behaviors, information on medical visits, and prescrip-
tionhistory, haveencouragedmanaged-carecompanies
andsomeemployers to minethedataanddeveloppre-
dictivemodelstohelpmanagehealthcarecosts.
Not only does more customer information exist, but
interactions aroundcustomer informationhavebecome
more frequent. For example, almost all organizations
havebeguntoexploittheInternetanditsvariantstoshare
information. Theendresultisthatcustomer information
isavailableinalargervolumeandafinergranularitythan
ever before. Moreover, the tools used to analyze
customer information continueto becomeincreasingly
sophisticated, feasibleandeconomical. Today, relevant
knowledgeisextractedbyprocessingthesevast quanti-
tiesof informationthroughsuchtechniquesasstatistical
analysisand, morerecently, datamining.
The TGI Fridays restaurant chain, for example, used
information about its customers to redefine its food
offerings (5). After observing that customers were
seeking more healthy food options, the restaurants
changed their menus, letting customers replaceFrench
fries with baked potatoes or green vegetables, for
instance. Datamininganalysis onits point-of-saledata
uncovered further patterns and combinations in how
their patronscustomizedthestandardofferings, leading
tothecreationof dietmenuitemsandlow-caloriemeals.
Customer involvement in information gathering is
minimal, sincemostof thedataneededtogenerateinfor-
mationarereadilyavailable. Thus, creditcardcompanies
donotneedtoinvolvetheircustomersinordertoanalyze
purchasingbehavior becausetheyreceivesuchdataand
informationregularlyandcanprocessbotheasily.
CommunicatingwithCustomers
Organizations may increasethetypeof channels (e.g.,
telephone, email, chat rooms, discussion forums) that
customerscanaccessinordertocommunicatemoreeffi-
ciently. Customer Relationship Management (CRM)
systems track interactions withcustomers andimprove
thedeliveryof productsandservices.
OrganizationshavealsoembracedtheInternetfor trans-
mittingproduct documentation, troubleshootingguides,
repair manuals, andother formsof support information.
Whilecustomerscanresolvetheir queriesandproblems
on-line by using chat rooms, email and structured
reasoning systems, most computer manufacturers have
gone a step further and added interactive Web-based
programs to handle customer support queries and to
debugtheir purchases.
Companies like Barnes & Noble allow customers to
purchaseaproducton-lineandreturnitatalocal storeif
they are not satisfied. Some electronics stores, like
Circuit City, allowcustomers to order on-lineandpick
upfromtheir local store. Best Buy, another electronics
store, allows customers to use in-store kiosks to
customize products and answer questions, thereby
providing the same flexibility as if purchasing on the
Internet.
Banking firmWashington Mutual has developed inno-
vative communication strategies with customers by
definingcustomer touchpoints, that is, every interac-
tionwithcustomershasbeennamedanddefinedsothat
both management and employees can analyzeways to
innovatethoseinteractions. Sampletouchpointsinclude
an ATM, during a phone call to a call center, and
in-personinquiriesat abank.
One innovation that resulted fromthis model was the
developmentof anewIT interfacethatgivesbankrepre-
sentatives access to histories of interactions withapar-
ticular customer, includingpriority informationlikethe
customers risk profile. Thesenewinterfaces aggregate
useful informationandhavedramatically improvedthe
qualityof customer interactionaswell asincreasingthe
amountof practical informationatbankrepresentatives
fingertips.
Customer innovation
has become an
essential strategy
for organizational
survival.
MayJ une2008 37
BusinessProcessCustomer Interactions
Customers used to not be involved with business
processes, their rolelimitedtoconsumptionof thefinal
productsandservicesandpossiblygivingtheir feedback
toacompany. Thishaschanged, however. For example,
most airline companies now allow passengers to book
theirtickets, choosetheirseats, printareceipt, andcheck
inon-line.
One of the outcomes of increased integration of
customersintoacompanyssupply chainprocessisthe
disintermediation of certain players in the industry.
Thus, on-linebookingfor air travel resultedindisinter-
mediationof travel agents, andhenceincreasedtheeffi-
ciency and effectiveness of the ticketing process. A
similar changeinbusiness processes intheautomobile
andsecurities industries, amongothers, enabledby the
Internet, hasledtocustomersdealingdirectlywith, and
hencecommunicatingmore, withthecompanies them-
selves.
