New Age Innovation Strategy: Co-Creation with Customers

As an Account manager incharge of BT Global Services account in UK, I had written about levels of customer relationships and its implication to sales.

Relationship between buyer and seller can be identified in 6 distinct levels. Level-1 being the lowest level of relationship and level-6 being the deepest level of relationship.

1. Level-1: Utility Need
2. Level-2: Convenience Need
3. Level-3: Comfort Need
4. Level-4: Personal Recognition Need
5. Level-5: Self-expression Need
6. Level-6: Co-Creation Need

The practice of Co-Creation with customers has widely publicized by C.K. Prahalad in his book: "Future of Competition - Co-Creating unique value with customers" & also in the book "Open Innovation: The New Imperative for Creating and Profiting from Technology" By Henry William Chesbrough

Managers & leaders today have a clear understanding of customer relationship management & the need to co-create with the customer. However, the main challenge for companies today is to decide: When to opt for a co-creation - i.e., when should the company engage with the customer for a joint product development effort?

In large organizations, the burden of this decision falls on middle managers - who may or may not be equipped with all the facts/information to make the right decision.

In this article, I will talk about the right conditions needed for Co-creation or Joint product development.

What is co-creation?

Co-Creation stands for new product/service development in which customer is also investing resources/efforts/capital in a significant way. Often times, it is the customer who comes up with the idea for a new product and scouts for a supplier in the venture. In most cases, customer has a great strategic interest/need for the new product, and is willing to foot a part of the bill. The vendor firm brings in the technical expertise to design/produce the product, manufactures it - and retains the rights on the product. The vendor retains the rights to make & sell similar products to other customers in the future.

Customer involved in co-creation provides valuble inputs such as design requirements, product specifications, product testing, and in some cases customer even shares the design process. The customer and the vendor may jointly own the IPR developed in the project.

Examples of Co-Creation

Today there are lots of examples of co-creation. For example development of Tata Nano involved participation from 14 different vendors:

• Bosch - Alternator; Brakes; Fuel injection system; Ignition system
• Lumax Automotive - Headlamps
• Rico Auto - Engine blocks
• NK Minda - Switches; horns
• Sona Group - Steering columns
• Gabriel - Suspensions
• Kinetic Engineering - Gears
• Federal-Mogul Goetzee - Engine pistons
• JK Tyres - 12" tyres

Intel developed a special version of Core2 Duo processor for Apple Air notebook computer.

Rolls Royce developed a high fuel economy jet engine for Boeing 787 - Dreamliner.

HITCO developed special carbon composites for body construction of Boeing 787

When to opt for a co-creation?

To begin with, let me make it clear that, the decision for a joint product development must be a financial one i.e., one must be able to quantify the expenses (inputs) and all the benefits in Dollar terms. Like in all projects, there will be uncertanities - and therefore, it must be accounted for in the financial calculations. One must go ahead with the project only when the project yeilds a net positive NPV. (while considering a suitable hurdle rate)

Now that we know the rational for making the final decision - lets take a look into the suitable conditions that may yeild a positive NPV.

Essentially there are five conditions (in the increasing order of risk) for co-creation:

1. Customer promises to buy in volumes that ensures that the project has a positive NPV
2. Customer bears a fair percentage of the development costs
3. The product being jointly developed is in the product roadmap
4. The product being jointly developed is in the strategic direction of the company
5. The product being jointly developed provides a new market opportunity ( and is a major diversification)

In all five conditions, one needs to model the financial investments & returns and see if there is a positive NPV in the project. It is a general management philosophy to avoid making decision based on the "Gut" factor. However with co-creation projects, like in any startups, as the uncertainties associated with joint development project increases it becomes difficult to develop a accurate financial model - and at some point you have to go by "Gut" instincts.
Co-creation & co-innovation with the customer enhances the relationship with the customer and increase customer loyality. In most cases, the customer will be committed to buying for a long term ( i.e. a large sale). Co-creation or co-innovation provides an ideal platform for increase sales, improved customer relationships, and reduced business risks.

Closing thoughts

In today’s world, companies (and its managers) are closely monitored by Wall Street and investors demand lower risks and higher returns. Under such circumstances, it is better to lower the costs & risks associated with innovation by collaborating with a customer - rather than going alone. Co-creation lowers the risks of innovation and increases revenue/profitability. This makes it necessary for managers( & leaders) should first strive for a co-creation partner for innovation.

Also see:
http://arunkottolli.blogspot.com/2006/04/customer-relationship-management-sales.html