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Co-Creation and Customization: An Interview

Recently, I had the pleasure of being introduced to ICFAI University, one of India's leading educational institutions, recognized for its skills in developing innovative educational programs and writing insightful case studies. It is also a leading publisher, 18 magazines and 46 journals, in areas such as marketing, finance, environment, and health care.

Effective Executive is the flagship magazine of the University. Started in 2000 and published monthly, it features articles on topics like marketing, strategy, sustainability, and innovation. Every issue also features interviews on these topics with experts. In the recent past, the magazine has interviewed globally renowned experts and intellectuals, like Philip Kotler, Michael Tracy, Pankaj Ghemawat, Vijay Govindarajan, and Dr.A.P.J.Abdul Kalam, a renowned nuclear scientist, and former President of India.

The magazine's latest issue is dedicated to the theme Co-Creation: the New Frontiers of Competitive Advantage. The issue features an interview conducted with me on my HBR article and on co-creation.

I would like to share two key topics covered by the interview. The first deals with the nature of co-creation, and the second with the difference between customization and co-creation.

Understanding co-creation

Often, the more people use an expression, the less certain we are what they really mean by it. It's as if usage guarantees understanding, and more frequent usage guarantees deeper understanding. But that's not true. Take expressions like Web 2.0, the new normal, or sustainability. People don't often explain or use these terms the same way.

In the interview, I explained co-creation not by defining it, but by decomposing it, to better explain its features and characteristics.

Co-creation, as currently used in the business and marketing world, has a very specific meaning. Rather than present a definition, my preference would be to explain co-creation by decomposing it, so we can better understand its characteristics. First, co-creation, represents interaction, and takes place between one or more firms, and one or more actual or potential customers. Second, this interaction is willing, purposive, and intentional. Third, this interaction is managed, either by the firm, or jointly by the firm and its customers. Fourth, the output of this interaction results in value for both the firm and for its customers. Lastly, the value created for customers may or may not be unique, and is derived through a variety of experiences, such as suggesting ideas, refining current value, designing new products, improving current designs, fixing defects, and consuming new products and services.

Customization and Co-Creation

I've blogged on this topic before when I interviewed Page Moreau. But its worth revisiting, since the two words are often used interchangeably, giving the impression that the two concepts are the same.

There is no doubt that in specific cases there is a blurring of boundaries, but customization and co-creation are not the same.

Let me answer the last part of the question first - do boundaries between customization and co-creation get blurred? Yes, they do. Part of the reason is that researchers and authors who introduce these terms are not always diligent in defining them, and differentiating them from other similar terms. Let me illustrate this for you with an example. Take a men's clothing company like Paul Fredrick, that sells its offerings through a catalog. If you want to order dress shirts, you have two options. You can either buy the color and pattern you prefer, in your size, based on all the shirts displayed in the catalog, or you can order a custom shirt. Customization allows you to mix and match the fabric, collar and cuff styles, fit, pleat style, pocket, among other things! But wait, there's more. You can also have the shirt personalized, by having your initials monogrammed in several different styles, in different colors, on either the cuff, or the pocket. Customization, personalization, or both! But is it co-creation?

What is important to realize is that customization and personalization are possible only within the boundaries of choices offered by the company. To go back to the shirt example, the only way I can order a shirt with kurta sleeves (an Indian style shirt with tubular sleeves) is if the company offers that option. If the company does not offer that option, then all that I can do is pick from the sleeve styles offered. This is in sharp contrast to co-creation. If the shirt were being co-created, then all options would be on the table, including kurta sleeves, because the starting point would be a blank canvas, not a menu of predetermined options and styles.

I am sure I'll blog again on the similarities and differences between customization and co-creation. We owe it to ourselves to keep our thinking fresh and focused.

Peter Drucker's Ideas and Legacy: A Centennial Celebration!

Cogito ergo sum - one of Descartes's most famous legacies - loosely translated as, I think, therefore I am.

Peter Drucker had a similar way of introducing himself - I write - is how he used to introduce himself. What Peter should have really said was - I think and I write, and I don't know which one comes first. An interesting chicken and egg problem, but not one you lose sleep over, especially if your writing borders on the prolific, and your thinking can stand the test of time!

November 2009 marked the 100th anniversary of Peter Drucker's birth and we should celebrate it. Universally acclaimed as a great management thinker and business guru, for over 50 years, from the early 1950's to the early 2000's his provocative and often controversial ideas dominated the business world.

The management kingdom is rediscovering him and finding him to be just as relevant as he was all those years ago.

HBR ran a special issue on Drucker in Nov. 2009 - asking What Would Peter Drucker Do?

Books like Inside Drucker's Brain are attempting to make him and his cutting edge thinking more accessible.

