Entovation International - Delivering Knowledge Innovation Strategies for the Millennium
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Customer Innovation: A Function of Knowledge

by Debra M. Amidon
Founder and Chief Strategist ENTOVATION International, Ltd.


First published in the Journal of Customer Relationships, published by the Technology Solutions Company


Foreword

Customers have always been integral to the innovation process. What else is the purpose of productization and commercialization? However, current global business conditions have shed new light on the value of customer interactions and the scope and structure of the innovation process itself. Moreover, what good are your customers if they are satisfied, but not successful? This renewed orientation toward the nature of the customer interface itself has led to a view of customers as a source of knowledge, not someone to whom goods and services are delivered. This article will define some of the elements of this new economy, provide a rationale for the innovation value-system and illustrate how companies can manage the development of their new products and services to fulfill unarticulated customer needs and unserved markets. This is the only road to sustainable competitive advantage.

Conditions for the Knowledge Economy

Companies are all too familiar with the implications of hyper-competition: the sophistication of consumer demand, commoditization of the business, the acceleration of computer/communications technology, an environment in which products are easy to imitate and strategies are likewise emulated. The speed of innovation (i.e., idea to market) may provide the most viable competitive edge. Consequently, good ideas - from wherever they come - must be nurtured and applied as efficiently and effectively as possible in order to reap economic rewards.

This redefined focus on the innovation process requires a new view of learning (as opposed to training and development), calculated notions of value-creation and an increased emphasis on partnering and networking. Instead of managing differences, executives are seeking a common language, mutual understanding and shared purpose - across functional, business unit and geographical boundaries. In fact, the nature of this interdependence goes beyond the confines of the corporate walls into what is being called - the extended enterprise. Stakeholders - including customers - are seen as integral to a company's success.

Traditionally, customers have been viewed primarily from the financial perspective (i.e., revenue from sales). More advanced views have documented the value of retaining an existing customer in contrast to developing a new one. Recent developments in the knowledge economy have focused increased attention on the invisible assets which may not show up on the balance sheet. More and more business articles are referencing the difference in market value of a Microsoft in contrast with a General Motors because of the perceived intangible value in the marketplace.

Skandia, a Sweden-based international financial services company, has been seen as the leader in developing indicators for intangible revenue-generation. According to Lars Eric Petersson, its President and CEO, Skandia creates long term growth by investing in customer relationships. But by adopting a greater customer focus, we do more than create value. We also contribute to the success and growth in value for our customers.(1) It is the knowledge interface where true value is created for mutual success - the company and its stakeholders. Managing that intellectual capital provides a new framework for customer intimacy and innovating our future...together.

Historic Roots

For years, technology-push had been the secret to entrepreneurial success. In fact, larger firms place considerable emphasis on their ability to access new technology in advance of competitors. The role of R&D was pre-eminent. This remained the prime strategy until the 1980s when global competitors - Japanese firms, in particular. They seemed able to capitalize upon the research results originating in the United States and to realize the economic benefits with their progressive management techniques and understanding of the full spectrum of innovation activities. U.S.-based firms developed specialties while the Japanese promoted an understanding of the entire innovation system.

This increased competition prompted marketing strategies which focused upon the commercialization side of the house. Market-driven and customer-driven strategies were commonplace. Services - as a function - began to reap more profit-margin benefits than the volume of products sold. The pendulum had totally shifted. Quality methodologies refocused attention on the value-chain itself, which - although has come to include suppliers - is still linear in scope. With the exception of Quality Function Deployment (QFD) principles which place the customer at the heart, most processes consider the customer at the end of the chain of events. This is in marked contrast with the Japanese who place the customer at the beginning of the chain.

In 1989, in a Roundtable entitled Managing the Knowledge Assets into the 21st Century, we concluded that only a balanced technology push/market pull management strategy could take advantage of the full innovation system - from idea creation to full commercialization. In fact, we determined that one had not truly innovated until the market demanded more of the product or technology! This provides the foundation for the innovation value-system - a series of interactions which balance the potential of the technology (or product/service in the services sector) with what the market might value and for which it would pay a premium.

Although complex to manage, many progressive firms began to experiment with cross-functional integration, concurrent engineering, and simultaneous development processes as ways of building interdependence - and ultimate efficiencies - into the innovation system. Jay Foresters principles of systems dynamics - together with Peter Senges learning dynamics - began to have increased relevance and applicability in the modern organization. These provide the foundation for the relatively new managerial practice - learning from the customer.

