Customer-Driven Innovation
An Interview with Gaurav Bhalla
by Christian Sarkar

Gaurav Bhalla advises companies on how to create authentic customer-driven innovation strategies to build long-term value. He is the founder of Knowledge Kinetics, a management consulting company, and regularly blogs on the subject. He served as an adjunct professor at Duke University's Fuqua School of Business and is currently associated with the University of Maryland's R. H Smith School of Business, as adjunct faculty.

Let's start by defining what you mean by customer-driven innovation. What is it and what are its key building blocks?

Gaurav Bhalla : For the better part of the 20th century, manufacturers and providers of services called all the shots, they enjoyed more power, relative to retailers and consumers. This picture changed with the advent of store and generic brands. As the size of retail operations increased, the balance of power shifted in favor of retailers. In some special cases, as in the case of Wal-Mart, the company no longer called the shots, the retailer did.

Power is shifting again today, this time from companies and retailers to consumers. Today's informed, connected, and web-savvy consumers are demanding and playing significantly more active roles in areas where only companies once functioned - such as price setting, product information, usage advice, advertising content, distribution, and packaging.

For businesses, the informed, connected, collaborative customer can be both an opportunity and a threat.

Initially, more companies saw the threat, they could not understand the opportunity. That balance between threat and opportunity is beginning to change, especially in the area of innovation and co-creation of value. More companies are beginning to see and acknowledge the richness of interaction that is possible with new technology.

Innovation as a business and economic concept is not new. Companies like Polaroid, Gillette, Du Pont, and Apple have been practicing it for several decades. What is new is the urgency that developing an innovation competence has acquired and the realization that innovation need not be a solo venture, sponsored and nurtured exclusively within the four walls of an organization.

There is an emerging and growing awareness that opening the Innovation process, whereby a company connects with a large number of influences outside its physical boundaries, like universities, independent research labs, experts, and consumers will significantly improve the effectiveness of the entire co-creation of value process, from identification to delivery to post-consumption renewal.

Of all these open innovation connections, the one that interests me most is customer-driven innovation.

Why? Because it represents a fundamental and quantum shift in deciding which resources will be utilized to create what value for whom.

This shift in power, with consumers no longer merely being a source of demand at the end of a value chain has fundamentally altered the way in which marketing is practiced and value is created. In today's world, value is created jointly by a company and its many customers/non-customers. The consumer is a fundamental resource and input in the value identification, creation, and delivery process, and the co-creation experience is an integral part of the total value offering.

The key building blocks of co-creation of value are:

Listening: learning about consumers' experiences; their angst, frustrations, desires, and aspirations

Sustaining value co-creation conversations: meaningful conversations that yield the raw material for co-creation

Experimenting and rapid prototyping: to manage risk, improvise, and enable speedy value co-creation

Execution: only when co-created value is delivered can the next round of value co-creation be initiated

Can you give us a few examples?

Sure.

There's Nike + iPod - they allow gym fitness enthusiasts and runners to co-create their own fitness experiences and share it with similar others.

If you dream it, ASUS builds it, Intel inside - ASUS and Intel are combining forces to build the first community-designed laptop

Can innovation lead to evolution? Toyota believes it can. It is engaging millions of people to co-create value in domains like water, air, and energy.

If you start looking, you'll see that many companies are trying to engage their customers, some successfully, some not quite so successfully.

So what makes the difference? What separates the successful companies and the ones that fail?

The emerging disciplines of customer-driven innovation and value co-creation don't enjoy a natural fit with existing mental maps of managers. 

Most marketing executives equate involving customers in the innovation process as ceding control.  They perceive customers' demands for co-creation as a threat, wrongly believing that it weakens and undermines a company's need for controlling transactions with consumers.

Consequently, developing and implementing a customer collaboration capability is not merely a matter of implementing a recipe; it also requires a shift in mindset. The three prerequisites for a new mindset that encourage managers to look beyond traditional models of markets, where markets are disjointed from the value creation process to newer models, where markets are isomorphic with the value creation process, are: authenticity, flexibility, and conviction.

Companies need to recognize that in the absence of a shift in mindset, efforts at implementing customer-driven innovation programs are likely to stall.  It would be far too easy to shoot the messenger, or fault the recommended solution. 

Companies that invest in advanced and contemporary customer-centric competencies earn a significantly higher ROI on their marketing expenditures, than companies that don’t. And a core contributor to customer-centric companies earning higher returns is their willingness and ability to create, customize, deliver, and innovate unique customer value.

Customer-driven innovation doesn't just happen. Companies need to build a value-innovation architecture which drives this transformation. It's a process, not just a program.

How does the recession impact customer-driven initiatives?

At a minimum, the recession forces companies to rethink their portfolios, rethink their new product introduction programs, and reflect deeply about their own philosophies towards what they consider investment and what they consider expenditure. The pace of new product introduction is bound to slow. But that’s not all bad if it means elimination of endless product-line extensions with little or no real value for the customer.

On the other hand when companies modify their portfolio or innovate customer relationship processes in response to recessionary times, there is the potential of establishing a new handshake with the customer. Two good examples of this are Starbucks coming out with an instant coffee – Via, and Hyundai offeing to "take back your car if you lose your job", which is now being matched by other auto brands as well. Sensitivity to customer needs is key to building a sound business at all times. Its importance increases dramatically during recessionary times when customers are more wlling to forgo or defer consumption.

In extreme cases, it may require reengineering the value proposition from ground zero, as if none of the previous success ever happened. Take for instance the perspective I offered on GM a while back. GM is no longer a part of America's iconic or symbolic consciousness. In this context, urging GM to fix what is broken is only a partial solution. All that it will do is temporarily stem the bleeding. Good housekeeping may fix the plumbing leaks; it will not resolve the fundamental problems of an alienated customer base and an irrelevant iconic status.

How should businesses treat innovation during these current times?

As a necessary long-term investment to nurture future customer value and not as short-term expenditure that can be cut back to boost current earnings. In a recent conversation with Gerry Tellis, he asserted that stock markets value announcements on innovation projects and reward companies with disproportionately higher stock returns.  His research clearly shows that the total market returns to an innovation project are $643 million, more than 13 times the return of $49 million from an average innovation event.  Additionally, returns to initiation of innovation projects occur 4.7 years ahead of launch.

So investing in innovation is even more important, we find, in a recessionary time.

Which companies are listening to their customers the best? Are there any leaders that stand out?

How many CEOs do you know who have done laundry in 25 countries?  Or sat with their feet dangling in water, talking through an interpreter to a woman and her daughter doing their laundry in a river in China?  Or studying low-income women's daily washing rituals in Mexico?  No, this isn't a plug for A.G. Lafley.  It is an impassioned plea for authenticity in how organizations and their leaders do business with their customers.

Too many companies pay lip service to the idea, but stop well short of realizing their potential. Now is the time to change that.

Thanks for your time...

Visit Gaurav Bhalla's blog on customer-driven innovation: www.gauravbhalla.com

Christian Sarkar is the managing editor of this site. He is the founder and CEO of Double Loop Marketing LLC, an online company specializing in ecosystem marketing and thought-leadership-based campaigns.