Oneexampleof both customer segmentation and inte-
gration into the value chain is the auto insurance
company, Progressive, whichtargetedtheunder-served
segment of high-risk customers (6). To serve these
customers efficiently and effectively, it developed
Claims Workbench, a software platforminstalled in
laptopswithwirelessmodems, that allowsclaimsrepre-
sentativestoperformupto20separatetransactionsinthe
field. When an accident is reported, Progressive dis-
patchesitsrepresentativetotheincident locationwhere
they completeall paperwork onthespot, thusminimiz-
ing the incidence of fraud. The representatives can
conduct damage assessments by checking parts lists
installed in the software application. Using the
Immediate Responsible Vehicles (IRVs), the reps can
sendtheclaimtotheclaimscentersandsettleitquickly,
therebysavingmoneyandimprovingcustomer service.
Dell Computer Corporationsdirect mode model was
inventedbyMichael Dell, whorecognizedtwotrendsin
themarketplace: 1) that standardization of PC compo-
nents allowed Dell to outsource the manufacturing
process (except assembly), and2) thesophisticationof
customer knowledgeabout, andcomfort with, PC tech-
nology. Becauseof thesefactors, Dell decidedtodesign
a value chain that allows direct interaction and gives
customersmorechoicesandtheabilitytocustomizetheir
orders. Thedirectmodel providesnotonlytechnical and
costadvantagesresultingfromlowerinventorycosts, but
also a significant advantage in terms of customer
knowledge management. Because Dell can directly
interact withcustomers, it hasabetter chanceof discov-
eringcustomer needs.
Strategic innovations by ICTs can scale-up existing
business models that do not allowcompetitors to catch
up quickly. For example, Enterprise-Rent-A-Car
focusedonthecar replacementmarketanunderserved
and ignored service the firmcould offer. Enterprise
developed Automated Rental Management Systems
(ARMS), an Internet-based software application that
connects Enterprise, insurance companies and auto-
repair shops, to managetheentirerental car cycleand
process. When an Enterprisecustomer has an accident
and calls an insurance company with a claim, the
insuranceclaimsagent logsontoARMS andautomati-
cally replaces thecustomers rental reservation. Tradi-
tionally, thisprocesstookatediouspaper-based, manual,
andhumanprocessthatinvolvedhalf adozenphonecalls
to different rental office locations. The systemis also
connected to auto-repair shops, which can send repair
updatestobothinsurancecompaniesandcustomers.
ARMSalsotracksthecollectionof therepairedcar and
thereturnof therental car, andautomatically generates
an electronic invoice for the insurance company. The
great thing hereis that it reduces human involvement;
Enterprise eliminated, on average, 8.5 phone calls per
rental transaction. This is about 85millionphonecalls,
and, since1993, about sevenmillionhoursof employee
time(5minutespercall). Bylate2002, ARMSwasbeing
usedby 22of the25largest insurancecompaniesinthe
UnitedStates.
Customer InteractionswithProductsandServices
Asproductsbecomemoresophisticated, onlyrarelywill
everycustomerusethetechnologyinthesameway. This
is becausemost products nowhaveoptions for modifi-
cation, personalizationor customization. Understanding
how users engage in these customizations can yield
insights on possibleenhancements and innovations, as
occurswithsoftwareorganizationsthatregularlytapinto
their lead users to discover newroutines, methods and
enhancements(7).
One aspect of managing knowledge to support the
customer requires personalizing the shopping experi-
ence. Organizations can use transaction data and
customer information, especially for those purchases
conducted on the Internet or through other electronic
medialikepersonal digital assistants (PDAs) or mobile
phones. Forfrequenttravelers, enteringtheirpreferences
intoaticketingsystemfor everytripistime-consuming
and annoying. In the past, they would have gone to a
travel agent who knew their preferences and madethe
arrangements accordingly. These travel agents were
knowledgeable, not onlyabout thevariousdestinations,
but also about preferences: window seat, nonsmoking,
makeand model of rental car, and so on. Today, elec-
troniccustomer reservationsystemscanhandlemanyof
thesedetails.
