Customer Integration: From Mass Customization to Open Innovation



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Customer Integration:

From Mass Customization to Open Innovation






Erik Kruijer

Student Nr. 1198335

Email: kruijer@gmail.com
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 merits1, 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 toolkits2. 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.

Several scholars (e.g. Eric von Hippel) have written about IPR and Open Innovation. User innovators are generally not able to protect their findings with IPR against imitation. Companies can benefit from user innovations, since they own the complementary assets needed for commercialization. Problems can emerge when the company co-creates with a consumer, since the consumer might be able to claim (shared) IPR ownership. Furthermore, consumers can claim without cost copyright protection for their designs. So when a company has invited the consumer to send his contributions, it must be careful to avoid similarities. Companies have probably enough legal knowledge to ensure that their products won’t infringe copyrights, but a consumer who sees some similarities with his designs might think otherwise. The problem for the company is not the outcome of a legal dispute, but the damage to its reputation. This could especially be the case in creative industries like the fashion industry, where brands emphasize how unique their designs are. This discussion gives arguments why companies deter from open innovation at all, or even develop policies to explicitly refuse ideas or designs from others. If a company wants to invite consumers, then it is in a better position when they sign an entry form for a contest and thereby agreeing to the terms and conditions. Furthermore, if the company likes to take a design into production, it has to deal with only one creator. In the case of (collective) design via a toolkit and community, one shoe could be designed and influenced by several participants. It becomes increasingly difficult, when one person has re-designed a part of another’s design. This has lead to the third and last hypothesis, namely that companies deter from offering high-end toolkits, because conflicts about the ownership of IPR might arise.

The case study presents the Open Source Shoe project of John Fluevog. This project was almost stopped because of the discussions about IPR ownership with the contributors. The problem was solved by letting everyone declare that his design is in the public domain. It is questionable whether a major manufacturer would do this, when he – like Fluevog – has the intention to take the best designs into production. The t-shirt website Threadless does actually become the owner of a winning design. In exchange, the winner receives a fixed remuneration that is so high, that is also attractive for undiscovered but professional designers to contribute. The intelligent collective customer commitment business model gives Threadless the security that there is enough demand for the product, so that they don’t run a risk. Basically Threadless is an online continuous design contest, with a peer/market selection system instead of an expert selection system. Both Fluevog and Threadless show they were able to solve the IPR, but none of them operated a high-end toolkit for innovation. To investigate this, a few decision makers of MC websites were interviewed and asked to react on the idea of giving more design freedom in their MC configurator.
These persons brought up the issue of IPR spontaneously, but the issue was not a potential conflict with a consumer. A parallel with YouTube was found: companies are afraid that ‘creative’ consumers submit designs that infringe intellectual property rights of third parties. A user might upload a Mickey Mouse picture to a Nike shoe. To prevent this, t-shirt customizers already scan all designs contributed and delete suspicious content. Furthermore, they ask submitters to state that they are the original creators of their work, but at the same time Cafepress.com (a stock-listed online t-shirt maker) encourages it’s users to search for materials in the public domain. These companies run the risk that they become the target of claims. Mass customizers might obtain (exclusive) licenses with owners of popular IPR (content, trademarks) to solve this problem and to differentiate themselves from other mass customizers. T-shirt customizers Cafepress and Zazzle have licenses with e.g. Disney, and Reebok offers consumers the possibility to place the logo of their favourite team in the NFL or MLB. Shoe manufacturers already cooperate with major brands and stars, but with the MC technologies they could supply the long tail of ‘stars’, e.g. a Nike sneaker for a local popular rapper or band.

