Customer Integration:
From Mass Customization to Open Innovation
Erik Kruijer
Student Nr. 1198335
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Customer Integration:
From Mass Customization to Open Innovation
Summary
Recently user generated content (UGC) received massive attention. Websites as YouTube make it possible for amateurs to upload their self-created videos and share it with others with the chance of fame. Some of the videos are actually very funny and are watched by hundred thousands of people. Some other videos are only watched by small groups with similar interests, which might be a reason to argue that users can supply for the ‘Long Tail’.
The objective of this work is to make a deep dive into the methods and tools that are available for consumers to make valuable creative contributions to the development of products. It proposes customer integration as a means to involve consumers in the new product development in an innovative way. Customer integration is an essential principle of a mass customization (MC) strategy, although most attention has been given to its internal (production) principles. A website like Nike ID offers consumers toolkits – or configurators – with which they can ‘design’ their own individual products, but the design possibilities are rather superficial. This work argues that MC configurators have many merits[1], but could be leveraged by offering also a high-end toolkit especially for lead users.
In order to ensure commercial success, it is important that a MC process is simple so that consumers finish it and buy the product. A funnel approach could improve the conversion and therefore a MC configuration process is in reality often rather linear. This hinders experimentation and learning-by-doing processes, albeit both are part of an innovation process. It focuses on the shopping experience, since consumers derive much value from that. A MC configurator must also be accessible for a broad public, since the high investments in a mass customization system must be earned back. The problem is that ordinary consumers won’t develop valuable innovations, since they suffer from a functional fixedness. Only lead users – who have extreme needs – can create radical innovations. Research has confirmed that lead users can develop innovations with high commercial value and that cooperation with them will increase the chance of success. Cooperation with lead users sounds easier than it is, since the problem of sticky knowledge makes it practically impossible for a lead user and a company to jointly develop a solution for the needs that the lead user experiences. Therefore it is better to provide the lead user with a toolkit, so that he can develop and try out different solutions by himself. Ultimately, the lead user can simply send his final design to the company, that doesn’t need explanation for understanding how to produce the solution with its existing technologies and capabilities (not per se: existing production system).
Lead users are generally early adopters of MC configurators, but they are also the first to abandon them. After some time they start to demand more advanced design possibilities. Lead users are willing to invest time in mastering a more complex toolkit, if it can help them to create exactly what they need. If the MC company doesn’t offer a high-end toolkit, the lead user starts to search for one that does or even develops his own toolkit. Hereby the MC company risks the possibility that lead users develop a disruptive innovation with a toolkit that is linked to a competitive technology (standard). Furthermore, it gives up the chance to cooperate with lead users for now and in the future. The major problem with lead users is namely that they are hard to identify. However, research has shown that a lifecycle pattern amongst users of toolkits exists. Thus a company could breed its own lead users with a MC configurator instead of hunting for them. So, a company with a mass customization strategy could have a competitive advantage over other companies that adopt (the outside-in archetype of) open innovation, since its base of lead users is scarce and hard to copy.
A literature study of both MC and Open Innovation shows that they are appropriate under the same circumstances and based on similar principles. Companies in many consumer markets are confronted with heterogeneous and rapid-changing needs. They recognize that they can’t respond efficiently on this with existing approaches as segmentation and traditional market research. They adopt an approach wherein the customer is seen as partner for value creation: the customer is integrated in the value-creating processes of the company. At the same time, groups of consumers exist that are highly motivated to cooperate with a company in order to satisfy their individual needs. Interaction is essential for a fruitful cooperation, since the customer-specific information about the individual customer’s needs and preferences needs to be exchanged, as well as information about the company’s capabilities. Internet has enabled cost-effective interaction with individual customers on a mass scale. Web-based toolkits make it possible for a company to outsource part of its value-creating processes to consumers, but at the same to control their activities by means of setting a solution space. A MC configurator does allow consumers only to design custom products that can be produced within the existing, flexible production facility. In that way a MC company can produce individual products against near mass production efficiency. A toolkit for innovation has a larger solution space than a MC configurator, but ‘forces’ the user innovators to make their designs in a language that the company understands. Furthermore, the toolkit allows the user innovator to develop only a solution that is based on technologies and capabilities that the company owns. For instance, a construction should be build with LEGO bricks and new compatible modules and not with Mecano.
The literature review has also identified some differences between MC and Open Innovation, such as the differences between low-end and high-end toolkits[2]. However, a continuum between both toolkits exists and both approaches are complementary instead of conflicting. So does Fiat not alone offer the ‘Fiat Configurator’ for people that want to buy a car, but also the Fiat 500 Concept Lab. The latter website includes an idea contest in order to get the most innovative ideas for future accessories and a configurator of the FIAT 500 prototype. LEGO Company is often referred to as leading in both MC and Open Innovation, since it has embraced the efforts of consumers to hack it’s configurators in order to get more design freedom. LEGO offers nowadays toolkits with more design freedom such as the LEGO Designer and Mindstorms toolkits. Furthermore, it experiments with innovative business models, whereby LEGO sells models on its website and in stores that have been designed by consumers (who also receive royalties). Similar examples of this micro merchandising business model are known in the t-shirts industry. However, it is still surprising that there are so few examples of companies that combine both toolkits. The case study wants to find out why. It investigated an industry where already many (leading) companies have adopted MC: namely the shoe and clothing industry. The research question that will be answered is:
“Why have only a few companies in the shoe and clothing industry, so far, combined a mass customization strategy with an open innovation strategy?”.
