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Today, innovation is a must for businesses. To survive in the market, the pace of innovation must be sustained or even sped up. In this chapter, we shall first look at the realities surrounding the need to innovate in terms of the experience we offer our customers. We shall then explore the strategies open to companies to develop their innovative capability, with a particular emphasis on the concept of

“open innovation.”

Is innovation necessary?

Innovation seems to be regarded as a cure-all for businesses, and even whole countries and economies (such as Europe), to return to the so-called “growth track.”

Not a week goes by without media news items on this topic. At business schools, increasing numbers of executives anxiously ask us to help them design innovation processes and practices. Given this constant pressure, our first question ought to be

“Is innovation even necessary?” To answer this question we should first specify what we mean by “innovation.”

Innovation was traditionally the preserve of laboratories and company R &

D departments. It was a matter of developing new technologies, patterns and processes, which, with a bit of luck, could be launched on the market. Even today, this is the predominant vision of innovation, the “lab coat” paradigm. From the customer experience standpoint, this picture of innovation only partly explains what innovation involves. When we look at the customer’s relationship at all its points of contact with the company, and we think about the full measure of value

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we can create for the customer, there emerges a new kind of innovation, which has nothing to do with laboratory work, and arises at any time and in any situation where the customer is in contact with the company. Let’s think, for example, of a restaurant, which is highly suited to explaining customer experience. Here, “lab coat” innovation happens in the kitchen when the chef creates new dishes, using new combinations of flavors, colors and aromas. While non-laboratory innovation happens in the rest of settings where a customer comes into contact with the restaurant: from how we communicate with customers, through dealings with the maître d’ and the waiters, taking and delivering orders, collecting payment for the bill, and managing patrons’ satisfaction or otherwise. The example also helps us visualize the vast opportunities for non-laboratory innovation - the field is far wider and less expensive in time and money terms than kitchen or

“lab coat” innovation. Some authors (lately Ryan and Lowry in their book The Method Method) have called lab coat innovation “hard” innovation, and non-laboratory innovation “soft innovation.” These authors have further pointed out that hard innovation focuses on technical features and appeals to customers’ left hemisphere, the rational, analytical region of the brain; soft innovation, however, focuses on the circumstances surrounding access to the experience, and appeals to the right hemisphere - feelings and emotions. Following this line of reasoning (which has not been empirically tested), soft innovation is not only less expensive but also better able to nurture customer preferences and loyalty.

Having defined what innovation means in the field of customer experience - the sum of hard and soft innovation - we can try to answer our original question as to whether innovation is really necessary. By way of a response, in fine Socratic style, we could come back with another question: “Why do customers choose our experience rather than other options available on the market?” The reason is that, unless the market is distorted, and assuming that it is open and competitive, customers choose our experience because it is different and better than what they would find elsewhere. Difference, superiority and relevance (for our customer’s life or business) are the keys to constructing sustainable value models according to the classic authors Anderson and Narus. Our next Socratic question consists of wondering what we can do to build experiences that are different, superior and relevant to our customers. The answer lies in innovation. In 1954, Peter Drucker said that the ultimate aim of every business is to satisfy a customer, and in the absence of this no business makes sense. To this end, according to Drucker, a business needs to equip itself with the two functions necessary for

innovation, R & D (hard innovation) and marketing (soft innovation). This brief Socratic interlude enables us to answer the original question with a robust

“yes.” Innovation is necessary for a business to exist, because innovation holds the key to the business itself, by offering something different than and superior to the competition. Moreover, innovation is vital to the growth of the business, by providing different and superior experiences for new customer segments or new experiences for the same segment that are superior to those offered by the competition. To return to our restaurant example, innovation is not just the sauce flavoring a business: it is the business.

Innovation models

Having answered the question whether we need to innovate with a resounding yes, the next issue is how to go about it. The problem is traditionally solved by hiring engineers and scientists or copying the innovations of others, all within the hard innovation paradigm. In the 21st century this innovation model has faced the challenge of another model, that looks beyond the resources internal to the company to embrace all resources existing in the market and in the society in which the company operates. The new model has been dubbed “open innovation.” It could be defined by “Joy’s Law” (attributed to the cofounder of Sun Microsystems, Bill Joy), which states that, “No matter who you are, most of the smartest people work for someone else.”