ICTs have also made experimenting with product and
serviceofferingspopular. Customersoftentryaproduct
or service before committing to a purchase; on-line
vendors provide trial software, music samples, no-risk
trial periods for services, and the like. In light of this
cultureof sampling, ithasbecomemoredifficulttolock
customers into apurchasewithout providing atasteof
what they canexpect. This requires theorganizationto
make such knowledge available in easily digestible
formats, todevisemechanismsthatallowthecustomer a
senseof theexpectedproduct benefitswithout releasing
theentireproductforfree, andtoensurethatinformation
isopenlysharedwithandreceivedfromthecustomer.
When purchasing abook, for example, readers want a
synopsis, theauthorscredentials, thereviews, price, and
other information to informtheir decision. One of the
reasonswhycompanieslikeAmazoncontinuetobesuc-
cessful isthehighlysophisticatedwayssuchinformation
is presentedto apotential buyer viatheInternet. Thus,
publishers allowreaders toreadafewpages of abook,
andon-linemusicvendorsprovidesongsamplesfortheir
customers.
As another example, Google has Google labs on its
Website, whichletsuserstryGooglesbetaproductsand
services. Users can download themfreeand play with
them, afterwhichtheycangivetheirfeedbackdirectlyto
developers by sending email or by joining community
discussions. Once the products graduate fromlabs,
theybecomeavailablefor all Googleusers. Experimen-
tation is the requirement of this constant knowledge
exchange; knowledge must flow freely from the
customer totheorganizationandviceversa.
InnovationinProductsandServices
Innovationintheformof final productsandservicesisan
implementation of knowledge fromthe customer,
definedastheinsights, ideas, thoughts, andinformation
the organization receives fromits customers. These
insights can be about current products and services,
customer trendsandfutureneeds, andideasfor product
innovations. Ideasforsuccessful productinnovationsare
mostlikelytocomefromendusersandcustomersof the
products and not fromwithin the organization. An
organization must therefore actively seek out such
knowledgeinorder to bebetter preparedto implement
product enhancementsandinnovations.
Sometimes, throughthis formof innovation, customers
canchangetheir businessmodelsor processesandoffer
different services. For instance, NPower Seattle was
awareof anEarnedIncomeTax Credit that was under-
utilized, and worked with early technology adopters
(whohadshowneagernesstousenewformsof technol-
ogytochangetheirservices) toallowthemtoofferanew
service, making it easier to collect that money. As its
director, J amie Green, stated, Seventy-five million is
left unclaimedby low-incomeWashington families. In
oneof our grants, wearticulatedthatwewantedtowork
withearly adopters andpragmatists andsee$2million
additional dollarscomingbacktothecommunity.
As this quote demonstrates, the measure of success in
suchcaseswill usuallydependonthesuccessof thecus-
tomers new offerings. In these instances, changing
customer business practices is aserviceprovidedby an
outsideorganization.
It is also important to design, manufacture and sell a
product that customers want, rather than trying to
convince themto buy something created elsewhere.
Thatswhylisteningtocustomersissoimportantforsuc-
cessful innovations. For example, Hewlett-Packard
modified its Laser J et V printer design by adding
handles, after observingthat morethan30percent of its
customers, most oftenwomen, routinelymovedprinters
anddidnot want tobreaktheir fingernails(8).
These types of customer innovation raise a range of
critical issues (see Table 1) that organizations must
consider astheyutilizecustomer innovation. Thedevel-
opment of organizational processes around customer
innovationdemandsanewlensthroughwhichtoassess
both innovative processes and organizational mission.
Our next sectionpresentssuchaframework.
ManagingaCustomer InnovationProgram
Organizationstakeideasfromcustomers, processthem,
incorporatethemintofinishedproducts, andthendeliver
themtocustomers. Theorganizationsvalueisnormally
tied to the internal and external value generated. The
ideal organization will recognize and appreciate the
customer dimensionineveryinteractionandbuilditinto
itsinternal innovationprocess.
Successful customer innovationprograms arebasedon
systematic interactions among three key entities: the
organization, products and services, and customers.
Thesethreeentitiesinteractwitheachother inaseriesof
innovationstages: theideagenerationanddevelopment
stage; thedesign, testingandrefinement stage; andthe
commercializationstage(seeillustration, page41).