Paradoxically, in the West, where he made his greatest contributions, he is all but forgotten, pushed aside by gurus du jour. On the other side of the Atlantic, Drucker societies are still alive and flourishing. They assemble routinely to discuss his work and learn from his teachings.

It is impossible to compress a sixty-year career comprising over thirty books that have sold over 5 million copies and scores of articles, including some HBR classics, in a page or two. So, how about we take inspiration from Hollywood and present instead a 90 second trailer on the World according to Peter Drucker.

His signature idea - Management by Objectives; still relevant, especially as companies flounder with direction and purpose.

His committed and unwavering focus - the long term health and well being of companies, not short-term hits. He rarely blamed individuals, maintaining that it was always the underlying systems that were the root causes of failure. He believed organizations should constantly challenge their design and operations; he saw this as the key to long-term well being.

His favorite questions - What is your company's ultimate purpose? Who is the customer? What is your mission? What is it you should continue to do? What is it you should stop doing? Where has the obsession with the short-term undermined long-term effectiveness? Why aren't some younger people in the company earning more than the Directors?

His passions - writing, context-bound thinking, integrating ideas, processes not outcomes, urging companies to innovate and create the future, long-term corporate well being, nurturing future stars, and of course - the CUSTOMER!

What did A.G. Lafley, ex CEO of P&G, learn from Drucker?

In A.G.'s own words:

Over the years, I learned many things from Peter, but far and away the most important were the simplest:

The purpose of company is to create a customer.
A business is defined by the needs, wants, desires a customer satisfies when buying the company's product or service.
To satisfy the customer is the most important mission and purpose of every business.

No presentation of Peter Drucker's work is complete without sharing some of his memorable quotes and brilliant observations. A very brief, you might even say self-serving, sampling related to marketing, the customer, and innovation follow.

Because the purpose of business is to create a customer, the business enterprise has two--and only two--basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs.
The customer rather than the manufacturer defines a market
Of course innovation is risky. But so is stepping into the car to drive to the supermarket for a loaf of bread. All economic activity is by definition 'high risk.' And defending yesterday - that is, not innovating - is far more risky than making tomorrow.

Paraphrasing Drucker and taking a few artistic liberties: since customers define markets, and market creation should be the fundamental focus of a company, and innovation is the primary fuel that drives this market creation - then what better world to be thinking, writing, and consulting in, than customer-driven innovation!

Happy 100th Peter! You are not forgotten.

Rethinking Marketing: From Marketing Products to Cultivating Customers

We are being constantly reminded, by scholars, practitioners, and journalists, that today's individuals and business organizations live in a highly networked, interactive, and collaborative world.

This new reality has given rise to new customer behaviors, and to entirely new vocabularies. The consumer is dead, long live Prosumers, Trysumers, and several other forms of - - - sumers yet to be born.

Prosumers - today's customers are both producers and consumers; i.e., they are not just consumption machines, but also contributors and co-creators of unique value
Trysumers - consumers immune to most advertising, who enjoy full access to information, reviews, and navigation, who love to try out new products and services - appliances, artists, outfits, food, holiday destinations - new "anything", with post mass-market gusto

Despite this daily dose of revivalist thinking, several companies approach their customers and markets as if they were still stuck in the 1960s; an era of impersonal transactions with the customer, relying on everything "mass" - mass markets, mass media, and mass undifferentiated value. For these companies, Marketing is still a one-way street, where companies do the talking and influencing through their advertising, and customers do the listening and consuming; passively at the end of a long invisible value chain.

There is something wrong with this picture and it needs fixing. What is wrong is that most companies are still set up to market products. That needs fixing. Companies must transition from marketing products to cultivating customers!

In the January-February Harvard Business Review article - Rethinking Marketing (download here) - my co-authors (Roland Rust, Christine Moorman) and I discuss how companies must shift their focus from driving product-centered transactions, to building long-term relationships with customers by offering whichever of the company's products the customer values most at any given time.

This can only be done if companies make products and brands subservient to long-term customer relationships. And that means - reinventing the marketing department altogether.

The essence of reconfiguring marketing as a customer department is captured in this diagram:

The traditional marketing department must be reconfigured as a customer department that puts building customer relationships ahead of pushing specific products. To this end, product managers and customer-focused departments report to a Chief Customer Officer instead of a CMO, and support the strategies of customer or segment managers.