Eric Raymond, a Pennsylvania-based software programmer, was one of the first people to define open innovation, at a conference in 1997. Raymond used the metaphor of the cathedral and the bazaar. Both are highly complex projects. The cathedral is majestic and imposing; it is the outcome of a genius and a team working for the genius (his master plans) for many years, using an infinity of resources. The bazaar, however, is the upshot of an informal group of actors; structures are built with reference to each actor’s own interests, and without regard to coordination;

the bazaar emerges far more rapidly and using fewer resources; the trade-off is that the result is perhaps less spectacular. The first major example of innovation achieved by this model was the Linux operating system, created on a voluntary basis by a community of developers inspired, rather than led, by a developer called Linus Torvalds. Another example of the “bazaar” model was Wikipedia, which in just a few years has become larger than the venerable Encyclopaedia Britannica, albeit offering a patchy standard of quality. In between these two extremes - the

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cathedral and the bazaar - there is an infinity of intermediate models, where the “open” and “closed” blueprints combine to generate different and innovative experiences for customers.

Open innovation poses two key challenges for any company wishing to implement it. First, the openness that the model imposes on the company.

Under open innovation, and depending on the extent to which the company approximates a pure instantiation of the bazaar model, the various actors involved in the innovation process (customers, suppliers, employees, general public) enjoy more or less direct access to the company, its resources, its information and its communications. This flies in the face of the traditional conception of what a company is, and requires suitable structures and collaborators. To return to our restaurant example, it would be as if the kitchen itself, ingredient sourcing, the menu and front-of-house were all left to the devices of patrons: the people who wish to partner the restaurant in innovating the experience it offers. The chefs, the maître d’ and the waiters, but also customers and suppliers, would have to be willing to share and co-create with people from “outside.” This can be very hard to do if one is not ready for it.

The second major challenge is the quality aimed at. Open innovation processes are intrinsically messy. A large volume of input is attracted, but its quality is highly uneven. Companies wishing to use open innovation must be willing to take on board this quality inconsistency and work around it. In models representing a step away from the pure bazaar paradigm, one of the techniques used is contribution

“editing.” This is a standard practice in the Linux community, and Wikipedia is moving in this direction too. Another practice that helps deal with this issue is to specify which tasks will allow open access. The most successful open innovation models are those that define specific, finite tasks that can be implemented in parallel with one another and are sufficiently varied for contributors having a wide range of different profiles to participate.

A great example of the open innovation model is Threadless.com. The principle is very simple: Threadless is a new fashion experience. You send your T-shirt design, they manufacture and sell it. The tasks are simple and finite: sending a design for a specific type of garment. The task can be performed in parallel; designs can arrive at the same time without disrupting the operation of the business. Finally, besides sending designs, you can contribute the simpler activity of suggesting color changes or just voting for one design or another.

The rise of open innovation models has been driven by the development and popularization of information technologies. The growth of the Linux community and project, for example, has gone hand-in-hand with the development and democratization of Internet access. Open innovation models are more readily implemented in purely digital business settings. Nevertheless, some companies have been able to develop atom-based rather than bit-based open innovation models.

One such model has been called “mass customization.” It is fairly remote from the bazaar paradigm in its pure form, because the business is opened up to third parties only within the restricted scope of the design of certain product features.

This represents a first step in companies adopting open innovation models, and has enabled them to stand apart from the competition by creating far more personalized experiences for customers.

One example is “Lego Designed by Me,” from the Lego building-toy company. The experience Lego offers is highly analogous to Threadless, except that the customer’s design need not be shared by others. To facilitate toy design, Lego has created Lego Digital Designer, an application that allows you to create a fully parameterized design. Lego manufactures the item and sends it to the customer in a personalized box. Customization options of this sort are increasingly widespread, and many fashion brands already offer them to their customers (Nike, with its NikeiD project; Oakley with its Custom Sunglasses; and many more - a list is available at milkorsugar.com). By containing all the possibilities inherent in a “designer community,” these models have the added dimension of offering customers a unique and personal experience. The brand not only enables the customer to display and show off her creations, but may even include the most successful designs within its own “standard” product catalogue.