Organizations must integratetheir customer innovation
programwiththevarioustypesof innovation(seeTable
2). The typology of customer innovation given previ-
ously may haveseemeddauntingin aspects andpossi-
bilities for innovation management. Each type of
customer innovationfits withinthemanagement model
outlinedbelow, whichwill provideacompleteinnova-
tion programwith an emphasis on customer-generated
and customer-focused innovation. First, we give an
overviewof theinnovationprocess, andthenweprovide
three areas of focus for projects or organizations to
consider withrespect to customer innovationandorga-
nizational strategy. The three areas can be considered
indicatorsof customerinvolvementandmetricsfororga-
nizational effortsaroundcustomer innovation.
MayJ une2008 39
Ideagenerationanddevelopment
Thefirst stageof theinnovationprocessisideagenera-
tionanddevelopment. Consider thisquotefromaninno-
vationofficer at abuilder of computer games:
We are a very fast-paced and dynamic industry. In the gaming
industryweareknowntowork24/7. Oneof thechallengeswehaveis
gettingattherightsourcesof ideas, informationandinnovations. We
arenowhiring17- and18-year-oldkidsandgivingthemsalariesto
playgamesandtotell ushowtocomeupwithnewideas. Someday
whenyouhavekids, youwill knowthattheyarenottheeasiestsources
to manage . . . sources management is the most challenging and
complexactivity.
Understandingthesourcesof ideasiscritical for innova-
tion. Today, companiesarefindingnovel waystoengage
inideagenerationwiththeir customers. Creatingarenas
where customers feel comfortable and encouraged to
provide feedback is a key component of collecting
customer-generated ideas. In the gaming industry,
customer ideas are solicited via constant feedback
through Web sites, discussion groups, blogs, and so
forth. Inaddition, customers innovateby buildingadd-
ins, scriptsandthelike, toaccompanythegames. Asour
intervieweenoted:
For themost part our sourcesareour customersthegamers. They
havebecomesotechsavvythat all wedoisprovidethearchitecture
for agame, andthentheycancustomizeit asneededtoplayvarious
versionsof thegame. So, whatwearetryingtodoisbringthesources
that we are interested in into the organizations. We do hire high
school students, inparticular thosethatposttogaminglistservs, etc.
Rather than trying to get information fromthese sources via your
traditional techniques suchas surveys, etc., webringtheminto the
manifoldof theorganizationandthenget informationfromthem. By
far, wepaymost attentiontoour customer sources.
An organization needs to collect as many ideas as
possiblefromappropriatecustomers, whichmeans that
customer segmentationcanplayanimportantrole. Ideas
fromnovices are different fromthe ideas fromsuper-
users, as Table 1 illustrates. Ideas provided by those
averageusersarenormallymorecreativethantheideas
Table1.Critical I ssues, ConcernsandCheckpoints
Typeof Customer Innovation Critical Issue Checkpoints
Customer segmentation Customersandcategoriesaredynamic. Aretypesof customer informationprioritized?
Staff must betrainedandunderstandpurpose. Aretherecustomer protectionguidelines?
Right typesof informationmust guide
segmentationtoavoiddiscrimination.
Customer analysis Informationoverload, particularlyfrom
automatedsystems.
Cananalysesbetracedbacktospecific
customers?
Systemsmust beintegrated(i.e., fromall
typesof customer interactions).
Areall systemsconnected?
Privacyandsecurityof customer datamust be
protected.
Customer communication Complexproblemsandvaluableclients
requirein-personinteraction.
If outsourced, doescustomer servicestill
understandcustomers?
High-qualitycommunicationmust be
paramount.
Manychannelsandoptionsfor communication
must exist for anytime, anywhere service.
Customer interactionwith
organization
Investment must bemadeininfrastructurefor
agilityinadaptingtoenvironment.
Cantheorganizationsstructuremorph?
Riskswithestablishedrelationshipswhenever
communicationchannelschanged.
Hasgroundworkfor changebeenlaidwith
establishedsuppliers, vendors, customers, etc?
Copycatsmayrapidlyduplicateideas.
Customer interactionwith
productsandservices
Customersandtechniciansneedacommon
language.