Based on the literature study and common sense, two initial hypotheses have been developed. The first hypothesis assumes that lead users are satisfied (for now) with the design freedom that is offered by MC configurators. Examples like LEGO have shown that companies only became aware of a need for more advanced toolkits, once customers started to demand them or came up with usercreated / hacked toolkits. So that would explain why companies don’t offer high-end toolkits (yet). The second hypothesis assumes that companies in the shoe and clothing industry reject the idea of open innovation. Both MC and Open Innovation aim to identify a (individual) need and then develop a solution for that. An often heard critique on open innovation is that successful innovations like the car and walkman would not have been developed, if one would have looked for a need. Clayton M. Christensen has even described in his book ‘The Innovator’s Dilemma’ that companies that focus too much on their customers, run the risk to be surprised by disruptive innovations. So it might be that a company follows a MC strategy in order to ‘fine-tune’ the product variances to the individual and unpredictable preferences of consumers, but doesn’t want to rely on customer integration for the development of innovations. The literature about diffusion of innovations has also described that in the case of the fashion industry, an innovation (e.g. a new fashion style) might create a need for it that didn’t exist before, instead of the other way around. There are strong arguments against this reasoning: the assumption of gradual diffusion of needs means that companies could identify the ‘sudden’ trends in an early stage by focussing on lead users. Especially in the fashion industry do fashion innovators and opinion leaders play a major role in the diffusion process of new fashion trends. Research has found that lead users are often opion leaders as well. So a fashion company that cooperates with lead users, would also increase the chance of success of the co-created innovations, since the lead users form simultaneously the selection system and actively promote it. Fashion companies are well aware of the role of opinion leaders, but might prefer to bet on their famous designers for the actual creation of their products. The cooperation with amateurs might harm their brand image, whereas the cooperation with designers or popular stars creates (secondary) value.
The case study describes developments in the shoe and clothing industry that invalidate both hypotheses. A comparison of more than 30 MC websites shows that their design freedom is limited. Websites for individual sport wear offer expensive upgrades in order to increase the functional performance of the product. However, the basic configurators allow not creating new options, although studies have found a high percentage of user innovators amongst users of sport equipment. Websites for custom formal shoes, shirts and suits don’t show a virtual product. Furthermore, they focus mostly on custom fit and (discrete) style modifications. Small independent manufacturers of fashion jeans ask consumers to send their creative designs, but they don’t support them with a toolkit. It is still necessary to call these (craftsman) companies to find out what can be made and what not. In contrast, casual shoe brands as Nike, Reebok and Puma have state–of–art toolkits, but offer nothing more than choices. These websites keep on developing their configurators, but the focus is on adding more products, colour variants and unique options and experience in order to increase sales and to differentiate themselves from other MC websites. Since (mass)exclusivity and offering experiences are major trends in this industry, they do often also organize workshops for opinion leaders such as VIPs and weblog owners. The goal seems to be to generate free publicity instead of gathering creative ideas for new products. Finally, some websites offering customized t-shirts have adopted a micro-merchandising business model. Threadless has even introduced the innovative collective-commitment method for selecting the designs with most creative and commercial value. However, the designs aren’t created with online toolkits but uploaded.
An observation of the posts in the independent forum for sneaker addicts – Niketalk.com – showed that users ridiculize the `design´ possibilities of MC websites like Nike ID. Instead, the users post pictures of their paintbrushed shoes or design sketches. A large group makes designs in templates that have been made available by experienced forum members. The forum also features a Photoshop competition, wherein users re–design existing shoes. So, it seems that certain consumers could use more design freedom than they get in the current MC configurators. This finding invalidates hypothesis 1.
The case study found that manufacturers organize many shoe design contests. Some contests have the objective to generate publicity. Others have serious intents to integrate the contributions in new products: e.g. some winning shoes were taken into production and winners received royalties. One organizer has kept the results of the competition for months secret with the explicit purpose to prevent competitors from benefiting of it. Other contests aim to identify talent. So, companies in the shoe and clothing industry don’t completely reject the idea of integrating consumers in their innovating activities. Typical is that the contests were not supported with online toolkits and a forum, despite the success of Niketalk community where fans like to discuss and comment each others designs.
It is necessary to find an explanation why companies deter from offering high-end toolkits, although they are interested in customer integration. It could be related to budget and technical constraints: it is easier and cheaper to organize a design contest without a toolkit. The programming language of many MC configurators – Flash – might not allow creating new elements without much effort and knowledge about Flash. It is also costly to develop such a new toolkit. On the other hand, a toolkit has to be developed once and can be re-used numerous times (economies of scale). A web-based toolkit facilitates the design process of the lead user and it is possible to build an online community around it. The latter has the benefit that lead users can comment on each others work, or even work as a collective comparable with open source communities. Furthermore, research has found that diffusion in a (lead user) community is a reliable predictor of success outside the community and so of commercial success. Basically, a traditional design contest with a jury is a form of expert selection, whereas a community of lead users has a peer selection system. Which selection system is better, depends on the industry. The difference in selection systems hints at the possibility to view the situation with theories from the strategic management of innovation. Namely, concepts like diffusion, opinion leaders, radical innovations etc. have also been mentioned. IPR (intellectual property rights) might play an important role.