Two key implications of this reconfiguration need additional emphasis:

First, reconfiguration is not merely drawing a different looking organizational chart, with different sounding titles. It is a fundamental shift in allocating, sharing, and managing resources - people, budgets, and information. This has implications not only for which tasks get priority and how they are executed, but also for who is the best person to execute them. For instance, since the role of the customer manager is the ultimate expression of what marketing should be - cocreating unique value with and for specific customers - we expect them to approach their task more like consumer anthropologists and behavioral scientists (see my post on A.G. Lafley), as opposed to advertising or promotion specialists.
Second, in this reconfigured world, being able to offer relevant consumer value at all times becomes a key driver of business success and profitable growth. For ongoing customer value innovation to become a part of the DNA of the organization, it is important that the company move from an internally focused concept of customer value creation, to a more open, collaborative model of co-creating value with customers and other key stakeholders. Integrating R&D into the customer department will go a long way to ensuring that the customer remains at the center of all value creation activities.

A migration from marketing products to cultivating customers will also require a shift in metrics to gauge the effectiveness of a company's customer-focused strategy. We discuss four new ways of thinking about business success in this customer-led world of marketing:

Focus more on customer profitability, less on product profitability
Customer Lifetime Value (CLV) thinking should trump maximizing current sales thinking
Customer equity - the sum of all CLV's of a company's customer base - should replace a brand equity orientation
Companies should pay more attention to customer equity share, and less attention to market share

I hope you find the article relevant, interesting, and useful. If you're having similar discussions in your own organizations, please share them with me. I'd love to start a conversation with you on how we need to rethink and reinvent the fundamental focus of marketing.

DOWNLOAD: Rethinking Marketing, by Roland Rust, Christine Moormon, Gaurav Bhalla, Harvard Business Review, January-February 2010.

AMA's Future of Marketing Report - Light on Customer-Driven Innovation

The American Marketing Association (AMA), Decision Strategies International, a global consultancy specializing in scenario planning, and a group of marketing leaders from industry and academics recently completed a project on the role of marketing in 2015 - Future of Marketing in 2015 - an American Marketing Association Special Report.

After nearly a year of secondary research, a survey of business and consumer marketers, and workshops with marketing leaders, the AMA developed four possible future states in 2015 and their potential impact on marketing in the organization. These scenarios are presented below. For each scenario, the project also created thumbnail sketches of key goals and objectives of professionals operating in each scenario.

The four scenarios and the CMO archetypes for each scenario follow:

CMO Archetypes:

While the effort of the AMA to peer into the future is laudable, I am personally very troubled by the output, and the lack of emphasis on some fundamental game-changing trends like customer collaboration, value co-creation, customization, and open systems thinking.

A useful tactic in evaluating the output of a future oriented undertaking is to study the inputs used. The report states that the scenario building process began with an identification of forces that might shape the role of marketing between now and 2015. The key issues and trends identified were:

Shrinking world, expanding relationships - increase in globalization and technology integration
Rise of new class, BRIC by BRIC - creation of new consumer markets
Innovation or Invasion - push back due to micro-profiling and and behavioral targeting
Command and Control becomes Cultivate and Create - two way conversations providing valuable information for new products/services offerings
Channel Convergence and Consequence - traditional media continues to be challenged
Talent Turmoil - increasing competition for valued skills and competencies
Pressure to Prove - Marketing is persistently challenged to prove strategic value and bottom line contribution.

Only one of the above inputs - "command and control becoming cultivate and create" - comes close to addressing how the concept and dynamics of value creation are changing. What could be more fundamental than the identification, creation, delivery, and nurturing of customer value? Yet not one of the archetypes presented above is obsessed with it.

The Future of Marketing should be a paradigm shift, not a straight line extension of Marketing's current focus with selling, promoting, and packaging. Even more disappointing is that the above scenarios and archetypes do little to move Marketing from its current inward product focus to a more outward customer orientation.

Marketing needs a bolder different future, one that is obsessed with customer value creation. This bolder future can't be achieved by a functional focus alone, no matter how cleverly worded - network integrator, sales facilitator, etc. Because Marketing is not a function, it is a business orientation that shapes how a company creates long term, sustainable value for customers, for society, and for itself.

The Future of Marketing can't lie in peddling influence and shouting brand superiority. It must lie in making investments in consumption ecosystems, of which the company is only one small part. For the future of marketing to be viable, it must part ways with its incarnation of today. The scenario that is personally most exciting to me is one where an obsession with customer value makes marketing as we know it today obsolete and unnecessary!

That indeed would be a bright new future.

Collaboration and Co-Creation of Social Value: Government, Citizens, and Sustainable Cities

The next few years are likely to witness numerous environmental initiatives around the globe. For starters, the 2009 UN Climate Change Conference is expected to update the Kyoto Protocol. Additionally, several countries are looking to green policy stimulus packages to pull them out of the current recession.

At recent G20 conferences, Japan and South Korea trumpeted their stimulus plans as Green New Deals, while China has earmarked $30 billion of its package for environmental programs. In the United States, the Obama administration continues to emphasize its commitment to the environment, dedicating $80 billion of its $800 billion package to support green projects.