Rationale for the Value-System

If we can agree that innovation is a combination of quality and creativity, short-term operations and long-term strategy formulation, then we can envision a different type of fluid, agile, adaptive system of interactions resulting in progress - however that might be defined. For a new company, it might mean a successful start-up. For a mature company, it might mean learning to create new markets. For a university or government agency, it might mean optimal utilization of resources. For a nation, it may be a more sustained economy. For society, it means an improved standard-of-living for people all over the world.

Regardless of the economic level from which you operate, success - in its simplest form - relies upon the quality of interactions among people and how effectively insights from those interactions are applied to action. The emphasis is on the interaction - either face-to-face or electronic - not the individual person or organization in and of itself.

So, what creates that stream of value - which we now know does not function as a linear process? The answers lie in the quality of ones knowledge and how he/she is able to share those insights with others in order to benefit the whole.

We know that knowledge resides in the minds of all stakeholders in the system. In fact, the ability to create new knowledge and/or receive the knowledge of others also resides throughout all functions in the system - including stakeholders, such as suppliers, alliances, distributors, customers and even competitors. Instead of trying to manage functions - or people within the functions who, heretofore, have been considered liabilities on the balance sheet - the focus should be placed upon the successful creation and application of new knowledge at all interfaces - including with the customer. This may be one of the primary reasons that 40% of Fortune 1000 companies have instituted programs of knowledge management within the last 18 months! (2) The focus on knowledge cuts across all boundaries and - if properly managed, rather than left to serendipity - can create fusion and synergy resulting in more profitable operations.

There has been considerable hype recently about this evolution of customer relationships and subsequent value to the business. Most of what is written continues to focus on customers as the end of a delivery chain - the recipient of the output. It is much more powerful to consider them an integral player in how value gets created and leveraged for them and even you as their supplier! There is even a case for customers playing a role in defining those unarticulated needs and new markets to be served. With the kaleidoscopic dynamics of the economy, it is difficult - if not impossible - for organizations to determine such value and strategic direction by themselves.

Multi-Form Customer Interface

So, what is this new essence of partnering? At the Massachusetts Institute of Technology, the Corporate Relations program sponsored a project - Innovating with the Customer. Through careful experimentation, they discovered some differences between sales, relationship and partnering models of interaction. These are represented in the graphic below which is also cited in the new International Journal of Innovation Management.(3)

Once the hypotheses were created and tested in the marketplace, it was realized that not one or another of these strategies were suitable for every customer or every occasion. It was a balanced portfolio of offerings which were needed in order to sustain an optimal degree of customer value. Different strategies are needed for different types of customers, levels of service et al.

This is all fine for a theoretical paper, but how do these concepts get applied in a given organization and with current operations? The answer was surprisingly simple. By plotting an existing range of products and services on a matrix (below) according to the type of knowledge and degree of customer involvement, an organization can assess its portfolio of capability.

The quick realization is that activities I the upper right quadrant are cost-intensive. With few exceptions, you would have difficulty treating all customers with this degree of customization and interaction.. On the other hand, companies like Steelcase (converting a commodity businesses into one of intensive services), Microsoft (paving the way for electronic commerce) and Skandia (managing the intangible assets as the difference between book value and market value), are examples of companies who know how to experiment with customers by treating them as sources of knowledge.

If one can systematically manage such experiments with meaningful customer interactions and learn from them, insights will be gleaned as to the unknown potential benefits of products and services. In this way a company can determine what might be replicated and these products and services can become the value-added offerings in the lower quadrant - perhaps even for a premium price.

Investment resources can then be applied to fuel the new ideas through select customer partnering - or what I call, customer innovation. This is not technology pushed to the customer; nor is it products and services driven by what the market demands today. It is a robust set of interactions carefully managed in which knowledge flows freely into and out of the organization. It is such a system which can enable the creation and application of new ideas - real-time. How else does an organization build the business case for a product or market that doesn't yet exist?!

Focus on Customer Success

Isn't success just a part of customer satisfaction? The answer is, no. Interacting with the customer to make them successful requires a totally different paradigm. It requires different questions. The intent is one of learning from, not delivering to, the customer.