The last suggestion to get licenses for unique content is basically an idea how MC could further develop in the future. It does not answer the question whether high-end toolkits for innovation will emerge. The examples of design contests and Threadless show that the IPR discussion can be solved by buying winning designs. This approach is only practical when one winner exists. Toolkits and communities enable collective development: the IPR ownership of one design becomes then vague and more than one creator is involved. This problem is solved in open source communities – for software but also John Fluevog’s Open Source Shoe – by declaring that all contributions are in the public domain. This makes it difficult for the organizing company to protect the final product against imitation, especially when production and distribution aren’t scarce complementary assets as in the shoe and clothing industry. Literature about MC writes often about the benefits of product platforms with regards to the production of varieties. It is proposed here to investigate the possibility to create toolkits for innovation that are based on a propertary product platform. Lead users could then develop new modules that become part of the public domain, but that are useless without the basic product. Successful examples for this approach can be found in the computer games industry. It might also work for tangible products like shoes. If Nike holds the patent on its ‘Nike Air’ technology, then it could allow lead users to design new models or to develop this technology further. Some recent innovations as the Nike that is connected to the iPod and the Adidas sport shoe with a computer chip show that the industry is developing intelligent, unique and hard to copy products. Nevertheless, it is more likely that this approach will be first found in b2c industries where mass customization is already based on modular platform products, such as cars, computers, consumer electronics and LEGO. Finally, it would make sense if companies based their high-end toolkits on the advanced design software programmes like Adobe Illustrator and Photoshop that are already being used by consumers. The companies could save money and effort by providing plugins and 3D templates that fit with this software.



Table of Contents



1. RESEARCH DESCRIPTION


p. 8

LITERATURE REVIEW





2. MASS CUSTOMIZATION


p. 9

3. OPEN INNOVATION


p. 25

4. FROM MASS CUSTOMIZATION TO OPEN INNOVATION


p. 41

5. STRATEGIC MANAGEMENT OF OPEN INNOVATION


p. 45

6. RESEARCH DESIGN


p. 48

CASE STUDY





7. THE MOTIVE(S) FOR MC IN THE SHOE & CLOTHING INDUSTRY


p. 54

8. CURRENT CUSTOMIZATION IN THE INDUSTRY


p. 58

9. USER INNOVATION IN THE NIKETALK COMMUNITY


p. 67

10. DESIGN COMPETITIONS IN THE INDUSTRY


p. 71

11. IPR CONFLICTS


p. 78

CONCLUSION


p. 82

REFERENCES


p. 87

CONCEPTS AND DEFINITIONS


p. 92


1. RESEARCH DESCRIPTION
1.1 Research Formulation

This explorative research aims to provide a better understanding of customer integration. In particular it focuses on the idea of combining an open innovation strategy with an (existing) mass customization strategy.


Research objective / Contribution of this project to theory:

The contribution of this thesis is that it will test hypotheses from the literature about mass customization, open innovation and the strategic management of innovation to see whether a company can improve the effectiveness (and speed) of its innovation process by extending its existing mass customization strategy into an open innovation approach.



Research question:

Why have only a few companies in the shoes and clothing industry, so far, combined a mass customization strategy with an open innovation strategy?”



Research Boundaries

The project focuses primary on:



  • Business to consumers industries;

  • A customer centric perspective of mass customization, not the internal view;

  • Open innovation, only the outside-in archetype (customer integration);

  • Web-based toolkits;

  • Product innovations, although the toolkit approach itself is innovative as well.

  • Note that in this thesis the terms ‘consumer’ and ‘customer’ sometimes could also apply to the user that isn’t a customer. It will deviate from this practice in the case of well known terms like ‘user innovation’ and ‘lead user’.



1.2 Research Method

A literature study is performed in the fields of mass customization, and the configuration process in particular, open innovation and strategic management of innovation theories. A deep understanding about the following particular subjects has been obtained3:



  • Customer integration;

  • Mass customization;

  • Open innovation;

  • Configuration process;

  • Innovation process;

  • Customer interaction, and customer co-design;

  • Economies of customer integration;

  • Toolkits for co-design and innovation;

  • Customer communities;

  • Learning relationships;

  • Sticky knowledge;

  • Lead user theory;

  • Collective commitment method;

  • Creative industries: gatekeepers & superstar system;

  • Intellectual property right protection and licensing;

  • Complementary assets;

  • Core competences;

  • Absorptive capacity.

Please read chapter 6 for the development of the hypothesed and the set up of the case study.

2. MASS CUSTOMIZATION
The most creative thing a person will do 20 years from now is to be a

very creative consumer… Namely, you’ll be sitting there doing things like

designing a suit of clothes for yourself or making modifications to a standard

design, so the computers can cut one for you by laser and sew it together

for you by NC machine…”

Robert H. Anderson, Head Information Systems, RAND Corporation,

quoted in Alvin Toffler “Third Wave” (1970: 274)

2.1 What is Mass Customization?
In the mass customisation concept, goods and services are to meet an individual

customer’s needs whilst being produced with near mass production efficiency” (Tseng and Jiao, 2001).



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