To maximize the benefits from these investments, local governments must successfully engage their citizens to influence their thinking and behaviors. Indeed, it is no coincidence that the most significant innovations occur within distinct cities or communities, as local governments can more easily interact with citizens, soliciting their feedback on key initiatives and working with them to execute policy.

The greenest communities share some common characteristics - energy-efficient buildings, renewable energy sources, widespread recycling, efficient and comprehensive mass transit, and substantive nature trails/green space. But that's just the cost of being green!

At the end of the day what they excel at is actively involving their residents in implementing green initiatives--the same way as corporations like Whole Foods do (discussed in the previous post). Two shining examples of innovative community initiatives are Curitiba and Malmö.

Curitiba, in Brazil, developed a holistic urban plan in the 1970s and 80s to preserve green space, establish a recycling program, and reinvent its public transportation system. However, given Curitiba's limited resources, it relies heavily on its residents to execute its initiatives.

Watch Brazilian urban planning guru, Jaime Lerner explain his philosophy of how to make life better for people by making cities more livable.

Curitiba's Cambio Verde program enables low-income citizens to exchange their metal and glass waste for fresh produce and bus tickets. Due to this program and widespread recycling of all residents, the city has emerged as Brazil's number one recycler, reusing 70% of its waste.
Curitiba used existing roadways to develop a rapid transit bus system that links all areas of the city. Investments in a high-speed, high-capacity bus network increased ridership by 400% in over 20 years; now 60% of urban travel occurs by bus. While citizens are more likely to own cars than other Brazilians, they use 25% less fuel per capita. Furthermore, 41 cities, ranging from Los Angeles to Bogotá to Seoul, are in the process of replicating Curitiba's transit system.
The city's Technology Street showcases 24 different homes, each built to spotlight sustainable construction materials, such as bamboo, or homes operating with renewable energy. The city encourages prospective homeowners to meet with the architects of these residents prior to starting any new construction.
Mandates for dedicated green space have encouraged residents to independently plant more than 1.5 million trees on city streets. A city-appointed shepherd and his flock of 30 sheep trim the grass in many of the nation's parks!

Malmö, Sweden, an industrial city in which the economy crashed and burned in the 1990s, has reinvented itself as a pioneer in sustainable development as an Ekostaden, or eco-city. Currently, Scandinavia receives more recognition than any other region for its sustainable living practices, with Sweden alone supporting more than 60 "eco-cities." How have they done it? A combination of bold politics, experimentation, and community empowerment.

Several key initiatives have enabled the city to achieve the following:

Widespread solicitation and implementation of citizens' unique ideas. One resident developed a plan for a new storm water system that captures 70% of rain water in one area of the city.
A community (Western Harbour) in which the government encouraged innovation from architects and planners to enable 100% renewable energy from the sun, wind, hydropower, and biofuels generated from organic waste
A mandate for increased green space, resulting in one of the largest developments of botanical roof gardens in the world with which citizens can insulate their homes, plant their own herbs and vegetables, and reduce the city's carbon dioxide emissions
A transportation system dominated by cyclers and mass transit. The city worked to make the cycling paths and bus network aesthetically pleasing to encourage shifts in citizen behavior.

Collaboration and Engagement are potent platforms for the co-creation of value, whether commercial or social. In both the commercial and social arenas, companies and institutions are only just beginning to truly understand the power of WE. Appropriately harnessing it and leveraging its power is still a few horizons away.

The old way of doing business is dead for business and marketing executives. It is dying fast for those who run countries and communities as well.

Continue reading Collaboration and Co-Creation of Social Value: Government, Citizens, and Sustainable Cities.

GM Reinvention: Symbolism or Substance?

In December, I blogged about why GM needs to reinvent itself and why a bailout will not be enough. So, when I heard that GM was planning to reinvent itself, naturally I was both excited and curious. But before we go any further, just in case any of you gung-ho readers get any wrong ideas - no, I am not taking any credit, just asking questions.

Is GM truly reinventing itself or is it merely trying to dress up its image for life after bankruptcy? Let's not be self-serving and evaluate GM's actions against the criteria for reinvention laid out in my December blog, let's just listen to GM's own words on how it intends to lead its new reinvented life and then pause to ask ourselves - symbolism or substance?

Based on reviewing a number of GM's press and video releases, GM's new identity revolves around the following features:

New GM to be built from GM's best and strongest parts
Best brands, best products (fuel efficient, world class quality, green, outstanding design)
Best in class cars and trucks
Product focussed and dedicated to customers (quality and service)
Leaner, meaner, greener, faster

While we don't need to add to the growing numbers who want to kick GM in the teeth, we don't need to be naive bystanders either. Does the agenda above suggest reinvention or does it suggest semantic symbolism aimed at placating its new stakeholders and gaining unexamined sympathy of the general public? Seems like the latter - as far as my vote goes.