Arecustomerssegmentedbyneedand
expertise?
Noviceandexpert customersneedtobe
handleddifferently.
Dotechniciansinteract regularlywith
customers?
Channelsof communicationneedtobevaried
andflexible.
Productsandservices
outputs
Requiresrich, human-to-humaninteraction. Arethereprotocolsfor elicitingknowledgefrom
customers?
Sticky or tacit knowledgecanbedifficult
toarticulate.
Aretheremetricstoevaluatethemarketability
of ideas?
Feasibilitymust becarefullyanalyzedand
customer needs, not specificproducts,
shouldbeidentified.
of experts (9), but aremoredifficult to implement than
theideasfromprofessionals. Expertsmay belimitedin
theirimaginationbytheirexpertise. Therefore, customer
information analysis is critical to understanding how
radical theideaisandhowdifficult it istoimplement.
Organizationsneedtodotheright kindof segmentation
andhavetheright communicationtools toget theright
kinds of ideas fromtheright sources, who may reside
anywhere. Toaccesstheseglobal customers, theorgani-
zationneedstohaveICTsthat canreachthemvirtually
Thecustomer innovationprogramisbasedonsystematicinteractionsamongtheorganization, productsand
services, andcustomers.
Table2.ThreeStagesof Customer I nnovation
IdeaGenerationandDevelopment
Design, Testingand
Refinement Commercialization
Interactingentities Organizationandcustomer Organizationandproductsand
services
Productsandservices, customers
Typeof customer
innovation
Customer definition, customer
informationanalysis, customer
communication
Businessprocess Productsandservices, customer
interaction
Challenges Segmentation, informationoverload,
privacyandsecurityissues
Systemandprocesstransformation Segmentation, knowledge
transfer, communicationtools
Checkpoints Areyousub-segmenting? Doyouknowyour existing
systemandcapabilities?
Doyouknowfor whomyou
developcustomizableproducts?
Doyouunderstandtheriskof privacy
andsecurityassociatedwith
customer informationanalysis?
Doyouhaveengineerswhocan
understandusers feedback?
MayJ une2008 41
andcommunicatewiththemintheir local languagesand
inreal time.
Design, testingandrefinement
Thisisthestageinwhichorganizationsneedtoincorpo-
ratewhat they learn fromcustomers into thedesign of
new products and services. First, ideas need to be
filtered, screened and tested beforeactual implementa-
tion; the organization needs to create an environment
where those ideas can be discussed by others. For
example, ideasfromnoviceusersmayneedtobefiltered
byengineerswhoknowhowtoimplementthem. Assem-
bling cross-functional teams can be important for
creating an environment wheretheideas can betrans-
latedintonewproductsandservices. It wouldtherefore
bebeneficial toincludethevarioustypesof peoplewho
normallyengageincustomer interactions. For example,
thesalesforceisthegroupclosesttocustomersandthus
possessesagreatdeal of customer information. Itisalso
importantfor organizationstoincludethatknowledgein
theR & D process (10). Inaddition, ICTs canconnect
distributed teammembers and provide themwith a
platformto interact with other members and exchange
opinions.
Organizations need to transformexisting business
processes and systems to make themsuitable for the
customer-driveninnovationprogram. For example, if an
organizationhasahighly rigidorganizational structure,
it needstoembraceanopenstructurewhereemployees
cancontributetheir opinionsof thenewideas. However,
this comes with pain and costs because people are
usuallyafraidof newsystemsandprocesses. Withoutan
explanationof why thetransformationis necessary and
howit will maketheenvironment better, therewill be
resistance.
This is thecasenot only for internal employees but for
external partners as well. For example, IBM and HP
couldnot imitateDells direct model, becauseit was
perceivedastooradical andtheydidnot want tojeopar-
dize their current operations, which were based on
existing relationships with vendors and suppliers. It is
essential that organizations understand which system
and process transformation will enable themto bring
customers and employees together into the design,
testingandrefinementstage. Preciseknowledgeof what
a specific transformation can do and how it can be
accomplished will help managers bring about the
requiredchange.