The second restricted form of the open innovation paradigm, more prevalent in the business-to-business setting, is what we might call “open labs.” Here, the company opens up its labs (under a strongly “hard” vision of innovation) to its customers to develop new projects. Though open, this approach is highly constrained and controlled. Its complexity lies in the fact that tasks and projects are not identified beforehand: they emerge from laboratory-based dialogue between the company and its customers.

A pioneer of the “open labs” model is 3M, the makers of Post-it notes and a whole range of other products. In 2009, 3M had 23 “customer innovation centers”

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across the world intended to generate innovative solutions for the “customer’s customer.” Customers present 3M technicians with their business models and then work with them on the various innovation platforms developed by 3M.

An interesting feature of this method is that customers are not restricted to the innovation platforms relating directly to their business; they can work on any platform operated by 3M. One example is Visteon, a 3M customer that supplies automobile parts. After visiting one of 3M’s customer innovation centers, it worked on Thinsulate (thermal insulation for textiles) to improve acoustic insulation in the design of automobile dashboards.

An analogous way of creating open yet controlled spaces for innovation is to provide an application development platform for a given environment. One of the most successful examples of this is Apple, and third-party apps developed for the iOS cellphone operating system. Under this model, Apple creates a space for independent developers to create apps for the iPhone, iPad and iPod. Much like Lego, Apple provides the software for third parties to develop apps; the ultimate destination, however, is not customization but a market on which the third-party developers can sell their apps (iTunes and iOS App Store). The Apple model has drawn criticism for being overly controlled and too remote from the open innovation paradigm. But it nonetheless provides a good example of how a company which was traditionally closed and jealously guarded its technical innovations found a way to open up to some extent, thus addressing the threat implied by Joy’s Law.

Finally, the most radical form of open innovation - which is atom-based, not just bit-based - is crowdsourcing. A crowd-powered platform gets people with ideas in touch with people and companies with production capabilities so that they can develop new customer experiences together. An interesting example of this model is local-motors.com. By opposing the concept of “local” to “general”

(a reference to General Motors, the US automobile giant), local-motors.com calls itself a “new generation automotive manufacturer,” and an “open-source community of designers, engineers, fabricators, enthusiasts and onlookers. It is the canvas on which the vehicles and technology of the future are designed. Anyone can participate, and we encourage you to come together to lead the revolution that will forever transform the automotive industry.” This first paragraph on the local-motors.com website neatly encapsulates the spirit of the crowdsourcing model. The company disappears to become a mere container (in this case, a “canvas”) in which

people (anyone) interact and innovate. And not just to create software or bit-based products, but in something as physical and complex as an automobile.

Open innovation and creating customer experiences

Having defined innovation as a combination of hard (technical or “lab coat”) aspects and soft (access-related, outside the lab) aspects, and having demonstrated that businesses need to innovate, we have looked at open innovation models. Open innovation is interesting from a product standpoint, and even more fascinating when viewed from the perspective of customer experience. When we create customer experiences, we do so along a variety of vectors: a product or service, certainly, but also access, information, after-sales and disposal - all those points at which the customer is in contact with our solution, or where our solution is present in the customer’s life. From the customer’s standpoint, the experience is intrinsically “multi-stakeholder.” It is not located within a single stakeholder, but typically generated by a range of different stakeholders. Returning to our restaurant example, the patron’s experience is influenced by the dishes she samples, by the way she is served and advised by the wait-staff, by her trip to the restaurant, by how she makes payment for her meal, by the atmosphere and decor of the premises, and so forth. Thinking about innovation from an open perspective enables us to encompass all the stakeholders involved in creating the customer’s experience. We can thus more readily develop proposals and new experiences, because we bring into play a far wider range of talent, from a more diverse spectrum of sources.

By way of conclusion, working with open innovation models can be intimidating at first. But there is no need to take a blind leap with no safety net. Take things step by step, learning while we innovate and at a pace commensurate with our partners’

and our customers’ needs.

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