Customer Driven Innovation

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In strategy + business, Michael Schrage writes about how involving customers in the innovation process can add value to new product designs:

"In industry after industry, a shared model for innovation adoption is emerging. The most valuable “platforms” — the tools and technologies used internally to discover, design, and test new products and services — can be creatively and cost-effectively sold or lent to customers, clients, and prospects. Customers get a chance to “try before they buy.” They can adopt and test new ideas and technologies before investing in them. And the purveyors of new technologies rapidly gain insights into the potential value of their wares — insights that might otherwise take years to gather."

His examples: Cisco, P&G, and Goldman Sachs.

Cisco: "Cisco had several highly sophisticated customers who weren’t satisfied with “solutions”; they wanted to see and understand the thought process behind the company’s proposals. Were these architectures really the best or most cost-effective that Cisco had to offer? So Cisco began showing these customers its in-house simulations. And the customers, in turn, expressed a desire to adapt these design, configuration, and optimization models for their own use."

P&G: "Procter & Gamble has begun to share some of its computer modeling and market research techniques with Wal-Mart, Tesco, and other distribution channels. This includes the celebrated P&G “moment of truth” research, which tracks consumer attitudes at two critical times: when the product is chosen and when it is used. To be sure, many of P&G’s biggest distributors are also rivals that offer their own private labels, so there are risks to sharing this type of proprietary innovation platform with them. But the rewards are even greater: They include ongoing close ties with retailers, who often share their own innovative tools for analyzing (for example) how store layout, shelf space, and signage influence purchase decisions. Together, these manufacturers and retailers can develop a relationship that transcends any particular innovation tool or technique."

Goldman Sachs: “In the early days, we would run simulation after simulation demonstrating that our instruments would help them better hedge their risks,” acknowledges one former Goldman Sachs and Salomon Brothers executive. “But, frankly, they didn’t fully trust either us or our simulations. It wasn’t until we started giving them the simulation tools we used ourselves that they took us seriously.” ... These free simulators proved to be the most profitable innovation that the Goldman Sachs derivatives group launched. Soon, clients began asking for custom derivatives and other tailored instruments. “Without the simulators, customers would never have known what to ask for, and we would never have thought to ask,” recalls the bank executive. Yet, despite its success, this innovation appeared nowhere in the bank’s R&D budget or prospectus. It was only a tacit, not an explicit, locus of value creation.

But not everyone is so keen to share their knowledge. The article tells us about Eric von Hippel's hypothesis that internal innovators frequently view customer innovators as rivals who might undermine their creative role.

Ultimately, we're talking about demand innovation. A double loop model enables you to learn how to extend your offerings into your customers’ internal value chain, creating a platform for profitable growth. It’s also about identifying unmet customer needs – by going upstream or downstream as dictated by your industry’s value configuration…

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This page contains a single entry by Christian Sarkar published on October 12, 2006 7:59 AM.

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