Commercialization
Inthecommercializationstage, organizationsneedtobe
innovativeinhowthey incorporatecustomer ideas into
products and services that will be acceptable to
customers. For example, organizations may want to
present apilot caseor offer anexperimental product to
findout howcustomersfeel about themandthenincor-
poratetheideas into themodified and revised version.
This strategy is common among software companies,
whichusually distributenewsoftwareproducts as beta
versions so that customers can identify bugs and give
other feedback.
Organizations should also provide opportunities for
customerstocustomizeorpersonalizetheirproductsand
services. Wireless companies are leaders in this area,
allowing their customers to personalize ring tones or
change the outward appearance of their phones with
different covers.
Inthisregard, itisimportanttorecognizethatknowledge
can beexplicit or tacit, and organizations should have
mechanisms, suchasemail, phones, chat rooms, Wikis,
andsoon, inplacetocapturecustomers comments. For
example, if customers want to give feedback on the
phone, it iscounterproductivetokeepinsistingthat they
fill out longforms. It isalsocritical herethat employees
appreciate the importance of capturing customer
feedback andbeflexibleenoughtoencouragecustomer
participation.
TowardCustomer-DrivenInnovation
Customer-driven innovation is very different fromthe
old customer innovation programs, which we call
customer-focusedinnovation andcustomer-centered
innovation(seeTable3). Incustomer-centeredinnova-
tion programs, innovation is done with customers
organizationsandcustomerscreateinnovationtogether.
Incustomer-focusedinnovationprograms, innovationis
donebytheorganization.
Incustomer-driveninnovationprograms, thecustomeris
thekey playerinnovation is donebycustomers, with
minimuminvolvement by theorganization. Customers
aretheprimarysourceof ideasandtheconsumersof new
productsandservicesTheycanoffer ideaswithout geo-
graphic andtimeconstraints, andtheorganizationmust
beabletoapplythoseideasquicklytothedevelopment
of new products and services. Without the tools to
Organizations need to
collect as many ideas
as possible from
appropriate
customers.
support such dynamic interaction, it risks losing its
customerstocompetitors.
Regardlessof thedangersof knowledgeleaksandintel-
lectual property issues, organizations need to pursue
customer-driven innovation programs that incorporate
all typesof customer innovation. Focusingoneachtype
of customer innovationandassessinganorganizations
currentstatusascustomer-centered, -focused, or -driven
will enableorganizationstoinnovatemoresuccessfully,
quicklyandwithlower overall investment. Weexamine
thesedifferencesbelow.
Theorganizationsrole
Inacustomer-driveninnovationprogram, theroleof the
organization shifts fromthat of communicator and
principal innovator towardcoordination, facilitationand
transparency. Theorganizationcoordinates theinnova-
tionactivitiesof customersduringtheentireinnovation
process, including, for example, theactivitiesby which
customerscontributetheir ideasandgivetheir feedback
oncurrent productsandservices. Theorganizationalso
needstocoordinatecustomer activitieswithitsexisting
businessprocessesandsystems.
Typeof innovation
The type of innovation represents the nature of
customers engagement. In customer-centered innova-
tionprograms, theengagementcanbedescribedasopen
innovation; that is, theinnovation programis open to
customersandthey areallowedtobeinvolvedwiththe
process, usually at specific points intimewithspecific
processes. In customer-focused innovation programs,
customerengagementcanbecalledclosedinnovation;
that is, theinnovationprocessisseenasablackboxand
customersarenot directly involvedwiththeinnovation
process. In customer-driven innovation programs, in
contrast, the customers engagement is dynamic,
providingideas anytimeandanywhere. Customers and
organizationsinteract frequently, sometimesinunstruc-
turedways, andorganizationsneedtoservecustomers
dynamicneeds.
Degreeof control
Thedegreeof control representsthedifficultythat orga-
nizations face in controlling the overall innovation
process. In customer-driven innovation programs, it is
probably impossible for organizations to control the
Customer-driven
innovation is very
different from the old
customer innovation
programs.
