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A Toolkit for Customer Innovation

It seems almost counterintuitive. But this Harvard
Business Review excerpt by Harvard Business School
professor Stefan Thomke and MIT’s Eric von Hippel
suggests that you stop listening closely to your
customers—and instead give them tools for creating
their own products.

by Stefan Thomke and Eric Von Hippel
HBSWK Pub. Date: May 6, 2002

"Listen carefully to what your
customers want and then respond
with new products that meet or
exceed their needs." That mantra
has dominated many a business,
and it has undoubtedly led to great
products and has even shaped
entire industries. But slavishly
obeying that conventional wisdom
can also threaten a company’s ability to compete.

The difficulty is that fully understanding customers’ needs is
often a costly and inexact process. Even when customers
know precisely what they want, they often cannot transfer
that information to manufacturers clearly or completely.
Today, as the pace of change in many markets accelerates
and as some industries move toward serving "markets of
one," the cost of understanding and responding to
customers’ needs can easily spiral out of control.

In the course of studying product innovation across many
industries, we have discovered that a number of companies
have adopted an intriguing approach, which at first seems
counterintuitive. Essentially, these companies have
abandoned their efforts to understand exactly what products
their customers want and have instead equipped them with
tools to design and develop their own products, ranging
from minor modifications to major new innovations. The
user-friendly tools, often integrated into a package we call a
"tool kit for customer innovation," deploy new technologies
like computer simulation and rapid prototyping to make
product development faster and less expensive.

A variety of industries use this approach. Bush Boake Allen
(BBA), a global supplier of specialty flavors to companies
like Nestlé, has built a tool kit that enables its customers to
develop their own flavors, which BBA then manufactures. In
the materials field, GE provides customers with Web-based
tools for designing better plastic products. In software, a
number of companies let people add custom-designed
modules to their standard products and then commercialize
the best of those components. Open-source software allows
users to design, build, distribute, and support their own
programs—no manufacturer required. Indeed, the trend toward customers as innovators has the
power to completely transform industries. In the semiconductor business, it has led to a
custom-chip market that has grown to more than $15 billion.

Tapping into customer innovation can certainly generate
tremendous value, but capturing that value is hardly a
simple or straightforward process. Not only must
companies develop the right tool kit, they must also
revamp their business models as well as their
management mind-sets. When companies relinquish a
fundamental task—such as designing a new
product—to customers, the two parties must redefine their relationship, and this change can be
risky. With custom computer chips, for instance, companies traditionally captured value by both
designing and manufacturing innovative products. Now, with customers taking over more of the
design task, companies must focus more intently on providing the best custom manufacturing. In
other words, the location where value is both created and captured changes, and companies must
reconfigure their business models accordingly. In this article, we offer some basic principles and
lessons for industries undergoing such a transformation.

A costly problem, a radical solution
In a nutshell, product development is often difficult because the "need" information (what the
customer wants) resides with the customer, and the "solution" information (how to satisfy those
needs) lies with the manufacturer. Traditionally, the onus has been on manufacturers to collect the
need information through various means, including market research and information gathered from
the field. The process can be costly and time-consuming because customer needs are often
complex, subtle, and fast changing. Frequently, customers don’t fully understand their needs until
they try out prototypes to explore exactly what does, and doesn’t, work (referred to as "learning
by doing").

Not surprisingly, traditional product development is a drawn-out process of trial and error, often
ping-ponging between manufacturer and customer. First, the manufacturer develops a prototype
based on information from customers that is incomplete and only partially correct. The customer
then tries out the product, finds flaws, and requests corrections. The cycle repeats until a
satisfactory solution is reached, often requiring many costly and time-consuming iterations.

To appreciate the extent of the difficulty, consider product development at BBA (now
International Flavors and Fragrances). In this industry, specialty flavors are created to bolster and
enhance the taste of nearly all processed foods because manufacturing techniques weaken the real
flavors. The development of those added flavors requires a high degree of customization and
expertise, and the practice remains more an art than a science.

A traditional product development project at BBA might progress in the following way: A
customer requests a meaty flavor for a soy product, and the sample must be delivered within a
week. BBA marketing professionals and flavorists jump into action, and the sample is shipped in
six days. A frustrating three weeks ensue until the client responds with, "It’s good, but we need it
less smoky and more gutsy." The client knows precisely what that means, but BBA flavorists find
the request difficult to interpret. The result is more frenzied activity as BBA struggles to adjust the
flavor in a couple days. Depending on the product, BBA and the client could go back and forth
for several more iterations. This represents a huge problem because clients often expect BBA to
get the flavor right the first time, or within two or three iterations.

To make matters worse, BBA bears most of the development risk. The company collects revenue
only after both the client and consumers are fully satisfied. R&D expenses could be just $1,000
for tweaking an existing flavor, but they could go as high as $300,000 for an entirely new family of
flavors that require not only chemists and flavorists but also sales, marketing, regulatory, and
quality control expertise. On average, the client eventually accepts only 15% of all new flavors for
full market evaluation, and only 5% to 10% make their way to the marketplace. Meanwhile,
margins in the flavor industry have been falling because of increased competition and cost
pressures from customers.

In response, BBA’s CEO Julian Boyden and VP of Technology John Wright investigated the
option of shifting more innovation activities to customers. The company developed an
Internet-based tool containing a large database of flavor profiles. A customer can select and
manipulate that information on a computer screen and send his new design directly to an
automated machine (perhaps located at the customer site) that will manufacture a sample within
minutes. After tasting the sample, the customer can make any adjustments that are needed. If the
flavor is too salty, for instance, he can easily tweak that parameter on the profile and have the
machine immediately produce another sample.

It is important to note that outsourcing product development to customers does not eliminate
learning by doing—nor should it. What it does is make traditional product development better and
faster—for two reasons. First, a company can bypass the expensive and error-prone effort to
understand customer needs in detail. Second, the trial-and-error cycles that inevitably occur
during product development can progress much more quickly because the iterations will be
performed solely by the customer.

But developing the right tool kit for customers is hardly a simple matter. Specifically, tool kits must
provide four important capabilities. First and most important, they must enable people to
complete a series of design cycles followed by learning by doing. Computer simulation, for
example, allows customers to quickly try out ideas and design alternatives without having to
manufacture the actual products. When the simulation technology lacks the desired accuracy, it
can be supplemented with rapid prototyping methods. Second, tool kits must be user-friendly.
They should not require customers to learn an entirely new design language. (Flavorists, for
example, think in terms of formulations and chemical compounds, whereas customers think of
tastes such as smoky, sweet, fresh, and so on.) Third, they must contain libraries of useful
components and modules that have been pretested and debugged. These save customers from
having to reinvent the wheel. Instead, people can focus their efforts on the truly novel elements of
their design. Fourth, tool kits must contain information about the capabilities and limitations of the
production process that will be used to manufacture the product. This will ensure that a
customer’s design will in fact be producible.

Excerpted with permission from "Customers as Innovators: A New Way to Create Value," Harvard
Business Review, Vol. 80, No. 4, April 2002.

Stefan Thomke, an authority on the management of technology and product innovation, is an associate
professor of business administration at Harvard Business School.

Eric von Hippel is a professor of technology management and entrepreneurship at MIT’s Sloan School of
Management.

http://hbswk.hbs.edu/pubitem.jhtml?id=2916&t=customer&sid=0&pid=0

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