Reinvention is not stitching together the best remnants of an eroding asset base that is incapable of producing relevant value for future markets. Its about transformation, about creating a new asset base capable of producing relevant value for future markets.

GM has failed on both counts. Its reinvention manifesto is totally silent on its vision of future value and future customers.

Cars and Trucks are not the only platforms for future value - or is GM declaring that it has no intention of participating in creating mass transit systems for green cities of the future?

Individual customers and families are not the only future customers - or is GM declaring that it has no intention of partnering with municipalities and local governments to help them search for longer term and sustainable transportation solutions?

Alfred D. Chandler, the noted business historian declared that essentially businesses are people. Another Alfred, Alfred Adler, no business historian, but a psychologist par excellence, advised us that in order to understand people watch their feet. The Washington Post informs us that at the Detroit Metropolitan Airport, before you reach baggage claim, a new GM auto sits on display in the airport's gift shop. Its not the much touted 2011 Volt, not one of the new GM hybrids, not even the Chevy Malibu which has got some impressive positive press. But a car that flies in the face of all claims of reinvention - the Chevy Camaro SS with a V8 engine!

A throwback to the muscle car days, an era that still maintains an eerie grip on GM's self image and its business mission. Sexy with charisma, is how Bob Lutz one of the executives most identified with GM's reinvention, recently described the Camaro. He himself drives a gas guzzling Corvette 2009, the ultimate aspiration of muscle car lovers. If businesses are people, and the people most responsible for GM's reinvention walk as described above, then all the din about GM's reinvention is exactly what it is - all hype, no hope!

Wake up, GM! For true reinvention to materialize, the caterpillar needs to become a butterfly! Time for merely being a faster, leaner, meaner, car company are over - that's just the cost of doing business, not the platform of a rejuvenated glorious existence.

When is an Innovation Not an Innovation?

"One word is too often profaned..."

The poet Shelley was of course talking about love!

The word innovation, while undoubtedly more prosaic, could soon be wearing that tag, if we are not careful. The current practice of labeling anything new as an innovation, maybe acceptable literally, but leaves a lot to be desired if we are to capture both the body and soul of the word - not merely something new, but also creating incremental value and welfare for some segment of society.

I have been thinking about this issue for some time now. The trigger was Akerlof and Shiller's excellent book Animal Spirits and Gillian Tett's FT article Lost through destructive creation. Both are truly impressive pieces, but I was uncomfortable with the usage of the word innovation to discuss financial products and practices that had heaped unprecedented ruin on millions of people around the globe. It led me to start a dialogue with some of my academic and corporate collaborators on when is an innovation not an innovation?

Federal Reserve Chairman Ben Bernanke's address in Washington on April 17 on Innovative Financial Services for the Underserved was the nudge we needed to stop discussing and start writing. In his speech, Bernanke admitted that financial innovations can misfire, but appealed for regulation not to prevent innovation. Rather, he recommended, that regulation should ensure that innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes.

Not everything new creates incremental value! So, back to the key question - what characteristics of innovation best capture its literal meaning and its economic soul?

In a single sentence: an innovation is not an innovation, when it produces snake oil! More formally, for an innovation to capture and reflect both its body (literal meaning - new) and soul (economic meaning - incremental value) it needs to pass the following litmus tests.

Is the innovation creating a valued asset?

Fundamentally, innovations are about asset creation. These assets can be tangible or intangible. Consider any of the past or current innovations - ATM's, MRI, iPhone -all of them created assets. The financial innovations that created products, better known by their acronyms, like CDO (collaterilsed debt obligations of asset-backed securities), fail this test.

Credit risk, by definition, is a liability. No amount of packaging and reselling it can convert it into an asset. Furthermore, moving credit risk around in an economic system by selling it and reselling it to a variety of interlinked organizations does not create value; it erodes it.

Is there mutuality of benefits?

Gillette promotes its Fusion Power shaving system as better than a Mach 3 - a result of 8 years of shaving innovation and 20 patents. Since Gillette would like to benefit from this innovation, wet shaving enthusiasts have to shell out more money for the Fusion Power razor and shaving cartridges than they did for Mach 3. But is it only Gillette that benefits? Not really, so does the shaver, in a mix of real and perceived ways.

But who benefited from the host of credit derivative innovations that are at the center of the current global financial crisis. Not the consumers borrowing, not even the shareholders of the banks doing the lending, only those banks and brokerage institutions that garnered fees at each stage of the slicing, dicing, and lending chain!

Is the process of value creation transparent?

Both Apple and Pandora have introduced innovations in the personal music listening space. The process through which they create value for music lovers is very different - iTunes vs. the music genome project - but very transparent.