The learning, however, is not only about product requirements or what constitutes improved process or service. It is, rather, viewing the customer as a interdependent stakeholder in the innovation value-system! What is their vision? What are their real competitive threats? How do they interact with their customers? What relationships do they have with other suppliers, alliances, and marketing partners - some of whom may even be your competitors? What are their relative strengths and weaknesses? What is it that they need in order to be successful; but have not envisioned you as their supplier? It may be that their business strategy requires your competence, but which you have not packaged to be sold! Therefore, in a true symbiotic relationship, you are able to determine together that which neither of you might have envisioned separately.

Once a company enters into such intimate customer partnering, insight can be gleaned on the unserved markets and unarticulated needs - the unleashed opportunity -as described by C.K. Prahalad and Gary Hamel. How does one create the business justification for the market that doesn't yet exist?! There is no market research data, no obvious competitors to monitor, and no products or services to reverse engineer. It is only through collaborative insight with stakeholders - especially customers - can a company optimally innovate its future.

Summary

Enhanced by worldwide communications technology and magnified market complexity, the dynamics of competition are likely to increase, not decrease. Therefore, new management methodologies must be utilized - those which may not yet be tested and true. The industry leaders today are learners(4) - those who are able to learn from every interaction with customers and feed those insights back into corporate strategy efficiently and expeditiously. The structure is networked and the process is one of a value-system, not a value-chain. People are viewed as sources of knowledge and their relationships are symbiotic. Performance is based upon the intangible assets (i.e., the difference between book value and market value) - how well they are managed and leveraged. The distinguishing partner factor may actually be the faith that you and your customers have in your mutual future. Resources - financial , human and technical - will be allocated differently depending upon the degree of customer intimacy and quality of conversation. How vested are you in the success - not satisfaction - of your customers?

References

(1) Customer Value. Supplement to Skandia's 1996 Annual Report. (2) Mary Leonard. Quick! Call the Knowledge Manager. The Boston Globe (6/22/97)
(3) Debra M. Amidon. Dialogue With Customers: Secret to Innovation Strategy. International Journal of Innovation Management Vol. 1, No. 1, Inaugural Issue (March 1997) pp. 73-87.
(4) David J. Skyrme and Debra M. Amidon. Creating the Knowledge Based-Business. Business Intelligence (1997).


What follows are marketing messages which have been tracked to this new concept of customer partnering.

"Customerize" - Unisys (WSJ 94)

"Relationships That Endure"; "CIGNA - A Century of Financial Partnership" - Citibank (WSJ 1/19/95)

"Our Business is Helping You Stay Focused" - General Electric (WSJ 1/19/95)

"Facing the Issues that Face our Customers." - Liberty Mutual (WSJ 3/28/95)

"If it is Your Concern, It's Our Concern." - Chrysler Corporation (WSJ 2/28/95)

"Good relationships need careful nurturing. We call our approach 'Total Customer Care.'" - Schott (WSJ 6/95)

"If integrity, trust and genuine caring matter to you, you're not alone. They matter to us too." - Transnational Life Companies (Fortune - 6/95)

"There are people who know your business as well as you do." - Aetna Life & Casualty (Fortune - 6/95)

"Only someone who knows where you come from can take you where you are going." - Bell Atlantic (WSJ 7/27/95)

"It's Time You Knew Us as our Customers Do" - SGS Thompson (Fortune - 7/95)

"Helping Investors Help Themselves" - Charles Schwab & Co. (Fortune - 7/95)

"Imagine What We Can Do For You." - Software AG (WSJ 8/24/95)

"At Parker, Our Customer Relationships Run Deep" - Parker Hannifin Corporation (WSJ - 8/24/95)

"Delivering Excellent Customer Service" - Kellogg School/Northwestern University (WSJ - 8/24/95) "Our Business is Helping Yours." - General Electric Capital Services (WSJ - 8/29/95)

"Keeping You Ahead of the Game." - Bell South (WSJ - 9/26/95)

"A Vested Interest in Your Success." - Everen Securities (WSJ - 9/26/95)


Copyright 1997 ENTOVATION International, Ltd. All rights reserved.


To focus on your customer see Profiles of Customer Innovation

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1996-1999 ENTOVATION International. All rights reserved.
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Last updated: 13 Aug 1999