Customer Co-Creation and Innovation Management

In June 2008 I wrote about co-creation as an innovation strategy - New Age Innovation Strategy: Co-Creation with Customers. The challenge in capitalizing on the co-creation strategy has been to identify what is the value being created and how the company can leverage that. Over a period of time, I have noticed that many companies routinely co-create with their customers, but they have failed to make full advantage of it. This became evident while dealing with Ashok Leyland – India’s second largest manufacturer of commercial vehicles. Customers of Ashok Leyland’s trucks and buses have developed several variants and different customizations on these vehicles, but Ashok Leyland had not taken full advantage of it. This apparent failure to capitalize on such wonderful innovation opportunities led me to develop a framework for capitalizing on co-creation with customers.

Co-Creation and Customer Relationship Management
Customer centric innovation is not possible without having a robust customer relationship management strategy. Companies must first have a robust customer relationship management policy and strategy to identify the levels of customer relationships. In my earlier article on Customer Relationship Management & Sales, I had listed out how companies can classify customers based on the levels of customer relationships & customer needs. Relationships with customers can be classified into six levels:

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

When a company has customers at the highest level of customer relationship – where the company is actively co-creating value or innovation with the customer, then the company should know what types of co-creation should be leveraged for greater benefit what types of co-creation should be kept out.In this article, I will concentrate on identifying types of co-creation. This will help managers identify co-creation opportunities that can be leveraged into real innovation.
Types of Co-Creation

Co-Creation exists in two forms:

• Explicit Co-Creation


• Implicit Co-Creation

Explicit Co-Creation occurs when customer openly seeks manufacturer’s help to modify existing product or create something new. This can range from something as trivial as changing the color of the product to very complex engineering – such as building a nuclear power plant.

Implicit Co-Creation occurs when the customer buys the product and modifies it to suit his needs. The customer may or may not disclose such modifications with the manufacturer.
Also at times customers are forced not to disclose modification. It is because managers tend to think that customers should use the product as it was intended by the manufacturer, but customers may have unique needs thus forcing them to use the product beyond the normal use cases – and that would violate the user terms.

In this article, I will concentrate only on explicit co-creation.

Types of Explicit Co-creation

Explicit Co-creation can further be classified into eight types based on the level of involvement of the manufacture & the customer.

Type-1: Mass customization
Type-2: Product Finishing
Type-3: Product Adaptation
Type-4: Customized experience
Type-5: Real time customization
Type-6: Open Community Product design & development
Type-7: New Service Design
Type-8: New product design & development

Type-1: Mass Customization

Co-Creation can exist in various forms. Starting with mass customization where every product is customized for each customer & the products are sold in huge numbers. Mass customization usually will not have a delivery impact, though there may be a price impact. Also the range of customization possibilities is limited by the manufacturer.

For example: Dell Inc., can customize every single computer it sells. Dell’s manufacturing and customer friendly web portal encourage customers to customize their computers. Today, mass garment retailers such as Levi’s can customize every single pair of jeans sold to each customer. See: Web Retailing Gets Really Personal

In mass customization, the customer involvement is not much apart from giving a set of simple details. The manufacturer has streamlined the manufacturing process to such an extent that it requires no managerial involvement to deliver the customized product. There is absolutely no engineering/pricing analysis needed to deliver the customized product. The customization is a “push-button” process.

Type-2: Product Finishing

In this type of co-creation, the customer is involved only in the product finishing details. The customer does not have much say in other details – such as engineering, materials manufacturing process etc. The level of details that the customer can specify is limited to the product finishing – but it has price & delivery impact.

Many manufacturers allow customers to specify the final finishing details. The customer is free to choose from wide range of possibility and based on the customer specification, the delivery time and the final price is worked out. For example customers can specify the color, trim and accessories in the car – but the customer has a wide range to choose from. For example Morgan Cars allows its customers to choose the colors, trim and all accessories – the range of choice available to the customer is huge – and it takes time/effort & money to deliver the customized product. Another good example will be Stretch Limousine builders. Each limousine is custom made and customer gives the specifications all the finishing details.

Type-3: Product Adaptation

Product Adaptation refers to cases where the manufacturer is actively involved in adapting the final product to meet the customer requirements. The manufacturer or a third party service provider will ensure that the product will perform the tasks stated by the customer. Customer takes the responsibility of providing detailed requirements of the end functionality and is also deeply involved in the adaptation. The product adaptation requires complex engineering and has significant cost & time implications.

Typical example of this will be ERP implementation. SAP provides the basic software, but each customer can adapt the software to meet their specific needs. SAP adaptation involves several engineers working for several months – all this has a major impact on time taken and the total cost of using the product. Similarly, there are several software that needs extensive user adaptation: Oracle’s Peoplesoft, HP OpenView, IBM Tivoli, EMC2 Documentem etc.

In the industrial world, all heavy engineering equipment such as TERRATAC’s tunnel boring machine, Ransomes & Rapier’s dragline excavator, Westinghouse’s nuclear reactors, BHEL Generators etc. All heavy engineering equipments are often manufactured as per customer’s specifications and the company takes the responsibility for its installation to its initial operation.

Type-4: Customized experience

Here the firm and the customer work together to create a customized experience for the customer. This is often seen in service industry and in retail sector.

For example, consulting companies such as McKinsey, BCG or KPMG etc., work with the customer to provide a unique solution. The customer’s involvement will be very high and on par with that of the firm. Even in retail sector – high end boutiques such as Luis Vuitton, Valentino, etc., provide a unique shopping experience to each individual customer.

GE’s Aviation business is one of the best examples of creating customized experience for customers – thus co-creating value with customers. GE commercial aviation services leases planes, jet engines and other aviation equipment to customers. GE treats each individual customer separately and structures the lease agreements that best fits the needs of the customer – thus creating a unique customer experience.