But that was not the case with Enron or the dot-com companies. The innovations in natural gas trading and gas-fired electrical generation systems that allowed Enron to miraculously book ever growing profits were hardly transparent. Valuation systems followed by analysts to forecast and monetize eyeballs in the case of dot-com companies were not transparent either. Nor are innovations, like securitized debt products, that transform mortgages to bonds and allow banks to lend significantly more per unit of capital.

Is the innovation simple to understand?

Two blades are better than one, three better than two, and five better than three. Gillette's positive that an average wet shaving enthusiast can handle this level of complexity. Innovation or overkill is the subject for another blog, but for the time being Gillette and the wet shaving army get it - more is better.

Simplicity is not part of the vocabulary of financial innovations that have landed us in this mess. These innovations were the result of complex computer-based systems that were imported from elsewhere - usually hard sciences - and designed and operated by statistical decathletes with next to no domain knowledge. Very much like 17-year olds designing CRM systems in their dorm rooms in the valley at the height of the dot-com boom.

Tett is spot on in his assessment when he states that these innovations became so intense that they outran the comprehension of ordinary bankers and regulators. Bernanke too echoes this sentiment when he alluded to complexity and opacity of financial innovations being at the heart of the current financial crisis.

Do claims and puffery totally overshadow substance?

Quackery and fraudulent patent medicines were well and alive in 19^th century USA. Theatrical performances and fire and brimstone selling pitches, more befitting religious sermons, usually accompanied the selling of these products. Not difficult to understand why? The extra sizzle had to compensate for the lack of steak!

The original developers of credit derivatives wanted us to believe that their creations would promote market completion, or more perfect free markets. Perhaps, but not when they are not traded on the free market! In the case of both Enron and the financial innovations in question, the claims far exceeded the benefits. Far from creating freer markets, they created opaque trading worlds for concentrating risk that few on the outside truly understood.

The word innovation is more than just a label. Greater understanding is required of its essence as a key driver of economic prosperity. Hopefully, this will lead to more discipline in its usage. The word innovation is a merit badge and not every new product or service is worthy of it.

Experimentation: Critical to Customer-Driven Innovation Success

In the Feb. 2009 issue of HBR, Tom Davenport offers advice on how to design smart business experiments. His main assertion is that in too many companies business innovations are launched on a wing and a prayer.

Tom's focus is on rigor, and knowledge, and valid conclusions. No arguments there; but there is even a more fundamental issue - a company's willingness to embrace experimentation.

Several thinkers, like Eric von Hippel, Stefan Thomke, and Michael Schrage have discussed the benefits of experimentation. Going beyond the obvious links with innovation, they discuss how experimentation can help companies create new value for customers faster and more effectively.

Experimentation is an essential ingredient for customer driven innovation. Getting companies to embrace it enthusiastically is key, if the true potential of co-creating value with customers is to be realized. So, the critical question then becomes: How do we get companies excited about experimentation in the context of value co-creation?

Here are a few prescriptions with extremely positive side-effects:

Recommendation 1: Get over the Steve Jobs syndrome

Too many companies suffer from the White Knight and the one omniscient, omnipotent decision maker syndrome. As brilliant as Steve Jobs is even he could not have predicted that the backbone of iPhone's mass appeal would be their multitude of diverse open-source apps. Even their latest ad speaks to this phenomenon.

In an environment where it is difficult to predict where users will take an innovation, involving a larger group of interested users through experimentation is even more critical. And before you dismiss this as being applicable only to technology products - think Arm & Hammer! It did not start off in our refrigerators and toothpastes, but it sure did show up there.

Recommendation 2: Lose addiction to control

All addictions thrive on the addict's perceived sense of loss, if the addiction were to be given up. Behavioral economists will have a field day with the psychological addiction companies have to control. Their gain-loss equation is totally focused on what they will lose; not what they stand to gain. Those that have - Mozilla Firefox, Dell, P&G, Hallmark, Under Armour - can testify that less company control often translates into more value for the customer, because you can engage in more "what-if" thinking. In short, you can experiment more, something that Mitchell Baker points to in explaining the success of Firefox in her interview with The Mckinsey Quarterly.

Recommendation 3: Redefine success

For most companies failure is the deviation from what was expected or planned for. Not so in the world of experimentation, where failures are often the proverbial stepping stones to success. In the world of innovation, experiments that fail can actually have a large number of positive side effects, such as speedy elimination of unproductive alternatives, rapid learning, and building on that learning through more rapid testing. According to Stefan Thomke, early failures can lead to more powerful successes faster; a sentiment that IDEO echoes when they talk of failing often to succeed sooner!