Table3.Customer-DrivenI nnovationvs. Older Paradigmsof Customer-CenteredandCustomer-FocusedI nnovation
Customer-Driven
Innovation
Customer-Centered
Innovation
Customer-Focused
Innovation
Central entity Customer Customer andorganization Organization
Degreeof customer
involvement
Innovationbycustomers Innovationwithcustomers Innovationfor customers
Roleof organization Coordinator Communicator Innovator
Typeof innovation Dynamicinnovation Openinnovation Closedinnovation
Degreeof control Impossibletocontrol Difficult tocontrol Easytocontrol
Degreeof coordination Emergent coordination Difficult tocoordinate Easytocoordinate
Critical innovationstage Commercialization(Ideasare
over-generatedanddeveloped,
but difficult tocommercialize)
Ideadevelopment (Ideasare
abundant, but difficult to
develop)
Ideageneration(Ideasare
scarce)
Typesof innovationto
focuson
Productsandservices, output
interaction; interactionwith
productsandservices
Communicationwithcustomers;
customer interactionwith
organization
Customer segmentationand
customer analysis
Critical issueswith
innovationtypes
Sticky andtacit knowledge
transfer requireshighlevelsof
humaninteraction
Investment ininfrastructure Analysismust beongoing
Customersmust besegmented
for proper analysis
High-qualitycommunication
needed
Systemsmust beintegrated
Riskof copycats Informationoverloadpossible
MayJ une2008 43
process, becausetheydonotknowhowmanycustomers
are involved and they cannot control when and where
customers contribute. Incustomer-centeredinnovation,
however, organizations can control the innovation
process, but it is difficult to do when compared to
customer-focused innovation. In the customer-focused
innovation process, control is the major strength and
most visible benefit, since the innovation process is
limitedto internal processes or to thirdparties who are
tiedbycontract.
Degreeof coordination
Thedegreeof coordinationrepresentsthedifficultythat
organizationshaveincoordinatinginnovationactivities
among stakeholders. In customer-driven innovation
programs, the degree of coordination is emergent; for
example, variouscustomer communitiesarecoordinated
at local group levels. In customer-centered innovation
programs, coordination is done by organization and is
quite complex, with multiple stakeholders involved.
Coordination is easier in customer-focused innovation
programs, wheretheinnovationprocessisstructuredby,
andinternal to, theorganization.
Commercial innovationstage
This is the most important stage of the innovation
processbecauseit isherethat theorganizationdevelops
theproductsandservicesthat candominatethemarket.
In customer-driven innovation, where ideas come
anytimeand fromanywhere, theremay beasurfeit of
ideas, and selection and implementation become the
main challenges. In customer-centered innovation
programs, ideadevelopment, screening and refinement
are central. In customer-focused innovation programs,
fresh ideas are scarce and the idea-generation stage
becomesthemost critical element.
LettheCustomer Drive
Organizationsmust bothcollect anddevelopideasfrom
customersquickly. Theyalsohavetocommercializethe
ideas rapidly. For example, Washington Mutual has a
history of product and services innovation beginning
withbeingthefirstbanktooffer freecheckingaccounts.
Deb Horvath, CIO of Washington Mutual, highlighted
thisissueinaninterview:
Inour history, years ago, wewerethefirst bank inour industryto
havefreechecking, andafter wedid, all theother bankskindof hadto
dothesamething. Wewerethefirst todonofeesfor our ATMs. We
werethefirst tosomeupwiththeretail experienceinour branches
(Occasio). Other banksaredoingthesamenow.
Washington Mutuals continued banking success
dependsonconsistentinnovationandrapidimplementa-
tion, whichtheorganizationhassuccessfullystreamlined
andencouragedinall sectorsof thebusiness.
Thus, itisnottheabilityof organizationstoinnovate, but
their ability to innovate continuously and consistently
that isvital. Buildingmodelsfor customer-driveninno-
vationisessential tothevitality of organizational inno-
vation programs. Organizations can no longer assume
that they possess all theknowledgeandcapabilities for
innovating for customers. Neither is it sufficient to
innovatewithcustomers. Customersneedtodriveinno-
vation. Successful organizations will bethosethat take
advantageof customer-driveninnovationtofurther their
growth, enter newmarkets andbeleaders intheir mar-
ketplace.
Acknowledgement
ThisresearchwasfundedinpartbytheInstituteforInno-
vationinInformationManagement (I
3
M) at TheInfor-
mation School, University of Washington, under the
LeveragingIdeasfor Organizational Innovationproject.
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