In the recent times, manufacturers are building various service extensions to their products – with the aim to provide better customer experience. Pharmaceutical firms and Genetic engineering firms are working on developing medication which is unique for each customer, and then deliver it though health care providers to create a unique customer experience.

Type-5: Real time customization

With the modern ERP & IT systems it is possible for manufacturers/service providers to have flexible operations. This enables the firm to offer real time customization: Customers can log into the systems and change the order specifications. For example, Amazon allows customers to change the order or the order delivery dates/schedule even after the order has been processed. FedEx allows its customers to change the delivery time for major customers. Weyerhaeuser allows its regular customers to change the order at a short notice period.

Type-6: Open Community product design & development

Linux is the poster child for open community development. Following the success of Linux, companies are now adapting different techniques for open community based product development. SUN opened up its Solaris OS software; its OpenOffice suite and a whole range of applications are now made open for general public to use, modify and develop. The company benefit by consolidating all the community development and thus improving the product.

A different variation of this approach is to create a user group. The user group may be sponsored by the firm or sponsored by the individual users. Today, few companies have successfully exploited this as a venue to interact with customers, take feedback from customers to improve & develop the product. For example, SNUG – Synopsys User Group, Harley Owners Group, Land Rover Clubs, Cadence Designer Network.

Type-7: New Service Design

Oftentimes customers often need different service than the ones being provided. In such cases many customers approach the seller with such service ideas. If the company may choose to implement these new services – then the customer is willing to help design the service offering. This kind of new service development is often seen in the financial world where investment banks develop new service lines based on customer involvement in service design.

IT services companies or pure play service companies routinely scout their customers for inputs while developing new service lines. For example FedEx developed a system by which customers can log in and change the delivery times and the transit schedules on the fly – when the delivery is being processed. Similarly, Amazon offers its customers to modify their orders and delivery schedules thought its IT systems.

Manufacturing companies too are jumping into this bandwagon. Caterpillar Inc., launched a new service line to help the customers lower maintenance costs and also be more environment friendly by remanufacturing old & worn out parts. See: Caterpillar Remanufacturing Services .

GE home appliance division has implemented an advanced ERP system which allows retailers to access GE’s warehouse and view it as though it is their inventory. The retailers can book orders against the inventory in GE’s warehouse – and GE will deliver it to the end customer. By tightly integrating the ERP system between the retailer and GE, GE is able to create a new service for its partners – who in turn can offer better range and prices to the end customer.

Peter Drucker once said “Customer does not want a 1” drill bit, he wants a 1” hole”. This statement makes us realize that customers are buying a product to satisfy their specific needs and that need can be fulfilled by a service. This theory is now being applied in the Software as a Service model – where customers are opting to buy the service instead of buying the software. Google Apps, Google Docs are good example of a service design built around the products.

Type-8: New product Design & development

In rare occasions, customers engage the supplier in developing new products. This is more common in business-to-business environment – where one business firm wants to develop a new product and that in turn forces all its suppliers to develop new products. For example to develop Tata Nano, Tata Motors has to involve several of its suppliers to innovate and create new products. Rane systems developed new steering wheel systems to meet the price & performance requirements of Nano. Bosch group had to develop an entirely new fuel injection system. Similarly, when Apple wanted to develop Apple Air – the ultra thin laptop, Apple approached Intel to develop a new range of microprocessors.
Co-creation is not without potential problems. The problems are more acute in case of new product design & development. Customers engage with vendors to develop new products mainly to serve their own needs. Therefore there will be a strong pull/resistance to ideas from the vendor if vendor tries to develop a generic product out of the joint efforts. Large customers can put exclusivity clauses over the usage of the new product – especially if the customer has enormous power. For example, Apple Inc, used Infineon 3G chip – but forced the vendor to mask it – void of any marks, and even forbade the vendor from reveling it even to investors & share holders.

The biggest hurdle in developing new products with the customer is the question of who owns the Intellectual Property Rights (IPR). Since the customer is also investing engineering/scientific resources and coming up with ideas, the customer will insist on having a joint IPR over the new products. If IPR is jointly owned, then the customer can demand & get exclusive use of the new product. The best way to get around this potential problem is the have IPR licensing agreements in place before starting on new product development.

Co-Creating new products or new service lines for a particular customer is risky. The vendor must be willing to take the risk. Customers are often willing to risk on the success of the program, but not bear the financial risks involved. Therefore, developing a new product or a service will require a higher level of financial scrutiny and managerial decision making. Senior management should get involved in managing the co-creation of new product development or new service development.

Levels of Customer relationships & Co-Creation
Co-Creation is all about customizing the offerings to meet customer needs. The extent to which a company is willing to customize/modify a product or a service is based on the quality of relationship it enjoys with the customer: Higher the level of relationship, greater the levels of co-creation. This implies that co-creation at the highest level – i.e. new product development or new service development is reserved only for select few customers.

The table below maps the types of co-creation with the levels of customer relationships. This mapping is not absolute – it is only indicative. The mapping between types of Co-creation and levels of customer relationships varies with industry and economic outlook.

Closing thoughts

Today Co-Creation is fast becoming the best strategy for innovation. This makes it necessary to understand the various types of co-creation and levels of customer engagement – so that one can make better decisions. In this article, I have outlined eight types of co-creation and mapped it to levels of customer relationships.

Managers today are busy delivering to customers and in the process there is a good possibility of missing out on good co-creation opportunities or losing the knowledge gained during the customer engagement. By mapping the customer relationships and classifying the nature of work being done, managers can ensure that the firm does not lose out on co-creation opportunities and also capitalize on co-creation activity.