Recommendation 4: Get serious about play

Most companies have tired ideas about work and play. The unrelenting focus on tasks, processes, and narrowly defined outcomes are a major stumbling block to turning people loose. And you can't experiment if you don't invite your people to play.

Inviting people to play lures them to play innovative "what-if" games and turns passive stakeholders into active collaborators - as Dell did with its customers, Boeing with its engineers and designers on the 737 assembly project, and Toyota with its suppliers.

Experimentation is essential to customer-driven innovation not only because it enables faster development of products and services better suited to customers' needs, but also because it enables innovations that companies alone can't imagine!

Companies that don't enthusiastically embrace experimentation forego this opportunity to start new conversations on innovation and value creation. All that remains - to paraphrase George Orwell - is a huge dump of worn-out metaphors, recycled as new and improved thinking.

Barriers to Customer-Centricity

Have you heard Branford Marsalis' rendition of I heard you twice the first time?

That's what you feel like telling most companies when you hear their claims to be customer-centric. It is difficult to pick up an annual report without hearing loud assertions of customer-centricity and customer value focus.

But few companies have started the journey in earnest, and fewer still can claim proficiency.

A Gartner Group report informs us that by 2007 fewer than 20% of marketing organizations among the Global 1000 enterprises had evolved enough to successfully leverage customer centric processes and capabilities.

The same Gartner report offers companies a performance tip. It advises that marketers that devote at least 50% of their time to advanced customer marketing processes and capabilities will achieve marketing ROI at least 30% greater than their peers who lack such an emphasis.

But this kind of thinking and exhortation is not new. In the 1950's and 1960's thinkers like Peter Drucker and Ted Levitt were urging companies to focus on the customer and customer needs - customers don't buy ¼" drills, they buy ¼" holes.

For several years now marketing scholars have been advocating firms to shift their thinking away from a brand-centered way of thinking - managing product portfolios, to a customer-centered way of thinking - managing customer portfolios. Recent research has demonstrated quite conclusively that customer value is an excellent proxy for firm value and that companies investing in customer-centric initiatives enjoy higher financial returns.

The question that naturally arises is: "Why haven't more companies become addicted to a customer-centric way of life?"

After all, customer-centricity sounds right, it feels right, it even does right (higher financial returns). Why then the lag in evolution?

If we want to go beyond the usual suspects of culture and leadership, we will need to check our assumptions. Quite a few of them are not true, the most notable being that strategy failures are due mainly due to failures of conceptualization and implementation. But as I like to explain in my strategy courses, organizations are people, and most strategy failures are human failures.

Three human failures:

1) insufficient appreciation of a significant other,
2) the inability to visualize an alternate reality, and
3) the lack of will,

provide a non-traditional explanation why the signal to noise ratio for customer-centricity is so low.

Do companies really value their customers?

As ridiculous as the question sounds, it must be asked, given all the evidence we are surrounded with. Simply put, if they did, companies would behave differently, in a more customer-centric way. If the customer was a significant other of a company in a social sense, the two would have got divorced and stayed permanently divorced.

How do we explain this? Prayer offers an interesting analogy. For the majority of human beings, prayer is still an exercise of the lip affair, not the heart. Similarly, for most companies, customers are a lip affair, not a heart affair.

For companies to become customer centric, customers must become a heart affair. As long as companies value their personal odyssey for the next round of higher profits and higher sales more than they value customers, this will never happen.

Type in the words "customer centric" in Google, and the first thing you find is customer-centric selling. Not customer-centric innovation, not customer-centric product development, not customer-centric strategy. Just selling.

The bare truth is that for most companies, the customer is a mere invisible means to an ever-increasing end; sales, market share, and profits. And the end is invariably more valuable than the means.

Can companies visualize the separate reality that customer-centricity represents?

Jack Nicklaus reportedly never played a golf shot without first visualizing it in his mind's eye. Research conducted by brain scientists and cognitive psychologists affirms that the ability to visualize positive outcomes increases the probability of those needs becoming reality

But what if the company can't visualize what it really means to be customer-centric? After all they can see tangibles like products, sales, and revenue charts on a daily basis. And while it may not be ideal or optimum, it is real!

What if this alternate reality is really more hype than substance, what then? And since most companies can never quite answer this question satisfactorily, the alternate reality stays locked and companies stay home, foregoing the customer-centric journey, despite its promise of greater prosperity and riches.

Do companies have the will to put in the hard yards that living a customer-centric life demands?

By all accounts customer-centricity is hard to build and sustain in large organizations. It requires a significant investment in people, training, resources, realignment of structure and processes, and breaking down information and power silos, to name just a few. This is hard work and could test the will of even the most determined CEO.

A few years ago I was in Athens, attending a global managers meeting for a large agency. On the last day a great ritual was staged. In the old Greek tradition we threw plates in the air (they were paper plates, throwing real china plates is banned), to symbolize a break from the past. We committed ourselves to our customers, to innovation, and went home. On returning home nothing changed, everything stayed exactly the way it was.

Most companies want to win at customer-centricity. They want the customer to love them more than their competitors. But rarely do they have the will to do whatever it takes to earn the customer's love. Up to a point, and no more.

We don't need more analysis to understand why there is such a huge chasm between what companies claim by way of customer-centricity and how they actually conduct their businesses.

All that we need is to acknowledge a cold and brutal fact:

customers are not # 1!

And as the good bard said - "...ay, there's the rub"

Starbucks Via: A Portfolio Extension for Recessionary Times

When was the last time you heard John Lennon's Instant Karma?

Well we all shine on,
Like the moon and the stars and the sun,
Well we all shine on,
Ev'ryone come on.

Instant Karma's gonna get you!

I'm not sure if Howard Shultz is a Lennon fan, but he sure hopes that the recently announced entry of his Starbucks Via brand of instant, or should it be soluble, coffee, is gonna get you anywhere, anytime. Or, as he says in his Huffpost blog - imagine a cup of Starbucks Via ready brew on a mountain top.

Via will initially be available in 3 single serve packs ($2.95) or 12 ($9.95). Two flavors - Columbian or Italian Roast, at Starbucks stores, Target, and Costco.
Chicago and Seattle will be the initial test markets. For the impatient, there is always on-line ordering from starbucks.com. But wait, it will not ship till March 3.

Will Instant Via get you?

I have a vested interest in whether it will or not. Being an ex-Nestle brand manager, us Nestle folk, both current and alums, are very touchy about wannabes encroaching our turf. We think we own instant coffee. We do! Remember Nescafé? The world's first real instant coffee brand launched in 1938.

Shultz is positive that Via will woo, wow, and win customers. At a Feb. 17 promotional event in NY, he brushed aside the skeptics, saying that this is not the instant coffee our mothers and grandmothers drank. He promised that Via would surprise and delight its customers.

Now whenever an iconic brand strays from the script written for it by sound- byte hungry business gods and gurus you know the fallout is going to be vicious. Remember how the marketing police absolutely ripped Mercedes-Benz when it introduced the A-class and M-class SUV models. The doom merchants predicted a serious dilution of brand equity and a quick demise of these models. May their souls R.I.P. because none of this ever happened. For the record, Mercedes-Benz recently unveiled redesigned 2009 models for both the A-class and M-class.

So, what are the prognostications for Via? Personally, I think its a smart business move, for the following reasons:

It's a customer-driven innovation consistent with our troubled times. Out of economic necessity and on account of life-style choices consumers are redefining value in favor of smaller quantities and lower prices - Via fits right in.
It's a portfolio extension in the right direction - more of the same would not have created incremental value for current or potential customers.
It adds new usage dimensions to the brand experience, by appealing to market segments that would like to experience Starbucks in non-store, non-office environments; in-home, on the go, on a mountain top.
It simplifies the brand-assortment choice. Feature bloat, that makes brand or brand variety choices excessively complex, actually turns away customers. A large number of people who shun Starbucks because of the perceived complexity of ordering a simple cup of coffee, may be willing to give the brand a try. Roland Rust at UMD had an interesting article on this in the HBR a few years ago.

There is cause for concern as well:

The key being price-value perception; its packaging may not ooze value for money, especially for the higher pack size

Instant coffee drinkers are used to opening jars and seeing their coffee as powder. I do believe that creates a more positive price-value perception than Via, where the product lies hidden in single serve packs.

Single serve packs have done well for Tea, they have not served the coffee category well.

Target and Costco is good, but why no grocery stores? Perhaps it will be distributed there and we just haven't been told.

So, will Via win? That's the Venti dollar question. That all depends on what's in the cup. If informal research amongst a group of associates is to be trusted, then Dan Macsai's informal taste test gets the Oscar. In a small experiment conducted amongst 10 of the biggest java junkies at Fast Company he squared off - Medaglia D'Oro instant (why?), Starbucks original blend (fresh brewed, store bought), Via - Columbian, and Via - Italian Roast.

Envelope please: the winner, Via Italian Roast. Second, third, and fourth - Via Columbian Roast, Starbucks freshly brewed, and Medaglia D'Oro, respectively. As an ex-Nestle Brand Manager, I have to protest Dan. No Taster's Choice!?

Now you can add one more thing to your list of things not to leave home without. First Karl Malden and American Express taught us not to leave home without the Amex card and TC's. Now Howard Shultz would like you to add Via to your pockets. As it says on the back of its stylish, put-in-your-shirt-pocket packaging: never be without great coffee!

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